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Magnus Ahlqvist: Good morning, and welcome, everyone. Andreas and I are proud to report strong results for Q4 and for the full year 2025. So let us go straight to some of the performance highlights. The organic growth in the quarter was 3%, and this was supported by 6% growth in Technology & Solutions. We had a good finish to the year in Technology & Solutions with 2% improvement sequentially. And the adjusted organic growth of the group -- and that means when you exclude the closedown of the SCIS business was 4%. And now to something important. The operating margin was 8% and 8.2% adjusted in the quarter, thanks to the strong delivery across the entire business. North America achieved a 10% operating margin in the quarter, and Europe delivered another quarter with more than 8%. And we have improved the operating margin now 20 quarters in a row and are delivering on the 8% target that we communicated 3.5 years ago. EPS real change, excluding IAC was also strong at 18% and we had continued strong delivery in terms of cash flow with operating cash flow of 88% for the full year and net debt to EBITDA ratio improved further to 2.1. And based on the stronger underlying performance, the dividend proposal is SEK 5.30, which represents an 18% increase. And looking at the future, we announced a very important milestone for our journey with the acquisition of Liferaft yesterday evening. And this is the leading provider of threat intelligence and I will provide more details regarding the strategic importance of Liferaft at the end of this presentation. So let's then shift to the performance in the business lines and segments. We delivered strong margin development in both business lines with 12.7% for Technology & Solutions, 6.6% of Services in the quarter. And there is growth, as I stated, in Technology & Solutions for 6%, so 2% improvement compared to the previous quarter. And the growth in Security Services was 1% and this growth is obviously negatively impacted by the SCIS business where we're closing down the government part of that business. So with that, let's move to the segment, and we are starting, as always, with North America where we're delivering a very strong set of results and a record 10% operating margin in the quarter. And if we start with a growth of 5%, this was driven by good portfolio development and price increases in the Guarding business and by good development in technology. The real sales growth in Technology & Solutions improved to 4% compared to lower growth in the previous quarter. And when looking at the profitability, strong leverage and cost control in Guarding, together with solid profitability in Technology and a recovery in the Pinkerton business all contributed to the record level operating margin. So all in all, a very strong performance, a record-breaking 10%, so well done by our North America team. We then move to Europe, where we are also very pleased with the development. The organic growth was 4% in the quarter, and the growth was supported by price increases including impact from the hyperinflation environment in Turkey and also by solid growth of Technology & Solutions, while active portfolio management in the Services business had a negative impact on growth. Sales growth in Technology & Solutions was 7%. But it's the profitability development that stands out with 110 basis points improvement to 8.1%. And the margin improvement was driven by both business lines, including positive impact from the business optimization program. The Security Services business was positively impacted by higher margin on new sales, active portfolio management and also the divestiture of the Airport Security business in France. We also recorded a solid improvement in the operating margin in the Technology & Solutions business line driven by good portfolio development and solid cost control. And as commented earlier, we expect the work we're addressing low-margin Guarding contracts to be completed during the first half of 2026. So all in all, solid development by our European team and also here an operating margin at a record level. Shifting then to be Ibero-America, where we are pleased to report good organic growth and decent margin improvement. The growth was 5%, and this was driven by high single digital growth in Technology & Solutions and prices increases in the Services business. But similar to Europe, there is a negative impact on the growth from active portfolio management, but we're making good progress here and driving good conversions to Technology & Solutions. And the real sales growth in Technology & Solutions was 7% in the quarter. The operating margin improved 20 basis points in the quarter, and the improvement was primarily driven by positive impact from active portfolio management in the Security Services business line. So to conclude, strong delivery in 2025 by our Ibero-America team. And looking then at the performance across the group, we are driving disciplined execution of our strategy, and I'm really pleased to see strong execution across all segments. And the client retention is solid at 90%. So with that, turn to the finance update and handing over to you, Andreas. Andreas Lindback: Thank you, Magnus. And first of all, if I sound different to normal, it is because I'm about to lose my voice, I apologize for that. We start with the income statement, where we had organic sales growth of 3% and improved the operating margin with 70 basis points to 8%. It is a strong quarter where we improved our operating income with 15% adjusted for currency. As we communicated in Q2, we have introduced 2 new KPIs, which are adjusting our organic growth and our operating margin for the government business to be closed down within SCIS. In the quarter, the adjusted organic growth was 4% and the adjusted operating margin was 8.2%. Looking below operating results, there are no material developments in amortization of acquisition-related intangibles nor in the acquisition-related costs. The items affecting comparability was SEK 78 million, and this was related to the ongoing European transformation and business optimization programs. And the full year cost for these programs was SEK 382 million, approximately in line with our previous guidance. We have executed the business optimization program in a good way where the annualized savings in Q4 are in line with the targeted SEK 200 million savings. The business optimization program is now closed. And in 2026, the only remaining program is related to the European transformation. And here, we estimate to have a full year 2026 program cost of SEK 225 million to SEK 250 million, a material reduction compared to the SEK 382 million related to the programs in 2025. In Q3, we took a SEK 1.5 billion cost in items affecting comparability related to the close-down of the government business within SCIS. The close-down is progressing according to plan and had limited impact on our operating result in Q4. We continue to expect the vast majority of the business to be closed down by the end of 2026, and we will also start to see an accelerated execution of the close-down during the first half year. Our finance net came in at SEK 383 million, a reduction of SEK 146 million compared to last year. And here, we continue to see a positive trend of reduced financing costs as interest rates and our debt levels are going down. For the full year 2026, we estimate the finance net to continue to reduce and land around SEK 1.6 billion to be compared to the SEK 1.8 billion for the full year 2025. Moving to tax. Here, we had a tax rate of 29.5% for the full year, slightly higher than our Q3 forecast of 29.2%. The full year tax rate was impacted by the SCIS close-down cost in Q3, where we estimate around half of the cost to be tax deductible over time. Adjusted for the close-down impact, the full year tax rate was 27.2%, and we expect the 2026 tax rate to be in the approximately same area. All in all, we have a strong quarter where we grow our FX adjusted EPS with 18%. And as we summarize 2025, we have improved our adjusted operating margin with 60 basis points to 7.7%, grown our operating result with 11% and grown our EPS with 18%. And at the same time, we also achieved our financial target of an operating margin of 8% in the second half year of 2025. The adjusted operating margin in the second half was 8.2%. We then move to cash flow, where our operating cash flow was solid at SEK 3.9 billion or 128% of operating income. The cash flow was supported by lower growth rates and the continued improved DSO, but also negatively impacted by the additional USD 44 million payroll in our U.S. Guarding business as we communicated in the third quarter. This negative impact is a timing impact only, which occurs every fifth to sixth year. The free cash flow landed at SEK 3 billion, supported then by the solid operating cash flow, reduced interest payments due to the lower interest rates and debt levels and positive tax timing impacts. Looking at the full year 2025, we delivered another year of record cash flow. The operating cash flow was more than SEK 10 billion or 88% of the result, supported by good working capital focus and lower growth rates. And we have now delivered operating cash flows above our financial targets of 70% to 80% over the last 2 years, a result of our strong focus to build a more qualitative business and also structurally improve our working capital over time. And this has, of course, also translated into stronger free cash flows, which creates increased flexibility and opportunity for us as we move into a new phase of our strategic journey. Our cash generation will also be positively impacted as our items affecting comparability continues to reduce as we go into 2026 and beyond. We then have a look at our net debt, which was SEK 31.3 billion at the end of the quarter. This is a reduction of SEK 2.1 billion compared to Q3, mainly supported by the strong free cash flow, but also by the strength in Swedish krona. In the quarter, we paid the second tranche of our dividend, and we had SEK 321 million of total IAC payments, whereof approximately SEK 160 million was related to the final payment for the U.S. government and Paragon settlement. We have now made all 3 payments related to this settlement and expect no further cash flow out related to the case. Looking at the right-hand side, our net debt to EBITDA reduced to 2.1. This is an 0.4x improvement compared to Q4 last year, where positive EBITDA development, good cash generation and the strength in Swedish krona have supported positively and we are well below our target net debt-to-EBITDA of less than 3x. Moving on to have a look at our financing and financial position, where we continue to have a strong balance sheet, remain with strong liquidity, and we have no financial covenants in our debt facilities. After a period of important refinancing focus, our main focus during the second half of 2025 has been to amortize debt, supported by the strong free cash flow generation. In the quarter, we repaid SEK 1.9 billion of debt and throughout 2025, we have amortized a total of SEK 3.3 billion. This continues to support our cost of financing going forward. And looking at the maturity chart, we have very limited refinancing needs throughout 2026. And as always, we remain committed to our investment-grade rating. So with that, I hand over back to you, Magnus. Magnus Ahlqvist: Many thanks, Andreas. So I'd like to share a few perspectives regarding our strategic development and the Liferaft acquisition before we open up the Q&A. First, we are proud of the fact that we are reaching our 8% target in the second half of 2025. Back in 2022, when we did the Stanley acquisition, we accelerated the work to change the profile of Securitas security company with the strongest technology and digital offering to our clients in combination with high-quality guarding services. And when looking back at last 4 years, we have been executing well. We are a sharper, more focused company today and operating at a different margin level. And as we're entering 2026, this also means that we can then start to retire this bridge that we have kept coming back to every quarter and over the last 3.5 years. Looking at the future, we're very excited about the acquisition of Liferaft. So when I look at the transformation of Securitas during the last 6, 7 years, we have kept a clear focus on investing in the core capabilities that we consider critical to winning in this industry and those are focused on presence, technology and data. In this context, we strengthened our guarding value proposition. We have improved the profitability of guarding. We've built a globally leading technology position and a more modern and digitally capable business. So we have strong pillars in our business today. But we've also worked to meet the increasing client demans for better understanding the risks and the threats facing their business. And over the past 5 years, we have developed in-house risk intelligence capabilities that we are providing to more and more customers. So all this is good, you might say, but what is then the importance of the Liferaft acquisition? Well, Liferaft is one of the leading SaaS-based threat intelligence providers focused on OSINT and that's open source intelligence. This is a very strong team with deep expertise in threat intelligence and they have been a partner and provider to Securitas for many years. And with Liferaft, we will be able to scale and leverage their capabilities across our client base and in the process strengthen our clients value proposition. When looking at the financials, the company is currently prioritizing rapid expansion and growing organically around 30% on an annual basis, but also then reinvesting very strong gross margins to accelerate organic growth. And given the increase in demand in this market, I fully support this approach. The acquisition is fully in line with our strategy to create a more scalable business model and becomes an important addition to accelerate growth in high-margin recurring monthly revenue. And as previously stated, the recurring monthly revenue for the group exceeds more than SEK 1 billion. So we are thrilled to welcome the Liferaft team when we are closing the transaction, joining forces to shape the future with more intelligence-led security. And the future is promising. With the transformation of Securitas, we're well positioned with a clearly differentiated client offering, well positioned for profitable growth. And we are operating in an attractive market, but also a growing market where we see steady increase in the demand for quality security. We have transformed and repositioned our client portfolio with a clear focus on segments with more sophisticated security needs and higher growth profile. And we partner with our clients for the long term and we see that our deeper engagement model, where we leverage our technology and digital capabilities, is generating high value for our clients and also for us. And the approach is working. So like Andreas and I have commented, we're executing well on our plans, 20 consecutive quarters of operating margin improvement and solid cash flow generation. We've had a clear focus on enhancing the quality of our business and margin improvement in recent years. But as more and more units reach the required profitability thresholds -- so from my perspective, that means for a good sustainable business, they also gained the right to shift focus to profitable growth. And with the business now in much better shape, we can shift emphasis towards commercial synergies and driving growth. And as stated many times, we do this with a clear focus on building a more scalable business. So we are confident and excited about our longer-term opportunities and we're looking forward to sharing more in the Capital Markets Day in June. So in conclusion, we are on the right path, well positioned for the next phase. So with that, we conclude the Q4 presentation and happy to open up the Q&A. Operator: [Operator Instructions] The next question comes from Francesco Nardinocchi from Goldman Sachs. Suhasini Varanasi: This is Suhasini from Goldman Sachs, actually. I just had a couple of questions please. So the -- if we think about your growth and margin expectations for the first half versus second half of this year, would it be fair to say that because of the impact of your underperforming contract exits that's going to be completed by first half this year, maybe the growth is a little more weighted to second half and similarly on margins. And I'm not sure I read but how much are you expecting to pay for the acquisition of Liferaft? And how is your M&A pipeline looking at this point in time? Magnus Ahlqvist: Yes. Thank you. So when you're looking at that, I think it's the right assumption that finalizing that work will have a negative impact in the near term from the active portfolio management. But that's why it's also so important and so positive that we are soon done with that work. And as I commented in the last couple of years, we were more quick in North America in terms of finalizing that work. So I think that is obviously something that we're looking forward to also in Europe. Then when you look at the growth in Q4, we had 6% growth in Technology & Solutions, and that's a clear improvement compared to the previous quarters. We have a strong offering. Solutions is more of a portfolio business. Technology part, there's also some variability with installations, but we see that we are on a good path. So I think that is the other part that I would just highlight because that part of the business, there is no impact from active portfolio management. Andreas Lindback: We have not disclosed the purchase price related to Liferaft simply due to commercial reasons that we're not doing that. But we have paid a fair market price for this type of business overall. So -- and there will be some details coming as we have closed the transaction as well. On the M&A pipeline side, as we have said, we are ramping up our focus on continued bolt-on acquisitions within Technology & Solutions and some targeted also acquisitions in the intelligence area. We made a few minor ones outside Liferaft, but we are still in ramp-up mode, I would say. So the pipeline is not -- there's not a huge pipeline at this point in time, but it's something that we are working towards improving. Operator: The next question comes Remi Grenu from Morgan Stanley. Remi Grenu: First, a quick question on the 2026 outlook. I guess, given you have achieved the 8% and the CMD is not before June, we are left a little bit in dark in term of margin development. So just trying to have your overview on 2026 margin development if we exclude any -- excluding the positive impact that the closure of SCIS is going to generate. But on an underlying basis with the portfolio of the company, do you believe that there is still potential for margin improvement from the current run rate at the end of 2025. So that would be the first question. The second one is on North America. The organic growth very suddenly accelerated in Q2 and it's been normalizing a little bit over the last 2 quarters. Just trying to understand the drivers of that sudden acceleration and what's happening since then? Why it is coming back down? Is it about like volume normalizing, lower pricing and also taking a step back on that market, what do you think is the structural level of organic growth in North America? And then the last one, you have come to the end of that strategic plan in 2025. Have you started to have a think about the new KPIs for management remuneration, variable remuneration and going into the next phase of the company, what do you think would be most relevant in terms of aligning the interest of shareholders with management? Magnus Ahlqvist: Very good. Thank you, Remi. So we don't provide guidance. But first of all, I think it's been really important for all of us internally and also externally that we are delivering on the 8% because it represents a very significant shift. When you're looking at 2026, driving good growth in Technology & Solutions will have a positive impact on margin. I could also expect some positive impact from active portfolio management work that we still have some of that work yet to be done. Business optimization program, we've commented as well. We successfully completed that in 2025, should also help and support. So generally speaking, I mean, we are -- and I spelled that out, I think back in 2022 is that 8% is important to achieve. We believe that now we have a really good opportunity to also be related to your third question, calibrate more precisely as well how we maximize the value creation because we've had very hard focus on improving the quality and the margin. But it's quite obvious to us as well that we get done with some of the structural work and the heavy lifting and cleaning. We're largely done with that now and that also means that we can then also start to shift focus on more profitable growth going forward. And I think that is something that we -- that is clearly on our minds. And it's also clearly something that we're also reflecting also in how we're calibrating some of the incentive programs as well so that we really gear those towards maximizing value for our shareholders. So I think those are the key points. North America, maybe briefly on your side, Andreas? Andreas Lindback: I can just follow up on the KPIs because there's also misunderstanding related to that up until now. We have both long-term incentive programs, and we have short-term incentive programs. It's right, as you say, that operating the margin has been a focus for the long-term incentive programs. But in the short-term incentive programs, which is a material part of total compensation, it is also about driving growth in the earnings as well. So I just want to highlight that. And then if you want to take the... Magnus Ahlqvist: Yes. No, that's an important point because if you look also at the operating result growth, really solid double-digit levels in 2025 in constant currency. And we are here, obviously, to drive that for change, but it's always going to be a balance as well. And we should also remember that operating margin improvement is also helping and accelerating also the operating result growth. So I think that's an important clarification about the programs that we've had up until now. When you look at North America, we feel good about our position. We feel good about the market in general. So I wouldn't -- and it's a little bit difficult to call out the specific growth numbers. This is something that in our industry, it is a little bit difficult to get a very clear understanding of how the total market is developing. But I would say that we are well positioned in terms of the segments where we are and also segments where there is, generally speaking, a higher emphasis on the quality, security is important, but there is also very healthy underlying growth. So I would say that we are well positioned, but it's difficult, Remi, to call out a very specific overall growth number. But I believe with the offering that we have, we should be able to grow at least with the market and preferably above market rate. And that is very much based on the strength of the offering but also that we are well positioned in terms of the segments that we serve. Operator: The next question comes from Andy Grobler from BNPP. Andrew Grobler: Just a couple from me, if I may. Firstly, just in Q4, in terms of the European growth, can you talk through the tailwinds from Turkey and also the headwinds from portfolio management, so sort of to get to the underlying numbers there? And then secondly on the longer-term perspective, Technology keeps evolving at pace as we can see from the stock market. I just wondered what you're seeing in your end markets? And if at this stage, there's any signs or you expect to see over time, price deflation within your monitoring activities and the extent to which that's possible. That would be really helpful. Andreas Lindback: Thank you. When it comes to the European growth rates in the fourth quarter, you can say more or less all the positive growth is coming from Turkey in essence. That's the first statement. So Turkey had an impact for sure. If you're then looking at the -- where we have volume growth was in Technology & Solutions in Europe and then there was a negative impact that we have not quantified related to the [ APM ] that is impacting the Security Services portfolio. So I think those are 3 pillars to bear in mind when looking at the European organic growth. Magnus Ahlqvist: And then, Andy, on the technology, I mean, what we call the technology business is essentially business where we drive or we design, we install systems and then we operate and serve those systems for our customers. So there's a couple of different components. But a big part of the value, I would say, when I look at the kind of 3 main areas of activity, installation, service maintenance and also monitoring is that, that work is quite tightly connected. So when we are doing a good integration and installation work, we're very well positioned to also provide the best type of service and maintenance. But more and more of what we are doing and what we're also interested in building is more the recurring revenue. And there, obviously, connected services, those are usually not just simple kind of monitoring lines, for example, it's usually part of a broader value proposition and there, I believe that we are in a good position based on the great strengths that we have built. And where also the deep integration of Stanley has really helped us because we have built genuinely good service capability and levels and also [ rich ] service offering to our clients as well. So I think that we are in good shape in that sense from a market perspective and also the offering that we bring. Andrew Grobler: Okay. And then just lastly, Andreas, thank you for all your help over the years and best of luck with whatever the future may bring. Andreas Lindback: Thank you. And likewise, Andy. Magnus Ahlqvist: I remember to say a special thank you to Andreas at the end of the call today as well. But I'm glad you comment that, Andy. Andreas has been a great partner all along here. Operator: The next question comes from Allen Wells from Jefferies. Allen Wells: A couple from me, please. Firstly, just following up from Remi's question on North America. Obviously, very mindful that active portfolio management has been a headwind to growth. And as that starts to end, you flagged in Europe in the first half, that should be a positive as you switch to that growth focus. But as Remi flagged, as we look at North America, the portfolio management has ended and growth has slowed sequentially from 2Q through to 4Q, the 5% we saw in 4Q. To what extent is that slowing in North America? Are you guys maybe holding back to focus on margin rather than kind of fully pushing the commercial engine in the business? And to what extent maybe is it just that it's a continued tough market that is still hard to drive growth? That would be the first question. Secondly, just like a bit of an update on the technology side. Obviously, growth improved sequentially 6% in the quarter, but it's still well below the 8% to 10% target. So I'd be keen just to understand of that 6%, how much is pricing, how much is volume and how you think about the outlook towards that 8% to 10%? And then third question, just on free cash flow. Just in the full year, obviously, a positive outcome overall, but there was a positive impact from working capital for the full year. Like I don't typically think of you guys as a positive net working capital business. So to what extent is that net working capital number sustainable and how should we think about potential unwind as we move through 2026 as well? Magnus Ahlqvist: Thank you, Allen. I think on the first question, we don't see any change in the trend in North America. I mean some variation there will be between the different quarters. We are well positioned. Like you highlighted, we've done with the active portfolio management, and it's obviously a dynamic market. But when you look at what we are winning and what we are losing, yes, we feel good. So no major issue or anything specific to read into that from my perspective. Andreas Lindback: When it comes to the Technology and Solutions growth, when we set the target of 8% to 10%, it's important to remember that was also including acquisitions. And there, we have done limited. We've been focusing on integrating and then also taking down our balance sheet, although it's something that we are looking at ramping up. So in that context, the 6% is a decent number. When you look into that 6% on the Technology side, it is definitely volumes mainly from that growth. If you're looking at the Solutions side, it's a combination of both volumes and price. So all in all, more volume than price when it comes to the 6%. So -- and it's also a decent number, we should say. When it comes to free cash flow, a couple of lenses here. I mean, we said in the last Capital Markets Day, yes, there will be a mix shift in the working capital with the technology business coming in. But we also said clearly that we are working on structurally improving our working capital, and that's really what we have been doing over the last couple of years, which is giving a positive result. So we have definitely structurally improved on the working capital side. And we also show that in the 88% cash flow this year, 84% last year. So it's also not just a temporary change. Then as you all know, we have seasonality in our cash flow, where our Q4 cash flow is stronger. And now the number is coming in somewhat below Q4 last year, but still at a very strong level. So going into Q1, yes, it will definitely be weaker from that standard seasonality that we're having. But the underlying trend, I think, is most important when it looks at the cash flow given we have volatility. And there, I hope you all see that we have elevated the cash flow, and we are now delivering above our financial targets 2 years in a row. Operator: The next question comes from Viktor Lindeberg from DNB Carnegie. Viktor Lindeberg: Two initially, if I may. And looking at the mounting down of CIS in 2026, if you could share some more details on the run rate and how it's sort of expected to progress and where we may be end of 2026 in terms of revenue? Are we all the way down to 0? Or is it only maybe halfway there? And second question is associated also to this, trying to trickle out the underlying cost base for the, call it, group other item or overhead line items here. So if you could share any guidance or thoughts on the underlying costs for the Securitas business, excluding CIS, that would be very much helpful. Andreas Lindback: Thank you. If we start then with the government business within SCIS closed down, as I mentioned here earlier as well, we have started to see some impact in the fourth quarter from the close-down on the top line, but it's not much. But you should expect to see an accelerated impact in the first 6 months from the close-down activities. And then if you're looking at your question there, where will it be at the end of 2026, we expect that most of it will for sure be done. The vast majority will be done by the end of 2026. So I hope that helps a little bit by understanding how we expect this to progress throughout the year. When it comes to other in our segment reporting, 3 components, as you know, our Africa, Middle East and Asia business. We have our SCIS business, and we have the group cost. The Africa, Middle East and Asia business continued to deliver strongly in the quarter comparing them to last year. The SCIS business was fairly stable when you look at the bottom line. And then on the group cost, it was higher than last year. And here, we have been running tight cost control throughout the year. But in the fourth quarter, we released some more project investments in the quarter. And that's the main reason and then some year-end reconciliation, but that's the main reason compared to last year. To understand the trend there, I would also very much look at the full year number. Viktor Lindeberg: Okay. That's very clear. And another question on the topic you have brought up Magnus in the CEO letter this quarter, you mentioned the run rate is about -- or at least USD 1 billion or looking at the [ SAS ] and recurring revenues. And I recall you mentioned 18 months ago a run rate of [ USD 1.25 billion ] per month. So just to understand, are we talking apples-to-apples here or what -- why dimensioning or maybe confusion from my side here? Magnus Ahlqvist: Thanks, Viktor. No, we're just keen also on highlighting that we have quite a significant number. I mean, we are clearly above that [ USD 1 billion ], but we will share a lot more detail in the Capital Markets Day in June because this is an important focus area also in terms of building a more scalable business. Viktor Lindeberg: Okay. So it has not deteriorated over the past 18 months. That's what you're saying? Andreas Lindback: No, no. We have seen growth in the business since then. Operator: [Operator Instructions] The next question comes from Johan Eliason from SB1 Markets. Johan Eliason: I just had a bit of a detailed follow-up on to Andreas. You mentioned that in 2026, you expect some SEK 225 million to SEK 250 million in items affecting comparability. Is that sort of including this 1% of revenue you are sort of reviewing right now? Or could there be some one-offs on top of this from this review? Andreas Lindback: Relevant question. The number that I mentioned is excluding any impact from strategic assessments, which obviously then could be both a positive or negative number, so to say. So excluding that, just for clarity. Operator: The next question comes from Nicole Manion from UBS. Nicole Manion: Just one quick follow-up question from me, please, on the Security Services margin. Obviously, that's now up more than 100 bps over the past couple of years. Just wondering if you can give us a sense of how much of the improvement there you've seen this year over the last year is portfolio management versus what's coming from price increases or any other drivers? Are we pretty close to peak margins in this side of the business as you get to the end of the portfolio pruning? Or are there other levers you think you can look at as you move into next year? Magnus Ahlqvist: Thank you. A couple of different drivers, Nicole. When you're looking at that margin improvement, new sales margins have been consistently very healthy, and that's a good indication that we have a good offering. Clients see the value in that offering. Active portfolio management is also there contributed. But I would also say that we've also been working to also run the business, leveraging the new platforms that we've invested in a more efficient way. So automation and also AI has also been helping us to also optimize how we run the operation. If you're looking at the services margin on a group level, I think that there is further opportunity to continuously improve that in the next couple of years. So I would not agree with the comment that this is kind of peak margin. We believe that driving the things that we have been driving, but also continuously strengthening the value proposition, we are in a good position to enhance the value essentially. Operator: There are no more questions at this time. So I hand the conference back to the President and CEO, Magnus Ahlqvist, for any closing comments. Magnus Ahlqvist: Thanks a lot, everyone, for your interest and a special thank you to you, Andreas. Highly respected and appreciated colleague. I also think with -- in the dialogue also with many of you have also been a really good asset. So just to say thank you. But obviously, then looking ahead as well, we are now at full speed in terms of the assessment and also seeing really good interest also for this position. So we will come back on that matter. But most important today, I think, is just to -- yes, for me to also express our appreciation from the entire team. Andreas Lindback: Thank you very much, Magnus. And thank you, everyone, on the call as well for really good collaboration in the last couple of years, highly appreciated. Magnus Ahlqvist: So I think with that, we wrap up the Q4 and 2025 presentation. Thanks a lot, everyone.
Magnus Ahlqvist: Good morning, and welcome, everyone. Andreas and I are proud to report strong results for Q4 and for the full year 2025. So let us go straight to some of the performance highlights. The organic growth in the quarter was 3%, and this was supported by 6% growth in Technology & Solutions. We had a good finish to the year in Technology & Solutions with 2% improvement sequentially. And the adjusted organic growth of the group -- and that means when you exclude the closedown of the SCIS business was 4%. And now to something important. The operating margin was 8% and 8.2% adjusted in the quarter, thanks to the strong delivery across the entire business. North America achieved a 10% operating margin in the quarter, and Europe delivered another quarter with more than 8%. And we have improved the operating margin now 20 quarters in a row and are delivering on the 8% target that we communicated 3.5 years ago. EPS real change, excluding IAC was also strong at 18% and we had continued strong delivery in terms of cash flow with operating cash flow of 88% for the full year and net debt to EBITDA ratio improved further to 2.1. And based on the stronger underlying performance, the dividend proposal is SEK 5.30, which represents an 18% increase. And looking at the future, we announced a very important milestone for our journey with the acquisition of Liferaft yesterday evening. And this is the leading provider of threat intelligence and I will provide more details regarding the strategic importance of Liferaft at the end of this presentation. So let's then shift to the performance in the business lines and segments. We delivered strong margin development in both business lines with 12.7% for Technology & Solutions, 6.6% of Services in the quarter. And there is growth, as I stated, in Technology & Solutions for 6%, so 2% improvement compared to the previous quarter. And the growth in Security Services was 1% and this growth is obviously negatively impacted by the SCIS business where we're closing down the government part of that business. So with that, let's move to the segment, and we are starting, as always, with North America where we're delivering a very strong set of results and a record 10% operating margin in the quarter. And if we start with a growth of 5%, this was driven by good portfolio development and price increases in the Guarding business and by good development in technology. The real sales growth in Technology & Solutions improved to 4% compared to lower growth in the previous quarter. And when looking at the profitability, strong leverage and cost control in Guarding, together with solid profitability in Technology and a recovery in the Pinkerton business all contributed to the record level operating margin. So all in all, a very strong performance, a record-breaking 10%, so well done by our North America team. We then move to Europe, where we are also very pleased with the development. The organic growth was 4% in the quarter, and the growth was supported by price increases including impact from the hyperinflation environment in Turkey and also by solid growth of Technology & Solutions, while active portfolio management in the Services business had a negative impact on growth. Sales growth in Technology & Solutions was 7%. But it's the profitability development that stands out with 110 basis points improvement to 8.1%. And the margin improvement was driven by both business lines, including positive impact from the business optimization program. The Security Services business was positively impacted by higher margin on new sales, active portfolio management and also the divestiture of the Airport Security business in France. We also recorded a solid improvement in the operating margin in the Technology & Solutions business line driven by good portfolio development and solid cost control. And as commented earlier, we expect the work we're addressing low-margin Guarding contracts to be completed during the first half of 2026. So all in all, solid development by our European team and also here an operating margin at a record level. Shifting then to be Ibero-America, where we are pleased to report good organic growth and decent margin improvement. The growth was 5%, and this was driven by high single digital growth in Technology & Solutions and prices increases in the Services business. But similar to Europe, there is a negative impact on the growth from active portfolio management, but we're making good progress here and driving good conversions to Technology & Solutions. And the real sales growth in Technology & Solutions was 7% in the quarter. The operating margin improved 20 basis points in the quarter, and the improvement was primarily driven by positive impact from active portfolio management in the Security Services business line. So to conclude, strong delivery in 2025 by our Ibero-America team. And looking then at the performance across the group, we are driving disciplined execution of our strategy, and I'm really pleased to see strong execution across all segments. And the client retention is solid at 90%. So with that, turn to the finance update and handing over to you, Andreas. Andreas Lindback: Thank you, Magnus. And first of all, if I sound different to normal, it is because I'm about to lose my voice, I apologize for that. We start with the income statement, where we had organic sales growth of 3% and improved the operating margin with 70 basis points to 8%. It is a strong quarter where we improved our operating income with 15% adjusted for currency. As we communicated in Q2, we have introduced 2 new KPIs, which are adjusting our organic growth and our operating margin for the government business to be closed down within SCIS. In the quarter, the adjusted organic growth was 4% and the adjusted operating margin was 8.2%. Looking below operating results, there are no material developments in amortization of acquisition-related intangibles nor in the acquisition-related costs. The items affecting comparability was SEK 78 million, and this was related to the ongoing European transformation and business optimization programs. And the full year cost for these programs was SEK 382 million, approximately in line with our previous guidance. We have executed the business optimization program in a good way where the annualized savings in Q4 are in line with the targeted SEK 200 million savings. The business optimization program is now closed. And in 2026, the only remaining program is related to the European transformation. And here, we estimate to have a full year 2026 program cost of SEK 225 million to SEK 250 million, a material reduction compared to the SEK 382 million related to the programs in 2025. In Q3, we took a SEK 1.5 billion cost in items affecting comparability related to the close-down of the government business within SCIS. The close-down is progressing according to plan and had limited impact on our operating result in Q4. We continue to expect the vast majority of the business to be closed down by the end of 2026, and we will also start to see an accelerated execution of the close-down during the first half year. Our finance net came in at SEK 383 million, a reduction of SEK 146 million compared to last year. And here, we continue to see a positive trend of reduced financing costs as interest rates and our debt levels are going down. For the full year 2026, we estimate the finance net to continue to reduce and land around SEK 1.6 billion to be compared to the SEK 1.8 billion for the full year 2025. Moving to tax. Here, we had a tax rate of 29.5% for the full year, slightly higher than our Q3 forecast of 29.2%. The full year tax rate was impacted by the SCIS close-down cost in Q3, where we estimate around half of the cost to be tax deductible over time. Adjusted for the close-down impact, the full year tax rate was 27.2%, and we expect the 2026 tax rate to be in the approximately same area. All in all, we have a strong quarter where we grow our FX adjusted EPS with 18%. And as we summarize 2025, we have improved our adjusted operating margin with 60 basis points to 7.7%, grown our operating result with 11% and grown our EPS with 18%. And at the same time, we also achieved our financial target of an operating margin of 8% in the second half year of 2025. The adjusted operating margin in the second half was 8.2%. We then move to cash flow, where our operating cash flow was solid at SEK 3.9 billion or 128% of operating income. The cash flow was supported by lower growth rates and the continued improved DSO, but also negatively impacted by the additional USD 44 million payroll in our U.S. Guarding business as we communicated in the third quarter. This negative impact is a timing impact only, which occurs every fifth to sixth year. The free cash flow landed at SEK 3 billion, supported then by the solid operating cash flow, reduced interest payments due to the lower interest rates and debt levels and positive tax timing impacts. Looking at the full year 2025, we delivered another year of record cash flow. The operating cash flow was more than SEK 10 billion or 88% of the result, supported by good working capital focus and lower growth rates. And we have now delivered operating cash flows above our financial targets of 70% to 80% over the last 2 years, a result of our strong focus to build a more qualitative business and also structurally improve our working capital over time. And this has, of course, also translated into stronger free cash flows, which creates increased flexibility and opportunity for us as we move into a new phase of our strategic journey. Our cash generation will also be positively impacted as our items affecting comparability continues to reduce as we go into 2026 and beyond. We then have a look at our net debt, which was SEK 31.3 billion at the end of the quarter. This is a reduction of SEK 2.1 billion compared to Q3, mainly supported by the strong free cash flow, but also by the strength in Swedish krona. In the quarter, we paid the second tranche of our dividend, and we had SEK 321 million of total IAC payments, whereof approximately SEK 160 million was related to the final payment for the U.S. government and Paragon settlement. We have now made all 3 payments related to this settlement and expect no further cash flow out related to the case. Looking at the right-hand side, our net debt to EBITDA reduced to 2.1. This is an 0.4x improvement compared to Q4 last year, where positive EBITDA development, good cash generation and the strength in Swedish krona have supported positively and we are well below our target net debt-to-EBITDA of less than 3x. Moving on to have a look at our financing and financial position, where we continue to have a strong balance sheet, remain with strong liquidity, and we have no financial covenants in our debt facilities. After a period of important refinancing focus, our main focus during the second half of 2025 has been to amortize debt, supported by the strong free cash flow generation. In the quarter, we repaid SEK 1.9 billion of debt and throughout 2025, we have amortized a total of SEK 3.3 billion. This continues to support our cost of financing going forward. And looking at the maturity chart, we have very limited refinancing needs throughout 2026. And as always, we remain committed to our investment-grade rating. So with that, I hand over back to you, Magnus. Magnus Ahlqvist: Many thanks, Andreas. So I'd like to share a few perspectives regarding our strategic development and the Liferaft acquisition before we open up the Q&A. First, we are proud of the fact that we are reaching our 8% target in the second half of 2025. Back in 2022, when we did the Stanley acquisition, we accelerated the work to change the profile of Securitas security company with the strongest technology and digital offering to our clients in combination with high-quality guarding services. And when looking back at last 4 years, we have been executing well. We are a sharper, more focused company today and operating at a different margin level. And as we're entering 2026, this also means that we can then start to retire this bridge that we have kept coming back to every quarter and over the last 3.5 years. Looking at the future, we're very excited about the acquisition of Liferaft. So when I look at the transformation of Securitas during the last 6, 7 years, we have kept a clear focus on investing in the core capabilities that we consider critical to winning in this industry and those are focused on presence, technology and data. In this context, we strengthened our guarding value proposition. We have improved the profitability of guarding. We've built a globally leading technology position and a more modern and digitally capable business. So we have strong pillars in our business today. But we've also worked to meet the increasing client demans for better understanding the risks and the threats facing their business. And over the past 5 years, we have developed in-house risk intelligence capabilities that we are providing to more and more customers. So all this is good, you might say, but what is then the importance of the Liferaft acquisition? Well, Liferaft is one of the leading SaaS-based threat intelligence providers focused on OSINT and that's open source intelligence. This is a very strong team with deep expertise in threat intelligence and they have been a partner and provider to Securitas for many years. And with Liferaft, we will be able to scale and leverage their capabilities across our client base and in the process strengthen our clients value proposition. When looking at the financials, the company is currently prioritizing rapid expansion and growing organically around 30% on an annual basis, but also then reinvesting very strong gross margins to accelerate organic growth. And given the increase in demand in this market, I fully support this approach. The acquisition is fully in line with our strategy to create a more scalable business model and becomes an important addition to accelerate growth in high-margin recurring monthly revenue. And as previously stated, the recurring monthly revenue for the group exceeds more than SEK 1 billion. So we are thrilled to welcome the Liferaft team when we are closing the transaction, joining forces to shape the future with more intelligence-led security. And the future is promising. With the transformation of Securitas, we're well positioned with a clearly differentiated client offering, well positioned for profitable growth. And we are operating in an attractive market, but also a growing market where we see steady increase in the demand for quality security. We have transformed and repositioned our client portfolio with a clear focus on segments with more sophisticated security needs and higher growth profile. And we partner with our clients for the long term and we see that our deeper engagement model, where we leverage our technology and digital capabilities, is generating high value for our clients and also for us. And the approach is working. So like Andreas and I have commented, we're executing well on our plans, 20 consecutive quarters of operating margin improvement and solid cash flow generation. We've had a clear focus on enhancing the quality of our business and margin improvement in recent years. But as more and more units reach the required profitability thresholds -- so from my perspective, that means for a good sustainable business, they also gained the right to shift focus to profitable growth. And with the business now in much better shape, we can shift emphasis towards commercial synergies and driving growth. And as stated many times, we do this with a clear focus on building a more scalable business. So we are confident and excited about our longer-term opportunities and we're looking forward to sharing more in the Capital Markets Day in June. So in conclusion, we are on the right path, well positioned for the next phase. So with that, we conclude the Q4 presentation and happy to open up the Q&A. Operator: [Operator Instructions] The next question comes from Francesco Nardinocchi from Goldman Sachs. Suhasini Varanasi: This is Suhasini from Goldman Sachs, actually. I just had a couple of questions please. So the -- if we think about your growth and margin expectations for the first half versus second half of this year, would it be fair to say that because of the impact of your underperforming contract exits that's going to be completed by first half this year, maybe the growth is a little more weighted to second half and similarly on margins. And I'm not sure I read but how much are you expecting to pay for the acquisition of Liferaft? And how is your M&A pipeline looking at this point in time? Magnus Ahlqvist: Yes. Thank you. So when you're looking at that, I think it's the right assumption that finalizing that work will have a negative impact in the near term from the active portfolio management. But that's why it's also so important and so positive that we are soon done with that work. And as I commented in the last couple of years, we were more quick in North America in terms of finalizing that work. So I think that is obviously something that we're looking forward to also in Europe. Then when you look at the growth in Q4, we had 6% growth in Technology & Solutions, and that's a clear improvement compared to the previous quarters. We have a strong offering. Solutions is more of a portfolio business. Technology part, there's also some variability with installations, but we see that we are on a good path. So I think that is the other part that I would just highlight because that part of the business, there is no impact from active portfolio management. Andreas Lindback: We have not disclosed the purchase price related to Liferaft simply due to commercial reasons that we're not doing that. But we have paid a fair market price for this type of business overall. So -- and there will be some details coming as we have closed the transaction as well. On the M&A pipeline side, as we have said, we are ramping up our focus on continued bolt-on acquisitions within Technology & Solutions and some targeted also acquisitions in the intelligence area. We made a few minor ones outside Liferaft, but we are still in ramp-up mode, I would say. So the pipeline is not -- there's not a huge pipeline at this point in time, but it's something that we are working towards improving. Operator: The next question comes Remi Grenu from Morgan Stanley. Remi Grenu: First, a quick question on the 2026 outlook. I guess, given you have achieved the 8% and the CMD is not before June, we are left a little bit in dark in term of margin development. So just trying to have your overview on 2026 margin development if we exclude any -- excluding the positive impact that the closure of SCIS is going to generate. But on an underlying basis with the portfolio of the company, do you believe that there is still potential for margin improvement from the current run rate at the end of 2025. So that would be the first question. The second one is on North America. The organic growth very suddenly accelerated in Q2 and it's been normalizing a little bit over the last 2 quarters. Just trying to understand the drivers of that sudden acceleration and what's happening since then? Why it is coming back down? Is it about like volume normalizing, lower pricing and also taking a step back on that market, what do you think is the structural level of organic growth in North America? And then the last one, you have come to the end of that strategic plan in 2025. Have you started to have a think about the new KPIs for management remuneration, variable remuneration and going into the next phase of the company, what do you think would be most relevant in terms of aligning the interest of shareholders with management? Magnus Ahlqvist: Very good. Thank you, Remi. So we don't provide guidance. But first of all, I think it's been really important for all of us internally and also externally that we are delivering on the 8% because it represents a very significant shift. When you're looking at 2026, driving good growth in Technology & Solutions will have a positive impact on margin. I could also expect some positive impact from active portfolio management work that we still have some of that work yet to be done. Business optimization program, we've commented as well. We successfully completed that in 2025, should also help and support. So generally speaking, I mean, we are -- and I spelled that out, I think back in 2022 is that 8% is important to achieve. We believe that now we have a really good opportunity to also be related to your third question, calibrate more precisely as well how we maximize the value creation because we've had very hard focus on improving the quality and the margin. But it's quite obvious to us as well that we get done with some of the structural work and the heavy lifting and cleaning. We're largely done with that now and that also means that we can then also start to shift focus on more profitable growth going forward. And I think that is something that we -- that is clearly on our minds. And it's also clearly something that we're also reflecting also in how we're calibrating some of the incentive programs as well so that we really gear those towards maximizing value for our shareholders. So I think those are the key points. North America, maybe briefly on your side, Andreas? Andreas Lindback: I can just follow up on the KPIs because there's also misunderstanding related to that up until now. We have both long-term incentive programs, and we have short-term incentive programs. It's right, as you say, that operating the margin has been a focus for the long-term incentive programs. But in the short-term incentive programs, which is a material part of total compensation, it is also about driving growth in the earnings as well. So I just want to highlight that. And then if you want to take the... Magnus Ahlqvist: Yes. No, that's an important point because if you look also at the operating result growth, really solid double-digit levels in 2025 in constant currency. And we are here, obviously, to drive that for change, but it's always going to be a balance as well. And we should also remember that operating margin improvement is also helping and accelerating also the operating result growth. So I think that's an important clarification about the programs that we've had up until now. When you look at North America, we feel good about our position. We feel good about the market in general. So I wouldn't -- and it's a little bit difficult to call out the specific growth numbers. This is something that in our industry, it is a little bit difficult to get a very clear understanding of how the total market is developing. But I would say that we are well positioned in terms of the segments where we are and also segments where there is, generally speaking, a higher emphasis on the quality, security is important, but there is also very healthy underlying growth. So I would say that we are well positioned, but it's difficult, Remi, to call out a very specific overall growth number. But I believe with the offering that we have, we should be able to grow at least with the market and preferably above market rate. And that is very much based on the strength of the offering but also that we are well positioned in terms of the segments that we serve. Operator: The next question comes from Andy Grobler from BNPP. Andrew Grobler: Just a couple from me, if I may. Firstly, just in Q4, in terms of the European growth, can you talk through the tailwinds from Turkey and also the headwinds from portfolio management, so sort of to get to the underlying numbers there? And then secondly on the longer-term perspective, Technology keeps evolving at pace as we can see from the stock market. I just wondered what you're seeing in your end markets? And if at this stage, there's any signs or you expect to see over time, price deflation within your monitoring activities and the extent to which that's possible. That would be really helpful. Andreas Lindback: Thank you. When it comes to the European growth rates in the fourth quarter, you can say more or less all the positive growth is coming from Turkey in essence. That's the first statement. So Turkey had an impact for sure. If you're then looking at the -- where we have volume growth was in Technology & Solutions in Europe and then there was a negative impact that we have not quantified related to the [ APM ] that is impacting the Security Services portfolio. So I think those are 3 pillars to bear in mind when looking at the European organic growth. Magnus Ahlqvist: And then, Andy, on the technology, I mean, what we call the technology business is essentially business where we drive or we design, we install systems and then we operate and serve those systems for our customers. So there's a couple of different components. But a big part of the value, I would say, when I look at the kind of 3 main areas of activity, installation, service maintenance and also monitoring is that, that work is quite tightly connected. So when we are doing a good integration and installation work, we're very well positioned to also provide the best type of service and maintenance. But more and more of what we are doing and what we're also interested in building is more the recurring revenue. And there, obviously, connected services, those are usually not just simple kind of monitoring lines, for example, it's usually part of a broader value proposition and there, I believe that we are in a good position based on the great strengths that we have built. And where also the deep integration of Stanley has really helped us because we have built genuinely good service capability and levels and also [ rich ] service offering to our clients as well. So I think that we are in good shape in that sense from a market perspective and also the offering that we bring. Andrew Grobler: Okay. And then just lastly, Andreas, thank you for all your help over the years and best of luck with whatever the future may bring. Andreas Lindback: Thank you. And likewise, Andy. Magnus Ahlqvist: I remember to say a special thank you to Andreas at the end of the call today as well. But I'm glad you comment that, Andy. Andreas has been a great partner all along here. Operator: The next question comes from Allen Wells from Jefferies. Allen Wells: A couple from me, please. Firstly, just following up from Remi's question on North America. Obviously, very mindful that active portfolio management has been a headwind to growth. And as that starts to end, you flagged in Europe in the first half, that should be a positive as you switch to that growth focus. But as Remi flagged, as we look at North America, the portfolio management has ended and growth has slowed sequentially from 2Q through to 4Q, the 5% we saw in 4Q. To what extent is that slowing in North America? Are you guys maybe holding back to focus on margin rather than kind of fully pushing the commercial engine in the business? And to what extent maybe is it just that it's a continued tough market that is still hard to drive growth? That would be the first question. Secondly, just like a bit of an update on the technology side. Obviously, growth improved sequentially 6% in the quarter, but it's still well below the 8% to 10% target. So I'd be keen just to understand of that 6%, how much is pricing, how much is volume and how you think about the outlook towards that 8% to 10%? And then third question, just on free cash flow. Just in the full year, obviously, a positive outcome overall, but there was a positive impact from working capital for the full year. Like I don't typically think of you guys as a positive net working capital business. So to what extent is that net working capital number sustainable and how should we think about potential unwind as we move through 2026 as well? Magnus Ahlqvist: Thank you, Allen. I think on the first question, we don't see any change in the trend in North America. I mean some variation there will be between the different quarters. We are well positioned. Like you highlighted, we've done with the active portfolio management, and it's obviously a dynamic market. But when you look at what we are winning and what we are losing, yes, we feel good. So no major issue or anything specific to read into that from my perspective. Andreas Lindback: When it comes to the Technology and Solutions growth, when we set the target of 8% to 10%, it's important to remember that was also including acquisitions. And there, we have done limited. We've been focusing on integrating and then also taking down our balance sheet, although it's something that we are looking at ramping up. So in that context, the 6% is a decent number. When you look into that 6% on the Technology side, it is definitely volumes mainly from that growth. If you're looking at the Solutions side, it's a combination of both volumes and price. So all in all, more volume than price when it comes to the 6%. So -- and it's also a decent number, we should say. When it comes to free cash flow, a couple of lenses here. I mean, we said in the last Capital Markets Day, yes, there will be a mix shift in the working capital with the technology business coming in. But we also said clearly that we are working on structurally improving our working capital, and that's really what we have been doing over the last couple of years, which is giving a positive result. So we have definitely structurally improved on the working capital side. And we also show that in the 88% cash flow this year, 84% last year. So it's also not just a temporary change. Then as you all know, we have seasonality in our cash flow, where our Q4 cash flow is stronger. And now the number is coming in somewhat below Q4 last year, but still at a very strong level. So going into Q1, yes, it will definitely be weaker from that standard seasonality that we're having. But the underlying trend, I think, is most important when it looks at the cash flow given we have volatility. And there, I hope you all see that we have elevated the cash flow, and we are now delivering above our financial targets 2 years in a row. Operator: The next question comes from Viktor Lindeberg from DNB Carnegie. Viktor Lindeberg: Two initially, if I may. And looking at the mounting down of CIS in 2026, if you could share some more details on the run rate and how it's sort of expected to progress and where we may be end of 2026 in terms of revenue? Are we all the way down to 0? Or is it only maybe halfway there? And second question is associated also to this, trying to trickle out the underlying cost base for the, call it, group other item or overhead line items here. So if you could share any guidance or thoughts on the underlying costs for the Securitas business, excluding CIS, that would be very much helpful. Andreas Lindback: Thank you. If we start then with the government business within SCIS closed down, as I mentioned here earlier as well, we have started to see some impact in the fourth quarter from the close-down on the top line, but it's not much. But you should expect to see an accelerated impact in the first 6 months from the close-down activities. And then if you're looking at your question there, where will it be at the end of 2026, we expect that most of it will for sure be done. The vast majority will be done by the end of 2026. So I hope that helps a little bit by understanding how we expect this to progress throughout the year. When it comes to other in our segment reporting, 3 components, as you know, our Africa, Middle East and Asia business. We have our SCIS business, and we have the group cost. The Africa, Middle East and Asia business continued to deliver strongly in the quarter comparing them to last year. The SCIS business was fairly stable when you look at the bottom line. And then on the group cost, it was higher than last year. And here, we have been running tight cost control throughout the year. But in the fourth quarter, we released some more project investments in the quarter. And that's the main reason and then some year-end reconciliation, but that's the main reason compared to last year. To understand the trend there, I would also very much look at the full year number. Viktor Lindeberg: Okay. That's very clear. And another question on the topic you have brought up Magnus in the CEO letter this quarter, you mentioned the run rate is about -- or at least USD 1 billion or looking at the [ SAS ] and recurring revenues. And I recall you mentioned 18 months ago a run rate of [ USD 1.25 billion ] per month. So just to understand, are we talking apples-to-apples here or what -- why dimensioning or maybe confusion from my side here? Magnus Ahlqvist: Thanks, Viktor. No, we're just keen also on highlighting that we have quite a significant number. I mean, we are clearly above that [ USD 1 billion ], but we will share a lot more detail in the Capital Markets Day in June because this is an important focus area also in terms of building a more scalable business. Viktor Lindeberg: Okay. So it has not deteriorated over the past 18 months. That's what you're saying? Andreas Lindback: No, no. We have seen growth in the business since then. Operator: [Operator Instructions] The next question comes from Johan Eliason from SB1 Markets. Johan Eliason: I just had a bit of a detailed follow-up on to Andreas. You mentioned that in 2026, you expect some SEK 225 million to SEK 250 million in items affecting comparability. Is that sort of including this 1% of revenue you are sort of reviewing right now? Or could there be some one-offs on top of this from this review? Andreas Lindback: Relevant question. The number that I mentioned is excluding any impact from strategic assessments, which obviously then could be both a positive or negative number, so to say. So excluding that, just for clarity. Operator: The next question comes from Nicole Manion from UBS. Nicole Manion: Just one quick follow-up question from me, please, on the Security Services margin. Obviously, that's now up more than 100 bps over the past couple of years. Just wondering if you can give us a sense of how much of the improvement there you've seen this year over the last year is portfolio management versus what's coming from price increases or any other drivers? Are we pretty close to peak margins in this side of the business as you get to the end of the portfolio pruning? Or are there other levers you think you can look at as you move into next year? Magnus Ahlqvist: Thank you. A couple of different drivers, Nicole. When you're looking at that margin improvement, new sales margins have been consistently very healthy, and that's a good indication that we have a good offering. Clients see the value in that offering. Active portfolio management is also there contributed. But I would also say that we've also been working to also run the business, leveraging the new platforms that we've invested in a more efficient way. So automation and also AI has also been helping us to also optimize how we run the operation. If you're looking at the services margin on a group level, I think that there is further opportunity to continuously improve that in the next couple of years. So I would not agree with the comment that this is kind of peak margin. We believe that driving the things that we have been driving, but also continuously strengthening the value proposition, we are in a good position to enhance the value essentially. Operator: There are no more questions at this time. So I hand the conference back to the President and CEO, Magnus Ahlqvist, for any closing comments. Magnus Ahlqvist: Thanks a lot, everyone, for your interest and a special thank you to you, Andreas. Highly respected and appreciated colleague. I also think with -- in the dialogue also with many of you have also been a really good asset. So just to say thank you. But obviously, then looking ahead as well, we are now at full speed in terms of the assessment and also seeing really good interest also for this position. So we will come back on that matter. But most important today, I think, is just to -- yes, for me to also express our appreciation from the entire team. Andreas Lindback: Thank you very much, Magnus. And thank you, everyone, on the call as well for really good collaboration in the last couple of years, highly appreciated. Magnus Ahlqvist: So I think with that, we wrap up the Q4 and 2025 presentation. Thanks a lot, everyone.
Bård Pedersen: Good morning to all, both here in the room in Oslo and to all our participants online. Welcome to the presentation of Equinor's Fourth Quarter and Full Year Results for 2025. My name is B�rd Glad Pedersen. I'm Head of Investor Relations in Equinor. To those of you who are in the room, I want to inform you that there are no emergency drills planned for today. So if there is an alarm, we will evacuate and follow instructions. Today, we will have a presentation first from our CEO, Anders Opedal, followed by a presentation from our CFO, Torgrim Reitan, before we start the Q&A. [Operator Instructions] So with that, I hand it to Anders for your presentation. Anders Opedal: And thank you all for joining here in the room, and thank you for participating on digital. So for Equinor, 2025 was a year of strong deliveries, but it was also a year of increased geopolitical tension and market uncertainty. Our job is to ensure we allocate our resources in a way that maintain a competitive business, creating value at all times. Today, Torgrim and I will show how we take the necessary measures to further strengthen our competitiveness, cash flow and robustness. This makes sure that we can navigate through and leverage market volatility and the current macro environment. So we have 3 key messages for you today. First, we are well positioned for maximizing long-term shareholder value. Today, we will share how clear strategic priorities guide capital allocation for 2026 and '27, and we will revert at our Capital Market Day in June to present our strategy towards 2030. Second, we take firm actions to strengthen free cash flow. We reduced our CapEx outlook with $4 billion and maintain strong cost discipline. This makes us more robust towards lower prices and ensure that we can maintain a solid balance sheet through the cycles. And third, we continue to develop an attractive portfolio, delivering oil and gas production growth. With this, we are prepared for volatility ahead. The energy transition is shifting gears in many markets with governments and companies changing priorities. Current oil prices are supported by geopolitical risk, but we are prepared for strong supply combined with moderate demand growth, putting pressure on the oil price in the near-term. For gas, the European market has seen cold weather and high draw on storage in late December and in January. Storage levels are now around 40%, significantly below average for the last 5 years and also lower than last year. We expect continued volatility ahead and more LNG coming into the market. In the U.S., low temperatures have driven up local demand and reduced exports of LNG. But before I progress any further, I will always start with safety. Despite fewer people being hurt and our safety numbers moving in the right direction, we still have serious incidents and need to improve. In September, our colleague was fatally injured during a lifting operation at Mongstad. A stark reminder that we cannot rest until everyone returns safely home from work every day. Our safety trend reflects years of good work from the people in our organization and our suppliers. Safety remains our first priority. Throughout 2025, we have delivered strong performance despite geopolitical uncertainty, high inflation in the supply chain and lower commodity prices. This results in all-time high record production, thanks to good operational performance and new fields on stream. We have matured a competitive project portfolio across the Norwegian continental shelf and internationally. With Johan Castberg on stream, we opened a new region in the Barents Sea. In Brazil, we started production from Bacalhau, the first pre-salt operator ship awarded to an international company. We continue high-grading our portfolio, and we maintained cost and capital discipline. All this has enabled us to deliver industry-leading return on average capital employed of 14.5% and $18 billion in cash flow from operations after tax. We have delivered $9 billion in capital distribution to our shareholders, as we said at the start of the year. Last year, we received 2 stop-work orders for Empire Wind. In our view, both are unlawful. The first one was lifted by the UN administration in May. The second stop-work order came just before Christmas. This cited national security reasons, already a central part of an extensive approval process where we have complied with all requirements. In January, we were granted a preliminary injunction allowing us to resume construction. There will be a continued legal process, and we remain in dialogue with U.S. authorities to resolve any issues. Despite the significant challenges caused by the stop-work orders, the project execution is according to plan. The project is now over 60% complete. We have successfully installed all monopiles, the offshore substation and almost 300 kilometers of subsea cables. The total CapEx for Empire Wind is now expected to be around $7.5 billion. Around $3 billion is remaining, and we, like other companies, remain exposed to uncertainty when it comes to possible future tariffs. The project qualifies for tax credits as decided by the U.S. Congress. The cash effect of these is expected to be around $2.5 billion. So far, we have drawn $2.7 billion from project financing. We expect to draw the remaining $400 million this year. For 2027 and '28 combined, we expect around $600 million in cash flow from operations. Combined with the ITC, this covers the remaining CapEx in the period. We have continued high-grading our portfolio. We announced the latest move earlier this week, divesting onshore assets in Argentina for a total consideration of $1.1 billion, unlocking capital for high value creation opportunities. The establishment of Adura was a major milestone last year. Our joint venture with Shell has created a leading operator on the U.K. continental shelf, fully self-funded, covering all Rosebank CapEx and well positioned for growth. The JV company expects to distribute more than 50% of cash flow from operation to its shareholders, starting from the first half of 2026. Based on Adura's plans, we expect total dividends of more than $1 billion for 2026 and '27 combined with growth from '26 to '27. This moves our U.K. portfolio from being cash negative due to CapEx to cash positive from dividends. These 2 transactions build on previous high-grading of the portfolio, divesting mature assets and invest more in long-term gas production onshore U.S. Through this, we have created a more future-proof international portfolio, focusing on prospective core areas, increasing free cash flow, strong production, lowering cost and a portfolio with low carbon intensity. Now on to our strategic priorities for 2026 and '27 and how they guide our capital allocation. The world is changing, but one thing remains firm. Energy demand continues to grow. We are well positioned to contribute to energy security, affordability and sustainability. So first, after more than 50 years of developing the Norwegian continental shelf, we are uniquely positioned for value creation here, and we continue to invest. The Norwegian continental shelf remain the backbone of the company. In 2026, the NCS will contribute to our production growth, and we work to maintain strong production well into the next decade. In the future, as you know, we expect to make more but smaller discoveries. To ensure commerciality, we will work with partners, suppliers, authorities and unions to change the way we operate on the Norwegian continental shelf. We will develop future discoveries faster, become more efficient and increase return while improving safety further. Next, we are set to deliver strong production and cash flow growth from our high-graded internationally -- international oil and gas portfolio. We are progressing project execution and exploration across key geographies, adding new volumes and opportunities for longevity in the portfolio. On power, we combine our renewable portfolio with flexible power to build an integrated power business and strengthen our competitiveness. We are value-driven in all we do and disciplined in execution and capital allocation. The main focus for '26 and '27 deliver safe operations and strong project execution of already sanctioned portfolio. All this, Norwegian oil and gas, international oil and gas, power are tied together by our marketing and trading capabilities, creating value uplift across our business. We are positioned to create value within low carbon solutions like carbon capture and storage, but markets are developing at a slower pace than anticipated. In addition to the execution of Northern Lights and Northern Endurance, we will continue to mature a few selected options and markets at low cost. We will be positioned to invest as markets develops, customers are in place and returns are robust. We grow our production to even higher levels in 2026 from a record high production level in 2025. For the year, we expect a production growth of around 3%. We are ramping up new fields, which more than offset divestment and natural decline. We are replenishing our portfolio and have 3-year average reserve replacement ratio of 100%. On the NCS, we made 14 commercial discoveries last year, mainly close to existing infrastructure, adding to longevity. And we continue to explore. We have added attractive acreage in Norway, Brazil and Angola, where we expect to drill around 30 exploration wells in 2026. We expect to reduce our unit production cost to $6 per barrel. We continue to focus on delivering a carbon-efficient portfolio with a CO2 upstream intensity of 6.3 kilo per barrel. We take firm actions to strengthen our cash flow and further increase resilience facing higher market uncertainty. In 2026, we expect around $16 billion in cash flow from operations after tax. This reflects a lower price outlook and is also impacted by the tax lag effect in Norway. A flat price assumptions is growing to around $18 billion in 2027. We have strengthened our investment program for 2026 and '27, reflecting market realities. We have reduced our CapEx outlook for these 2 years with around $4 billion, mainly within power and low carbon. This also influenced our net carbon intensity reduction for 2030 and 2035, no change to 5% to 15% and 15% to 30%, respectively. We maintain a stable investments of around $10 billion annually to oil and gas. Our CapEx guiding for 2026 is around $13 billion. This includes Empire Wind, where we, in 2027, expect to monetize investment tax credits for around $2 billion. With this, we indicate CapEx of $9 billion for 2027. In the current situation for the offshore wind industry, we are focusing on projects in execution and have a high bar for committing capital towards new offshore wind projects. This includes our ownership in �rsted. We will continue driving cost improvements, including the portfolio high-grading we have done. We aim for 10% OpEx reduction in 2026, even while growing production. We continue with strategic portfolio optimization to strengthen future cash flow. Proceeds from the divestment of Peregrino and onshore Argentina assets is expected to contribute more than $1.1 billion this year. The action we take to strengthen our cash flow and robustness support sustainable, competitive capital distribution. This is important to me and a priority for the Board of Directors. The starting point is the cash dividend. We have set an ambition to grow the quarterly cash dividend with $0.02 per share on an annual basis. We continue to deliver on this. It represents an industry-leading increase of more than 5%. We also continue to use share buybacks to deliver competitive total distribution. For 2026, we announced a share buyback program of $1.5 billion, including the state share. The first tranche of $375 million starts tomorrow. As previously communicated, we see true timing effects like the tax lag in Norway and the phasing of Empire Wind and lean on the balance sheet to deliver competitive capital distribution in 2026. In 2027, we have taken action to deliver stronger free cash flow. This is important to ensure that we can deliver competitive capital distribution in a long-term sustainable manner. So with our guiding in the background, I will give the floor to Torgrim that will take you through -- further through the details. And then I look forward to questions together with Torgrim when he is finished. So Torgrim, please. Torgrim Reitan: So thank you, Anders, and good morning and good afternoon, and thank you for joining us here today. So 2025 was a good year for Equinor. We delivered strong performance and record high production. But before we dive into the financial results, I want to expand on how we will manage through a period of volatility. So we are prepared for lower prices with a strong balance sheet, lower cost and CapEx and an attractive project portfolio. Our financial framework sets the boundary conditions for how capital allocation -- for our capital allocation and how we manage our company. So to start, our highest priority will be to deliver a robust and a growing cash dividend, in line with our dividend policy, and this reflects growth in our long-term underlying earnings. Then we will continue to invest in an attractive and high-graded investment portfolio with low breakevens and strong returns in line with the following priorities. First, our unique position on the Norwegian continental shelf gives us competitive advantages. And this is why we will continue to prioritize developing this area and allocating almost 60% of our investments to an area we know better than anyone. In '26, we have 16 projects in execution in Norway. Many of these are tie-ins to existing infrastructure with low cost and very low breakevens. Then we will allocate 30% of our capital to our international oil and gas business. This is mainly to sanctioned projects, and we expect to increase production to more than 900,000 barrels per day in 2030. And then around 10% of our capital will be allocated to building an integrated power business where the main focus is on delivering our offshore wind projects in execution safely, on time and on cost. Outside these 3 areas, we expect limited investments over the next 2 years. As you know, we will prioritize having a strong balance sheet and liquidity necessary at all times. And this is important to manage risk and to continue to deliver value. Over the next 2 years, we will see through the timing effects such as the NCS tax lag and the tax credit on Empire Wind impacting our cash flow from operations, and we will lean on the balance sheet. We will lean on the balance sheet in 2026 to cover CapEx and distribution. Next year, in 2027, cash flow from operation is stronger, and we have lowered CapEx, significantly improving the free cash flow. So we will manage the balance sheet through this period and continue to deliver competitive capital distribution, including share buybacks. For more than a decade, we have consistently delivered an industry-leading return on capital employed. And if you ask me, that is a premium KPI that we hold very high in our company. And with this financial framework, we expect to deliver around 13% over the next 2 years, now using a lower price deck than what we have used earlier as such. So that is comparable to what we have said earlier. We are used to managing volatility and deliver value through cycles. First, to manage cycles, we have to run with a strong balance sheet and a robust credit rating, and we have that. We have that. And having liquidity available is key. We have close to $20 billion for the time being. Second, a low cost base is important to ensure that we make money at low prices, and we continue to reduce our costs. We have a low unit production cost. And in 2026, we will further reduce it by around 10% to $6 per barrel. We are the lowest cost supplier of pipe gas to Europe with our all-in costs of less than $2 per MBtu, and we are sure that we will create significant value in any price scenario in Europe. Through strong cost performance and portfolio high-grading, we aim to reduce OpEx and SG&A by 10% in 2026. This corresponds to a flat underlying cost development, overcoming inflation while growing production. We are addressing costs in all parts of the organization. And I want to highlight that in 2025, we brought down OpEx and SG&A in renewables by 27%, mainly due to reductions in early phase costs. And then thirdly, it is key to have a competitive project portfolio that makes sense at lower prices. And we operate a majority of our projects, giving us the flexibility needed to adjust when we want to do that. Through portfolio flexibility and high-grading, we have reduced CapEx over the next 2 years by $4 billion, made divestments totaling more than $6 billion since 2024 and strengthened the quality of our portfolio. Our average breakeven is around $40, and we see an internal rate of return of 25% in the portfolio at $65 oil. We remain a leader on CO2 efficiency and an average payback of 2.5 years. So I will call this a robust, low-risk and high-value project portfolio that will create value also at low prices. In periods of volatility, our NCS position and our international portfolio complement each other. In Norway, we are more robust to lower prices, while internationally and particularly in the U.S., where we have strengthened our gas position, we have a large exposure to upside in prices. So Norway first. We have immediate deductions for CapEx against the special petroleum tax. And with full consolidation between fields and no asset ring-fencing, our pretax CapEx of around $6 billion translates into an after-tax investments of less than $1.5 billion. And when prices change, 78% of the effect on the revenue is absorbed by reduced taxes. So this makes the NCS less exposed to lower prices than other basins. So what happens if prices change? With a $10 move in oil prices, the cash flow is only impacted by $1.2 billion, and this is across the global portfolio and adjusted for tax lag. For European gas, a $2 change equals $800 million. What is particularly interesting is the U.S. gas, where the production is now 1/3 of our Norwegian gas position. But still, a $2 movement in gas price has a similar effect on cash flow after tax as in Norway. So let me elaborate more on the U.S. gas as that has become even more important to us. So in 2025, we delivered around $1 billion in cash flow from operations out of that asset. Production increased by 45% on back of well-timed acquisitions to around 300,000 barrels per day, capturing gas prices that were more than 50% higher than in 2024. We have a low unit production cost for U.S. gas around $1 per barrel, and we are well positioned to benefit from robust power load growth and increased demand in the Northeast. We are marketing our gas ourselves, and we are able to add value through trading, pipeline capacity and access to premium markets such as New York City and Toronto. So in January this year, gas prices in the Northeast reached very high levels driven by the winter storms, and we used our infrastructure and trading to capture quite a bit of value out of that volatility. Okay. So now to our fourth quarter and full year results. These slides sums up the key numbers you heard from Anders. Safety is our first priority. We see strong safety results, but we need to continue improving with force. Return on average capital employed in '25 was 14.5%. Cash flow from operations after tax came in at $18 billion, and earnings per share was strong at $0.81. For the year, we produced 2,137,000 barrels per day. This is record high and up 3.4% from last year, driven by ramp-up on Johan Castberg and Halten East on the NCS, U.S. onshore gas and new wells coming on stream. In the quarter, production was up 6% despite some operational issues in Norway and in Brazil. On the NCS, Johan Sverdrup had another strong year. For power, we produced 5.65 terawatt hours and renewables power generation was up by 25%. So then to financials. Adjusted operating income from E&P Norway totaled $5 billion, driven by increased production at lower prices. Depreciation was up compared to last year due to new fields on stream. Our E&P International results were impacted by portfolio changes and an underlift situation in the quarter. In the U.S., results were driven by significantly higher gas production, capturing higher prices. And in our MMP segment, results were driven by gas trading and optimization and a favorable price review result in January. So the result of this price review explains the difference from the MMP guidance. So this is a one-off. However, important enough, and the cash flow impact will be somewhat higher than the accounting effect, and it will come in 2026. On a group level, we had net impairments of $626 million and losses on sale of assets of $282 million. These do not impact adjusted numbers. A significant part of this relates to the Peregrino and the Adura transactions, and they are mainly driven by accounting treatment of these transactions, more of a technical nature. Adjusted OpEx and SG&A was up 7% compared to the same quarter last year and up 9% for the year. These are driven by transportation costs, insurance claims and currency. For the year, underlying OpEx and SG&A was up 1%. And if you adjust for currency headwinds, it was actually slightly down. For the year, our cash flow from operations came in at $18 billion after tax, in line with our guidance when we adjust for changes in prices. Organic CapEx for the year was $13.1 billion, also in line with what we said. Our net debt to capital employed ended at 17.8%. This increase from last quarter is mainly driven by NCS tax payments and �rsted rights issue participation and somewhat increasing working capital. So let me conclude with our guiding. For 2026, we expect $13 billion in organic CapEx and a 3% growth in oil and gas production. We have increased our quarterly cash dividend by more than 5% now at $0.39 per share and announced a share buyback of up to $1.5 billion for the year, starting with the first tranche tomorrow. So thank you very much for the attention. And now I will leave the word back to you, B�rd, for the Q&A session. So thanks. Bård Pedersen: Thank you, both Anders and Torgrim. We will now start the Q&A. [Operator Instructions] So then we'll start. And the first hand I saw was Teodor Sveen-Nilsen from Sparebank. Teodor Nilsen: Congrats on strong results. So 2 questions. First on CapEx. You obviously reduced the guidance for 2027. I just wonder how we should interpret the run rate into 2028. Should we also assume that 2028 CapEx will be well below the $13 billion you previously announced? Or is that too early to say anything about? And second question, that is on MMP. Could you just explain what's behind the price review that boosted the results? Anders Opedal: Thank you very much. So you can think about the price review, Torgrim, while I'm talking about the CapEx. Yes, you're right. We have reduced the CapEx. We have -- when we are looking into the CapEx profile over the last years, we have had consistency. You have seen that we have consistency investing into Norwegian oil and gas and in international oil and gas. And last year and this year, we are reducing the CapEx outlook for our renewables and low carbon solutions. And this is due to that 2, 3 years ago, we had a different market view than we have today. We don't expect that this market will change dramatically over the next years. We intend to continue focusing, investing consistently into our attractive oil and gas portfolio that Torgrim demonstrated and be market-driven and invest in low-carbon solution and power when the time is right, the profitability is right and the market comes. So I cannot give you the guiding for '28 already. But with this consistency investments in oil and gas and this change we have done in the CapEx for renewables and low carbon solutions and the market will probably not change very much over the next years, I think you will see somewhat consistency in our CapEx guiding going forward, and we will come back to more details about this in June. Torgrim Reitan: And thanks, Teodor. On the price review, that is a normal mechanism in many of the gas contracts where sort of if the price in the contract dislocates from what the market should have been and the price should have been, we have a mechanism to renegotiate or open up that. We often disagree with customers in processes like this. And often, we take such things into arbitration as we have done in this case. So that has gone on for a while, and we won in that arbitration. Over the year, we have accrued revenue related to that because we consider that we had a strong case. We had an even better outcome than what we accrued as such. So this will be a one-off payment during the year. And from now on, there is a new mechanism in place on that contract as such. Bård Pedersen: Sorry, Teodor, I need to stick to the 2 questions because we want to cover as many as possible. And the next one is on my list is John Olaisen, ABG Sundal Collier. John Olaisen: First question is regarding Johan Sverdrup... Bård Pedersen: John, please use the microphone so people can hear you online. John Olaisen: Okay. Sorry. It's John Olaisen from ABG. My first question is regarding Johan Sverdrup. Anders, you quoted in the media today saying that you expect it to decline by more than 10% this year. I wanted to elaborate a little bit more on that. How much more? And do we expect the same for the next few years? So that's my first question on Johan Sverdrup production profile. The second question is regarding M&A. You've sold a lot of assets internationally. So I wonder, do you still have assets on the sales list internationally? And also secondly, it's a long time since you bought assets internationally. Do you have -- are you looking at potential acquisitions internationally? Those are the 2 questions, Sverdrup and M&A. Anders Opedal: Thank you. First of all, when it comes to Sverdrup, I think we have demonstrated over many, many years how we've been able to keep up the production, even increase it due to the fantastic work that is done by the people working with Johan Sverdrup. Then a field like this is like all other fields, eventually, it will come into decline, and we see that now. So we see a decline in Johan Sverdrup for 2026, which is more than 10%, but well below 20% and that is what we put into our numbers. Still, we will have a growth in Equinor of 3% for 2026 and actually also a growth both on the Norwegian continental shelf and internationally. And of course, based on all the good work, drilling new wells, placing the wells better, retrofitting the wells, high production efficiency, have a high water cut and flow through the separators. The team is working to make sure that this decline is as low as possible. But above 10, well below 20 is what we see and kind of planning for in 2026. Well, we don't have a specific list of M&A sales candidates and targets that we disclose. But I think what you have seen, what we have done in the past, we have been active both in divestment where we think the timing is right to create value and where we see that future investment can be used better elsewhere that we have monetized those assets. And when we have seen opportunistic opportunities to invest, we have done it like twice in the U.S. gas in the Marcellus. You can expect us to be active going forward. And we have had a strategy of optimizing the international business, and we have optimized it now and set it clear for growth. And now is the focus to deliver on that growth finding more attractive exploration opportunities within those selected areas and at the same time, be open for value-accretive opportunities in the market. Bård Pedersen: Thank you. Next on my list is Henri Patricot from UBS. Henri Patricot: Two questions from me. The first one on the cash flow guidance for '26, '27, you do show this meaningful improvement in '27 to $18 billion. Could you give us a bit more of a breakdown behind this improvement? I think you mentioned Empire Wind starting up, some tax lag effect. What else is contributing to this sharp increase? And then secondly, I was wondering, there's uncertainty still around Empire Wind 1. What would be the impact to the financial framework you presented today if the project does not complete or implications for the broader CapEx and shareholder returns? Anders Opedal: So if you, Torgrim start with Empire Wind, then I can take on the CapEx reduction for '27 afterwards. Torgrim Reitan: Okay. So thanks, Henri. On the Empire Wind, clearly, we are steered by sort of forward-looking economics and forward-looking cash flows when we make up our mind. So from now on, the remainder of investments will be covered by the ITC and cash flow from operations over the next 2 years in a way. So the threshold for not moving forward with it is extremely high in a way. I mean the total economics of that project life cycle is something else. But clearly, the decision that we have to make is actually how it look going forward. And going forward, it's actually pretty solid. So the threshold for stopping it is very high. Our job is to deliver this on time and schedule. And I must say, I am extremely proud of what that project organization has been able to do through all of this volatility this year to keep it steady on the track. So we are on track to deliver, and we have no other plans than that. Anders Opedal: Yes. And then the cash flow from operation that is increasing from $16 billion to $18 billion towards '27. This is based on flat price assumption, $65 on the oil price and $9 and $3.5 for Europe and U.S., respectively. And the answer here is that this is the tax lag. We are this year paying a higher tax based on higher prices last year on the Norwegian continental shelf. And it's also a 3% production increase in 2026 that will also contribute to a higher cash flow. Bård Pedersen: Good. I have a long list also online. So let's take a few from there. The first one to raise his hand was Biraj Borkhataria from RBC. Biraj Borkhataria: Just the first one is a follow-up on Johan Sverdrup. You mentioned the decline for 2026. What is in your base case for 2027 and beyond? Because obviously, it's quite a big part of your portfolio. It'd be good to get some clarity there on the decline rates. And then the second question is just on the Empire Wind budget has obviously gone up a little bit. How should we think about how much contingency you have in that new $7.5 billion budget? Anders Opedal: Well, when it comes to -- we are guiding now on Johan Sverdrup for 2026. And to say what it will be in '27 is too early. As I said, we have a fantastic team there that will do everything they can to reduce this decline. We will drill new wells. And I also remind you that in the end of '27, we will have Johan Sverdrup Phase 3 coming on stream as well. We have ramp-up of other fields on the Norwegian continental shelf, meaning that despite this reduction in '26 decline in Johan Sverdrup, we will still have a production growth. And then we will see now how Johan Sverdrup behave during the first part of the decline and how we are mitigated and then we will come back to it. So it's too early to say. When the increases on the Empire Wind, it's very much related to 2 elements, is tariffs that has been imposed to the project and is also an effect of the first stop-work order that we had. The second stop-work order, we were able to execute part of the project, most of the project in the beginning of the stop-work order. And the most important parts of the progress, we were able to do after the preliminary injunction. So very little effect of the project. So it's the execution part of it -- it's going well in terms of CapEx -- use of CapEx in this project, but there is a remaining uncertainty on tariffs. You might remember a couple of weeks ago, a 10% tariff due to Greenland that was removed a little bit a few days later, and that is some of the uncertainty that we are facing with this project. Bård Pedersen: The next one on the list is Alastair Syme from Citi. Alastair Syme: Just one question really to Anders. I just wanted to reflect on the journey that Equinor has been on in recent years with respect to the transition because you are signaling today a further scaling back in ambitions with a lower CapEx and look, I know you're not alone in doing this in the industry. But if I go back a few years ago, you had outlined a competitive position where Equinor could be differentiated in the transition space. So I guess my question is, what are your reflections on this journey? And what do you think has happened that is different to what you anticipated several years ago? Anders Opedal: Thank you. It's a really good question. And I think kind of this is where we were saying today that we are signaling a consistency. We have over the last 5 years, been extremely consistent in our communication around oil and gas and how we will develop the oil and gas portfolio, optimize it, and we have delivered on that. But we also had a different market view on offshore wind and the transportation and storage of CO2 in particular. This is where we were -- had experience. We saw a market growing for transportation and storage of CO2 going faster than we actually have seen. We -- for instance, also for hydrogen, a couple of years ago, we actually had head of terms contracts with customers. Those has been canceled, meaning that we have not been able to progress a lot of these projects within that area. But keeping in mind, we were able to -- been able to do Northern Lights -- Northern Lights Phase 2, Northern Endurance. So we see now that the licensing for or support regimes and applications for capturing CO2 goes slower despite that the framework and the laws are much more in favor of CO2 now than it was before. So to summarize very quickly, we had a different market view some years ago based on real discussions with governments and potential customers than we have today. 3, 4 years ago, customers called us to buy natural gas and was also asking for potential hydrogen and transportation and storage of CO2. Today, they continue to buy natural gas, but they have postponed their own targets for reducing emissions beyond 2030. Some years ago when everyone had a 2030 target, much more focus from customers to have this market up and running very fast. Now with different targets beyond 2030 to collect enough CO2 to have long-term contracts we have found it very difficult. That's why we are allocating no more CapEx into that area due to the market conditions. So that is what had happened. And we have focused on business-to-business with hard-to-abate industry that has postponed the targets. Bård Pedersen: Next question is from Irene Himona from Bernstein. Irene Himona: My first question is one of clarification really. You referred to your objective to build an integrated power portfolio. Typically, when your peers refer to integrated power, they mean essentially adding gas-fired power generation to renewables. So I wanted to ask what does integrated power mean for you? And how does �rsted fit in that? My second question, just going back to the share buyback. Previously, in the past, you had guided to a long-term sustainable through-the-cycle share buyback of around about $2 billion. Today, you lowered that to $1.5 billion. I'm just trying to understand what has changed between then and now essentially. Anders Opedal: You can start with that, Torgrim, and I'll do the integrated power. Torgrim Reitan: Okay. Thanks, Irene. So well, we have said at earlier years, $1.2 billion as sort of the sustainable level in a way. So $1.5 billion is actually above that. We retired the $1.2 billion a bit back. To give a little bit more context, Irene, it's the concept of having a stable share buyback through a cycle, comes a little bit theoretical. We're just coming out of a super cycle, and we have returned $54 billion over the last 3 years based on that in a way. So where we are now, we are actually the first year where the balance sheet is normalized, and we aim to manage within our means. So the number that we put forward today is $1.5 billion. We are leaning on the balance sheet this year, but you have seen in 2027. So we want to sort of give you an outlook for -- over a couple of years here. So the way you should think about share buyback is that it is a natural part of the capital distribution. It is something that is regular and is on top of the cash dividend. And the cash dividend, you should see -- consider as bankable. Share buyback clearly will be more dependent on macro environment as we move forward. Anders Opedal: When it comes to integrated power, for us, that means both intermittent power like offshore wind, onshore wind, solar, in addition to flexible power, batteries and CCGTs. We do have exposure in all of this. We have gas to power in U.K. We have battery in Poland and onshore and offshore and solar. This was divided in different business area. Now everything is integrated into one business area power. And then we have Danske Commodities that are able to integrate this totality and add additional value to this. Having said that, the priority within Integrated Power over the next year is to deliver on the already sanctioned projects. And from that, we are able to potentially if we have the right investment opportunity to expand further on the integrated power. But of course, with our gas position in Europe and U.S., we are, of course, well positioned also for gas to power if we see the right opportunities in the future. �rsted and working together with �rsted and collaboration with �rsted, as we have said, fits into this type of integrated power. We can be exposed in offshore wind in different ways and working together with �rsted, collaborating with �rsted will fit into an integrated power in different types of potential structures. Bård Pedersen: Thank you, Irene, for that. I'll take one more on the phone and then return to the room here. The next one is Paul Redman from BNP Paribas. Paul Redman: My first question is just how do you think about growth at Equinor? The reason I asked that question is at the Capital Markets Day last year, you highlighted a flat to decline in production 2026 plus. And I'm assuming that included some Vaca Muerta production as well. You're heavily cutting the renewable portfolio spend. So just how do we think about growth going forward from here? And then secondly, when I look at MMP, I guess the long-term -- well, the annual guidance was $1.6 billion, $400 million a quarter. You generated about $1.25 billion to $1.3 billion for the quarter if I take out the long-term gas contract review from this quarter. Is there any reason the guidance isn't updated? And how should we think about MMP going forward? Anders Opedal: I'll start with the growth, and we divide it so you can take the MMP. Well, let's start with the renewables. We have said that we don't want to invest more than what we have already sanctioned, but that will create a growth. We had a 45% growth quarter-to-quarter on the renewable business this year, 25% on the annual -- in 2025. So still growth in Integrated Power over the next year. And then as I said, we will have to think how we can create further profitable and disciplined growth into that area. When it comes to the international business, we have repositioned that portfolio. And you can expect from today's level towards 2030, growing this production towards 900 million barrels a day. So it's clearly a growth in there, growth in production, growth in free cash flow. On the Norwegian continental shelf, we will continue to explore. We -- it will be difficult to create further growth in -- on the Norwegian continental shelf, but we have received attractive acreage. We will drill 26 exploration wells on the Norwegian continental shelf next year. We're working on reducing the time from exploration to production from 5 to 7 years to 2 to 3 years, enabling more efficiency to be able to keep the production at the highest possible level on the Norwegian continental shelf and growing free cash flow from that portfolio. And that is what we're aiming for, for Norwegian continental shelf internationally and integrated power. Torgrim Reitan: Thanks, Paul. On MMP. So if you strip away the price review, you get to around $400 million in the fourth quarter, which is very much around sort of what we guide at. So that's sort of -- that's what you should, in a way, expect on a quarterly basis. However, there will be fluctuations as you very well know. What typically drives results are volatility in commodity markets and also contango versus backwardation. I can give you one example actually from January, where there has been a lot of volatility in the gas market. And in Europe, we have a 70% day ahead exposure and a 30% month ahead exposure. So you can rest assure that sort of the spikes you have seen in January, it finds its way to our P&L in Europe. In the U.S., we don't have -- we don't sort of have a firm exposure that we want, but clearly, the traders keep a certain part open. So when going into January, in the U.S., our traders left 30% exposed to the prompt or cash prices as such. So at the most extreme, for instance, the in-basin price for Marcellus gas was $60 per MBtu, and we took that. And then we have a transportation capacity into New York, actually coming up at Penn Station. And we achieved more than $100 per MBtu in that weekend as such. So just examples of when you see volatility, you should expect us to be able to get it in a way. So that's why these results typically fluctuates. Bård Pedersen: Thank you, Paul. Vidar Lyngv�r from Danske Bank. Vidar Lyngvær: First, just another clarification on the renewable spending in 2027. You're reducing CapEx by $4 billion. I get the tax credit part. Could you add some more color on where the remaining cut comes from? Second, Johan Sverdrup, you mentioned the decline rates there. Are those exit to exit, so exit '25 to exit '26? Or is it average production decline in '26 versus average in '25? Torgrim Reitan: Johan Sverdrup exit to exit or -- let's come back to the specifics on that. But I do think it is when you compare sort of the last year production with next year production as such. And just -- yes, and team is nodding there. So that is the way it works, yes. Anders Opedal: Yes. Yes, a little bit more color to this. As I answered earlier, we had a different market view. So we had, for instance, potential hydrogen project, transportation of CCS project in the CapEx outlook that we showed last year, those projects are not materializing. In addition, we have reduced our onshore renewable CapEx as well. And in total, this adds up to those $4 billion and together also with the ITC as you have seen. Bård Pedersen: Good. Steffen Evjen from DNB Carnegie. Steffen Evjen: On the ITC, just could you please remind me on the milestones they are required for that payment to come in, in terms of first power and any other things that has to be fulfilled? My second question is just a clarification on Adura. I think you said $1 billion in dividends. Is that your share? Or is that the total share to both shareholders? Torgrim Reitan: It's our share and then the ITC. ITC, yes. So the way it works is that you can recognize it when you start production and sort of that is sort of scale as you continue to start up the various turbines. So what we have assumed is that we recognize all of this in 2027 because that's sort of the plan. There is an upside that there is some ITCs recognized in 2026. We haven't based our analysis on it. So that is sort of the recognition part. And then there is -- so what is the cash flow impact of it. And it will take some time from we recognize it to the cash flow is in our account. So what you see on the slide is that we have assumed $2 billion impact of the ITC in '27, while the total number, the absolute number is $2.5 billion. So that sort of give you a little bit of a perspective around this. It is a significant financial operations to manage all of this, as you would know, but there is a large and growing market for ITC in a well-functioning market in the U.S. for this. Bård Pedersen: Next one is Martijn Rats from Morgan Stanley. Martijn Rats: I've got 2, if I may. I wanted to ask you again about the CapEx reductions. I know there have been a few questions about it already. But when Equinor took the initial 10% stake in �rsted, very soon thereafter, we also had a reduction in the CapEx outlook for offshore wind, renewables in general. And in many ways, that had the character, therefore, when you put these 2 things together, it's like, well, we do less organically and we do more inorganically. It was sort of not a total reduction, but it had an element of we're swapping one type of spending for another type of spending. And I was wondering how we should interpret this reduction in CapEx on this occasion. If power and low carbon CapEx goes down, is that -- should we interpret that as well, the company is just going to do less of that stuff? Or should we anticipate that in the fullness of time, this also turns out to be a swap, less organic, but more inorganic. I was hoping you could say a few things about that. And then the other question I wanted to ask is about the 10% OpEx and SG&A reduction target. Like 10% in a single year is quite a significant amount and also because Ecuador has already been very focused on that for some time. I was positively surprised that there's still sort of that type of opportunity available. Could you talk a little bit about the key levers, where that spending can be reduced? And also just for the avoidance of 10%, how does that translate into absolute sort of absolute dollar amounts, that would be helpful? Anders Opedal: Let's start with that question first, and Torgrim. Torgrim Reitan: Okay. Thanks, Martijn. So on the 10% reduction. So over the last years, we have been able to maintain OpEx and SG&A flat even if we have grown our production and despite the inflation as such. So our people and organization has done a good job. Next year, we expect that number to come down by 10%. That is a very big number. However, it is a significant impact of divestment of Peregrino and the establishment of Adura that will be equity accounted as such. So the reported numbers will be down 10%. But when you adjust for structural changes, we expect to maintain OpEx and SG&A flat, growing by 3% and still inflation as such. So this comes from many sources. First of all, activity level. Clearly, we have taken down and prioritized that very hard. That has a direct impact on it. We have taken down early phase costs significantly in the portfolio, also a significant contributor. Staff are continue to high grade and take out efficiencies. And then the business areas are clearly working on this. So -- but on your question, is there more to come? And the answer is yes, we are never satisfied with where we are on this. And I can give you 2 examples of what to come. One is the work around NCS 2035. We do see a significant cost impact of that. So we hope to show more on that in June. The other one is actually artificial intelligence. So we have already see that in our numbers, NOK 1 billion or so, which is good. However, this is early days. And we do believe that with our large operations and our ability to take out effect across assets that AI can really be a significant contributor to further cost improvements. So we'll continue to fight and work this -- but the 10% is clearly colored by the inorganic moves we have done. Anders Opedal: Yes. So -- and thank you for that CapEx question, Martijn. And let me elaborate a little bit how I think around this because you probably see now that several times, we have taken down the renewables and low-carbon solution CapEx. And it's not necessarily because we have done any inorganic moves. It's also because we have not been successful in some of the bidding because we have raised the bar for winning future CFDs. And a couple of years ago, we had several projects inside our CapEx outlook that is now not inside the CapEx outlook due to deliberately not being successful in those auctions. So a more positive view some years ago, as we said during the �rsted acquisition of 10%, we found it more value creating at that point in time, do an inorganic move than do organic move. This -- we have further taken down the CapEx for offshore wind, but also on onshore renewables. A couple of years ago and last year, we had a much more positive market view and direct discussions with customers for CO2 highway and the hydrogen project in Eemshaven, which are now pushed further out in time. And actually, the hydrogen projects in Eemshaven is stopped before FEED, and we will not move forward. And in these areas, I don't think there are many inorganic moves to be done that will create value. So you should not expect us to work much on this. We will continue to work on being a leading company in terms of transportation and storage of CO2, building on Northern Lights 1, 2 and Endurance, but we will not make investments before we see -- we have long-term contracts, we have seen costs coming down and we see profitable projects. And that means that there needs to be a better market than we see today. Bård Pedersen: Thank you, Martijn. Next one is Nash Cui from Barclays. Naisheng Cui: Two questions, please. The first one is on your upstream reserve life. I wonder how do you think about a reasonable level of upstream reserve life in the medium to long run, please could better technologies like AI to help extend base? Then my second question is on �rsted. I think earlier, you mentioned that you could collaborate more with �rsted in kind of different types of potential structures. And I wonder if you could elaborate what you mean by the potential structures? Anders Opedal: Well, you have seen what we have done, just an example with Shell in U.K. There's always way to work together to create value for both shareholders. But there is no discussion at the moment, but we see that a further collaboration with �rsted could benefit both companies, but nothing new to elaborate today. When it comes to reserve life, I think this will also -- the ROP will be affected in the years to come that we have many more exploration wells, smaller discoveries and faster time from discoveries to production, meaning that the ROP will be lower than traditionally when we had the big elephants on the Norwegian continental shelf. At the same time, we are comfortable with our ROP where we see it today around 7 because we have so many exploration wells, we have discoveries. And last year, we had 14 discoveries, adding in total 125 million barrels in new resources. Lofn and Langemann, which is in Sleipner area is in an area where we thought there was nothing more to be found, but new technology, new seismic, use of AI has enabled us to make more discoveries. We have seen the same in the Ringvei Vest area. So we will continue to implement AI in exploration to ensure that we are able to discover new resources that was overseen in the past that we now can drill and bring to market in a quicker way. And by using AI, not only on exploration, but also in operations, and so on. We saved $130 million last year, and this is accelerating. So as Torgrim said earlier, we are really focusing on implementing AI to create value in the company. And this is something that you will hear more about in the future. Bård Pedersen: Next is Jason Gabelman from TD Cowen. Jason Gabelman: I wanted to first go back to the Empire Wind guidance. And I'm wondering if the $600 million of cash flow, is that what Equinor expects to receive? Or are there going to be some repayments on the project financing that are going to minimize that in the earlier years? And I wonder if you have a similar number for the Dogger projects. And then my follow-up is just on kind of broader exploration opportunities beyond what you've discussed. And we've seen companies kind of going back into regions where fiscal terms have improved like the Middle East and West Africa. I wonder if you look at those regions as potential opportunities for the company to exploit or given kind of the lack of footprint in those regions, is it not a core focus? Anders Opedal: Yes. I'll start with that question, and you can do the $600 million and the synergy effects there. So basically, what you have seen, what we have done in the international oil and gas portfolio is to focus it. We were in 30 to 40 countries, high cost, high exploration cost. And we have concluded that we were not successful with that strategy, adding too much cost and too little of progress in putting new resources into the inventory. So we have worked very hard to focus and building an attractive exploration portfolio in those focused areas like in Angola, in Brazil and in U.S. offshore. And of course, Bidenor East Canada, we're working on the Bidenor field, where this will also have attractive exploration opportunities around it, similar to what we see on Castberg and other new fields. Then, of course, we will, of course, always be open for ideas and value-adding exploration activity outside this core, but the bar is high. We will not have a global exploration strategy moving around in all parts of the world. We have areas where we see now we have learned the basin. We have experience, and we think we can expand quite a lot on that one. Brazil, for one instance, by Bacalhau, the Raya, we have an attractive exploration opportunities there now, the neighbor block to the Bumerangue discoveries for BP. We have a block close to Raya, and we're maturing up to see what kind of exploration program we can have in that area. And next -- and in this year, we will actually also drill exploration wells in Angola. So we are curious about other areas, but we'll have most of our focus in the focused area. Torgrim Reitan: And then Jason, on the $600 million in cash flow related to Empire Wind, that is related to our equity as such. There's no sort of money of that, that goes to the lenders. A couple of things. There is a portfolio effect in addition to the cash flow within the project. And that is related to that the depreciation that we have in Empire Wind goes into the IFRS results and the minimum tax in the U.S. is based on IFRS results. So it sort of reduces the minimum tax payments in the states as such. So there's a portfolio effect coming on top of the direct cash flow in the project as such. Bård Pedersen: Just to clarify in the CFFO, the interest payment is included, but not the payment to the lenders, as you said. Thank you, Jason. Kim Fustier from HSBC is next on my list. Kim Fustier: I had a couple on the NCS, please. Firstly, I believe that back in November, you announced a reorganization of your NCS business along centralized functional lines like subsea drilling, et cetera. Could you give a bit more color on this? And how does that move help to set you up for a future on the NCS with fewer big developments, but more small developments? And then secondly, could you give an update on a couple of pre-FID projects, Wisting and then Bay du Nord in Canada, where there seems to have been some technical progress lately? Anders Opedal: Yes. Thank you. So the Norwegian continental shelf is changing. With after Johan Sverdrup and Bacalhau, we have, as I said, much more smaller discoveries, smaller fields. Most of the developments will be now subsea tie-in projects. We actually have 75 of those in our portfolio over the next 10 years. So it's about making sure that we're able to execute on these projects faster. We are going -- that we can drill more exploration well faster, and we can create more value. So then we have actually started with looking into how we work. how is our work processes, all the way from working together with partners, internal approval processes, field development processes for subsea tie-in and so on. We have looked at 70 work processes, how to -- for drilling to development and so on. We have simplified those work processes, and we have looked at them together such that all these processes are streamlined end to end. And just to say a change that I will do, instead of making 7, 8 individual decisions on these projects one by one, we will group the decision. And twice a year, I will make a lump decision of several projects, enabling faster decision-making processes and ensure that we're able to move this project faster. Based on changing the way we work, we are also reorganizing both the project organization, the drilling organization and the operation units on the Norwegian continental shelf, not offshore, but all the onshore function, enabling to work according to the new simplified work processes. So this is actually one of the largest changes we have done developing the Norwegian continental shelf since we established the StatoilHydro company and merged StatoilHydro back in 2007, 2008. So it's actually changing the way we work because the geology and the reserves on the Norwegian continental shelf changes. And what do we want to achieve? Well, we want to move time from discovery to production from 5 to 7 years to 2 to 3 years, and we need to increase the volumes that we are able to find during exploration, meaning that we need a 200 to 300 efficiency gains on the Norwegian continental shelf. When it comes to Wisting, this is far in the north in the Barents Sea, challenging projects. We're working hard to simplify it. We have made a lot of progress in that respect. We will work on concluding on the concept during first half of 2026 or in 2026 and then move towards hopefully a DG3 during 2027. But let me underline this. We are not schedule driven. This is a project where we have to make sure that this is the right project, right financial, right breakeven, NPV, and we have everything in place because this is a very, very challenging project. On the Bay du Nord, we are approaching also a concept selection at what we call Decision Gate 2. We have a good engagement with local authorities and the government of Canada to -- so we can work together. This is a very good project. We have worked well together with suppliers for a long time to take down the cost and the breakeven as much as possible. And if we are successful now over the next months, then we can bring it towards an investment decisions over the next -- over the next years. And both these projects, if we are successful, will contribute to high production beyond 2030. Bård Pedersen: Thank you, Kim. I have a few left on my list, and I want to cover as many as possible. So I ask that you limit yourself to one question to give as many as possible the opportunity. Next one is Chris Kuplent from Bank of America. Christopher Kuplent: I'll keep it to one question for Torgrim, and please forgive me for some quick mental math. But when you set your $1.5 billion buyback, are you effectively arguing over the course of '26 and '27, considering the lumps and bumps in your CFFO as well as CapEx, you're targeting to be free cash flow neutral after dividends and buybacks. Am I putting too many words in your mouth? Or is that a fair characterization of what you're trying to do over the next 2 years? Torgrim Reitan: Well, Chris, I think I need to be very precise here. So I mean, you're on to it. So clearly, you should look across those 2 years when you think about sort of our free cash flow generation that we have available to cash dividend and share buyback. We aim to run with a solid balance sheet. However, we are going to lean on the balance sheet in '26, well aware that next year is a larger free cash flow. So it makes sense to look across those 2 years. And we have done that when we have set the share buyback level for '26 as such, we have. Bård Pedersen: Thank you, Chris. Matt Lofting, JPMorgan. Matthew Lofting: Just one on Empire Wind and read-throughs from it. I mean it seems Equinor has done a good job keeping the project execution on track amid the past hold orders. But I just wonder how the company reflects on implications from this and having retained 100% equity stake through it for best assessing risk management and risk-adjusted returns, let's say, on future capital allocations. Are there learnings that are emerging from Empire Wind for optimal sizing, taking into account perhaps above as well as belowground factors? Anders Opedal: Thank you. That's a really good question. And yes, this is definitely something to reflect on. And we normally don't take 100% in any license, not on oil and gas and not in offshore wind. But due to a deal with BP, they took some and we took this. We derisked it somewhat with higher strike prices with a financing package. And then as you have seen, the political risk with the new administration was higher than anticipated. This is a trend we see now in several countries that energy investments are more and more politicalized and polarized. And we see it in Norway. We see it in U.K., we see it in U.S. And definitely, for us, this brings some reflections about what is the above-ground risk you can take. And for myself, I reflected quite a lot about to see bipartisan support for future projects. If there is a kind of a strong division for potential projects, then we need to think twice and really understand the political risk. And this is something new. It's not only in U.S. This is something new that we have seen lately in several countries. And kind of we need to adapt the learning, and we need to bring into future decision processes definitely. Very important question you raised there. And with the political changes we have seen, which were kind of outweighted all the other factors that was reducing the risk, we would have probably thought differently about Empire Wind in the past. Bård Pedersen: Thank you. We are on the hour, but let's take one more and hope is short and then we'll round it off, and that is you, James Carmichael from Berenberg. James Carmichael: Just one last quick one, I think. Just again on Empire Wind. I was just wondering if you could clarify your sort of best case estimate on the timing of the underlying court case and when we might be able to sort of put any uncertainty to be around sort of future hold orders, et cetera. Anders Opedal: Yes. This is a little bit early to say kind of because it's a judge in U.S. to decide that timing when this -- the merits of the case will come up for the court. There's been indication that will happen fairly quick with some couple of months, and that gives us opportunity to elaborate on the case in a good way. I just want to also remind you that all the 4 other operators we're doing exactly the same thing, challenging this in court and all of them were granted a preliminary injunction. We mean that this stop-work order was unlawful. And at least with so consistent preliminary injunction, I think also we have a strong case moving forward. But I'm an engineer and not a lawyer. So -- but yes, we are moving forward with a strong belief that we will have a good case in the court, strong case. Bård Pedersen: Thank you. I would like to thank you all for participating and for asking your questions. We didn't manage all the way through the list, but I want to be respectful for everybody's time. And as always, the Investor Relations team remain available for any follow-up questions during today or later in the week. Have a good afternoon, everybody, and thank you for joining.
Operator: Good day, ladies and gentlemen, and welcome to TomTom's Fourth Quarter and Full Year 2025 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn over to your host for today's conference, Claudia Janssen from Investor Relations. You may begin. Claudia Janssen: Thank you. Good afternoon, everyone, and welcome to our conference call. In today's call, we will discuss the fourth quarter and full year 2025 operational highlights and financial results with CEO, Harold Goddijn; and CFO, Taco Titulaer. Harold will begin with an update on strategic developments. Taco will then provide further insight into our financial results, our Automotive backlog and our outlook. After their prepared remarks, we will open the line for your questions. As always, please note that safe harbor applies. And with that, Harold, let me hand it over to you. Harold Goddijn: Yes. Thank you very much, Claudia, and good morning, good afternoon, everybody. 2025 was an important year for TomTom as our product strategy clearly matured and we gained commercial traction. We introduced several new products with our Lane Model Maps standing out as a major milestone. Orbis Lane Model Maps provide lane-level intelligence, including geometry and lane markings, but at a true urban scale. And by leveraging our AI-powered map factory, we can now produce lane accurate maps with exceptional efficiency and freshness, and this has been proven to be a differentiating capability. A strong validation is that we secured a record amount of new business, and that includes a collaboration with CARIAD where TomTom Orbis Lane Model Maps were selected as a core component of the automated driving system supporting the Volkswagen Group brands. In Enterprise, Orbis Maps broadened and diversified our customer base. In the beginning of 2025, we announced a new cooperation with Esri, through which we provide maps, traffic data to support businesses and governments with location intelligence, addressing various use cases from maintaining critical infrastructure to analyzing traffic flows. And more recently, we deepened our global partnership with Uber, expanding our collaboration to enhance on-demand travel experiences worldwide. Looking ahead to 2026, I'm confident that continued advancements in our product portfolio will further strengthen our commercial traction across both our Automotive and Enterprise business, supporting top line growth over time. We will continue to expand and enhance our product offering, and we will make it easier for developers and for businesses to access our data, which will support future growth. We see meaningful commercial opportunities emerging in automated driving and infotainment as well as in high potential verticals such as insurtech and state and local government. Thank you very much. This is my part of the presentation. I'm handing over to Taco. Taco Titulaer: Thank you, Harold. I will cover our financial performance, the key trends we're seeing, an update on our Automotive backlog and our outlook. After which, we will take your questions. Automotive IFRS revenue for the fourth quarter amounted to EUR 77 million, down 3% year-on-year. Automotive operational revenue was 12% lower compared to Q4 last year. The Enterprise business delivered EUR 39 million, a 10% decline versus the same quarter last year. Approximately half of this decline is explained by a weaker U.S. dollar versus the euro year-on-year as around 3/4 of our Enterprise revenue are U.S. dollar-denominated. The remainder of the decline reflects a continued phase out of a large customer, partly offset by a broadening of our customer base over the course of the year. Gross margin was 89% in the fourth quarter, a 2 percentage point improvement compared with Q4 2024, mainly driven by a lower proportion of hardware in our revenue mix. Operating expenses were EUR 110 million, a reduction of EUR 21 million compared with the same period last year, reflecting the combined effect of capitalizing development costs associated with our Lane Model Maps and disciplined cost management. For the full year 2025, we recorded group revenue of EUR 555 million, 3% lower than in 2024. Automotive IFRS revenue was EUR 323 million, down 2% from last year due to lower car volumes at some customers and the phaseout of certain car lines, partly balanced by new model starting production. Operational revenue in Automotive dropped 1%, staying largely stable versus 2024. Our Enterprise revenue for the year was EUR 159 million, 2% lower year-on-year. For the full year, the picture is similar as in the quarter, normalized for the currency fluctuations. Enterprise revenue showed a marginal increase compared with last year. For the full year, gross margin was 88%, an improvement compared with 2024. This continued shift away from consumer hardware structurally strengthened our gross margin from 85% in 2024 to 88% in 2025, and we expect it to move north of 90% in 2026. Operating expenses decreased to EUR 489 million, a EUR 19 million reduction, same as for the Q4 trend. This reduction was due to capitalization of our map investment, lower amortization charges and reduced personnel costs from the second half of 2025, partly offset by the reorganization charge booked in Q2 2025. Looking ahead, the quarterly OpEx run rate entering in 2026 will likely be a few minutes -- a few million euros higher than what we saw in Q4. But for the year as a whole, we expect the total operating expenses to remain below 2025 in 2026. Free cash flow, excluding the cost for the reorganization we announced halfway in the year, EUR 19 million. This was an inflow of EUR 32 million compared with EUR 4 million outflow last year. Having covered our results, let's move on to the Automotive backlog. Our Automotive backlog at the end of the year reached EUR 2.4 billion, a net increase of EUR 300 million compared with the end of 2024. Our Automotive backlog represents the expected IFRS revenue from all awarded deals. Accordingly, the backlog decreases as revenue is recognized and increases when new deals are won. Its value can also fluctuate when customers revise their vehicle production forecast and with ForEx revaluations. The increase in backlog this year was driven by a record level of new deals. Our book-to-bill ratio was well above 2 last year, partly offset by negative impact from ForEx revaluations, which has a more pronounced than usual effect on the backlog valuation. A large portion of the Automotive revenue we expect to report in 2026 and '27 is already covered by the backlog generated from prior year's order intake. The majority of the value from the 2025 order intake is expected to start being recognized from 2028 onwards. From a product perspective, we see Automotive RFQs increasingly gravitating towards Lane Model Maps, the maps that enable autonomous driving functionality and support a growing range of advanced safety features. The products accounted for approximately half of last year's order intake, and we expect this [ should ] continue to grow. OEMs are clearly increasing their product and engineering focus in this area as Lane Model Maps enable both improved vehicle performance and meaningful differentiation. Our strong positioning in this area reflects a decade of sustained investment in these capabilities, and we're now seeing those investments translate into tangible commercial results. An additional benefit is that securing Lane Model Maps deals opens the door to road model map awards for the navigation use cases, supporting further market share gains. Now let's move to the 2026 outlook. Looking ahead to 2026, our revenue will reflect the transition of some customers. However, this impact is temporary. 2026 group revenue is projected to be between EUR 495 million and EUR 555 million, with Location Technology contributing EUR 435 million to EUR 485 million. We expect our operating result to improve year-on-year, while free cash flow is expected to turn temporarily negative due to the sustained investment in our Lane Model Maps. Operating margin is expected to be around 3% of group revenue. A return to top line growth is foreseen in 2027. Higher revenues combined with disciplined cost control are set to drive a further step-up in operating margin as well. To conclude, let me summarize our prepared remarks. We closed 2025 with a strong strategic momentum, marked by a record Automotive order intake and an expansion into automated driving. Despite modest top line declines driven by market conditions and customer transitions, EBIT and cash generation improved meaningfully. With an expanded EUR 2.4 billion Automotive backlog, new product launches and strengthening commercial partnerships, TomTom enters 2026 well positioned for a return to growth in 2027. And with that, we are ready to take your questions. Please, operator, please start the Q&A session. Operator: [Operator Instructions] And our question come from the line from Marc Hesselink from ING. Marc Hesselink: Yes. I have a couple of questions on the lane model. I think this is the new product versus the HD Maps that you previously had. But I think under the hood, a lot changed in the way you build your process, you build your map, how you can integrate with the client. Just if you can explain how this product currently looks like? And also how are your clients going to integrate it? And if you can also talk about what is your competitive position there? Is this now something that is really unique for TomTom that none of the competition has something like this? And if you then compare it, there's always sometimes still the debate between for this kind of functionality, do you need a map, yes or no? What's the status there also with things like the redundancy of the safety features? Harold Goddijn: Yes, Marc, thank you. Yes. So the lane model is fundamentally different from a road model map because it is a representation of the actual road and all the lines on that road and the dividers and whatnot. So you get a replica encoded of what is the road surface, what the road surface looks like. And the problem with building that map is that it's always been very expensive and not -- didn't scale very well. But with new advances in technology and new data that are becoming available, we can now produce those maps to a high degree of automation, not completely automated, but there's a high degree of automation is possible now. And that means that it's becoming economically viable to do this on all roads, not just the motorways. And it also means that you have a process for upgrading and change detection. So you can build maps that are fresher. All those capabilities are critical for self-driving and automated driving. We see that those maps are used in those systems as not only as backup, but also as a sensor. The challenge for self-driving technologies is to reduce the number of interventions of the driver of the vehicle and maps data play a very critical role in reaching that objective. Marc Hesselink: Yes. And the competition at this stage? Harold Goddijn: Well, so we don't have full visibility, but we believe that the method that we are deploying is novel, differentiating, leads to better results, scales better than what our competitors are capable of producing. Marc Hesselink: Okay. And if we look at the client side, you obviously have a big success with the CARIAD. But what about the discussions with other OEMs? Is this something that you -- I'm sorry. Harold Goddijn: Yes, go on, Marc. Marc Hesselink: Yes, I said -- and I wanted to add to -- do you speak to many other clients, including also the Chinese OEMs? Harold Goddijn: Yes. So the interest is coming from a broad range of car brands. People of carmakers want this. They can see the value of having that dataset available for the self-driving function, and that is broadly shared amongst all our customers and also potentially new customers. So we see a profound deep interest in understanding what's going on and how this technology can help them to make those cars and bring the level of automation to the next level. And next to that, we also see interest from software developers who are developing the self-driving software stack. There are a number of independent software developers who are doing this, but some based in -- mostly based in China. And they also show strong interest in understanding what this technology can bring and how it can help them to mature their own technology stack. Operator: [Operator Instructions]. Claudia Janssen: Let me -- if there's no -- I see -- if there's no further questions, let me give the opportunity to some of the analysts if they want to take the questions. If not -- no. If there's no additional questions, I want to thank you all for joining us today. And operator, you may now close the call. Unknown Executive: There is... Claudia Janssen: Oh, sorry. Andrew, sorry. Operator: I have a question that's come through now. So we are now going to take the next question from Andrew Hayman from Independent Minds. Andrew Hayman: Yes. Could you maybe give some guidance to how negative you think the free cash flow will be in 2026? Taco Titulaer: Yes. Thank you, Andrew. So 2 things I want to say about that. One is -- the second thing is to answer your question. But the first thing is that we introduced new guidance metrics in 2020. So we gave guidance on the top line and the bottom line. The top line was the group revenue and the Location Technology revenue. And the bottom line, we chose free cash flow because free cash flow at that time was the best tracker of our profitability. That had to do with the disparity -- the difference between operating and reported revenue in Automotive and the big delta between amortization and CapEx that we saw in the OpEx line resulting from the acquisition of Tele Atlas. Now both effects are kind of gone. So you also saw last year that reported revenue and operational revenue in Automotive is at parity. They're kind of almost the same. And also, we have -- we don't have any amortization left that's related to the Tele Atlas acquisition. So we want to normalize our guidance towards a revenue and an EBIT forecast. And that said, as we also have -- and then coming into your second or your primary question, the fact that Automotive is declining next year temporarily and we sustain our investment at the same level as we had last year, we will see free cash flow being negative in this year. How large it will be, I don't know exactly, but I expect it will be above EUR 10 million, but not much more than that. And then if our revenue, our top line is recovering in 2027, I expect that free cash flow will be positive again as of 2027 onwards. But an official guidance will follow in 12 months from now about that. So we'll continue to provide direction about free cash flow, but the primary guider or primary KPI for profitability will be EBIT. Andrew Hayman: Okay. And then in terms of the bookings that came in, how much of that is new customers? And how much is just more business from existing customers? And then maybe just tied in with that, how does the funnel of business look for 2026? Is there going to be -- is it a bit quieter after so much activity in 2025? Taco Titulaer: Well, yes, so if you look at order intake, you can make a 2x2 matrix. In the horizontal, you say existing customers and new customers. On the vertical, you say lane model or road model, where lane model is the automated driving and safety use cases and where road model is more for the driver itself to navigate from A to B. What I already mentioned in my prepared remarks is that what we've seen is that if you break down the order intake of last year that roughly half of that order intake is related to lane model. And that percentage will only grow further. So also for 2026, we think that the proportion of lane model RFQs and potential wins will be tilted towards lane and not so much road. Road models can be a tag-along deal. Increasingly, OEMs want to focus on securing the right quality and the right vendor of lane models. And also that gives us opportunities to also secure extra deals in road modeling. The majority -- yes, CARIAD is an existing customer, of course, because we already do software with them. So in that sense, the majority of the order intake was with existing customers. Harold Goddijn: But I want to add to [Audio Gap] first time that we deliver map data at scale to the VW Group. Taco Titulaer: Yes, that's different. But before it was navigation software and traffic, et cetera, but now it is also including map data. Andrew Hayman: Okay. And how does the funnel of potential sales look for this year? Because it looks like -- I mean... Harold Goddijn: There's a broad and deep book of opportunities out there, not dissimilar from 2025. So the activity is really -- is there from what we can see now. But what we also have seen in 2025 is that timing is very difficult to predict also because of ambiguity in product planning in all sorts of market conditions. But I think the way we look at it now, there is substantial opportunity available again in 2026 for further building of the backlog. And there are also opportunities available to us for extending and growing our market share. Operator: And the questions come from the line of Marc Hesselink from ING. Marc Hesselink: A follow-up. One on the Enterprise segment. I think in previous calls, we've discussed a lot about the momentum for the small clients being quite good. But then for the bigger, longer sales cycles, is that still ongoing? Are you still talking to these bigger potential clients? And would we expect something beyond '26 in the '27 period? Is that likely? Harold Goddijn: I don't think there's -- we don't anticipate a big shift in market opportunities in 2026. No extraordinary, but we think that the momentum we have to an extent in the long tail opportunities, that will continue throughout 2026. The composition -- yes, so there's a lot to go after in -- also in the Enterprise sector. Marc Hesselink: Okay. And -- but the big clients, they sort of stick to their own products or... Harold Goddijn: Well, we have a good market share with the big tech companies already. There are not that many of them, but our market share there and our representation with big tech is significant. So the growth and the expansion need to come from companies below that tier. There's a lot of them in the EUR 10 million kind of category. There are a lot of them in the -- between EUR 1 million and EUR 10 million category that are available to us to win. Marc Hesselink: Okay. Okay. That's clear. And then the second follow-up was on -- you mentioned also for next [ year, so '27 ] to be cautious on the cost side. And I just want to understand that a bit because I think that you say you're moving towards the more automated process. It's almost now already almost fully automated. Is that something that you can still take a bit of steps there to further automate it and at that stage, decrease the cost a bit? Harold Goddijn: Yes. Well, we -- so there's a number of things that we can achieve through -- on the cost side. I think the most important one is that our product portfolio is maturing and coming together. And we're more product-driven than in the past. And that means that we can do things more effectively, better at higher quality and we can leverage that software much better than we've ever been able to do in the past. We see also opportunities to further leverage the power of AI, especially in the engineering side. We're making some meaningful progress in that area. So the combination of a simpler product portfolio at a higher quality that is reaching completeness now after a long period of transition, those are all indicators that we can do things more faster at higher quality, but also with -- allow us also to keep a lid on the cost and not let that grow. There will be additional costs in maturing lane level product, as Taco already indicated. But all in all, I think we are in a good position not to let the cost and the OpEx run away from us, but rather contain it and manage it carefully without that giving strong limitation on our ability to get things done. Claudia Janssen: Okay. With that, I want to thank you all for joining us today. And operator, now you can really close the call. Thank you. Operator: Thank you. This concludes today's presentation. Thank you for participating. You may now disconnect.
Bård Pedersen: Good morning to all, both here in the room in Oslo and to all our participants online. Welcome to the presentation of Equinor's Fourth Quarter and Full Year Results for 2025. My name is B�rd Glad Pedersen. I'm Head of Investor Relations in Equinor. To those of you who are in the room, I want to inform you that there are no emergency drills planned for today. So if there is an alarm, we will evacuate and follow instructions. Today, we will have a presentation first from our CEO, Anders Opedal, followed by a presentation from our CFO, Torgrim Reitan, before we start the Q&A. [Operator Instructions] So with that, I hand it to Anders for your presentation. Anders Opedal: And thank you all for joining here in the room, and thank you for participating on digital. So for Equinor, 2025 was a year of strong deliveries, but it was also a year of increased geopolitical tension and market uncertainty. Our job is to ensure we allocate our resources in a way that maintain a competitive business, creating value at all times. Today, Torgrim and I will show how we take the necessary measures to further strengthen our competitiveness, cash flow and robustness. This makes sure that we can navigate through and leverage market volatility and the current macro environment. So we have 3 key messages for you today. First, we are well positioned for maximizing long-term shareholder value. Today, we will share how clear strategic priorities guide capital allocation for 2026 and '27, and we will revert at our Capital Market Day in June to present our strategy towards 2030. Second, we take firm actions to strengthen free cash flow. We reduced our CapEx outlook with $4 billion and maintain strong cost discipline. This makes us more robust towards lower prices and ensure that we can maintain a solid balance sheet through the cycles. And third, we continue to develop an attractive portfolio, delivering oil and gas production growth. With this, we are prepared for volatility ahead. The energy transition is shifting gears in many markets with governments and companies changing priorities. Current oil prices are supported by geopolitical risk, but we are prepared for strong supply combined with moderate demand growth, putting pressure on the oil price in the near-term. For gas, the European market has seen cold weather and high draw on storage in late December and in January. Storage levels are now around 40%, significantly below average for the last 5 years and also lower than last year. We expect continued volatility ahead and more LNG coming into the market. In the U.S., low temperatures have driven up local demand and reduced exports of LNG. But before I progress any further, I will always start with safety. Despite fewer people being hurt and our safety numbers moving in the right direction, we still have serious incidents and need to improve. In September, our colleague was fatally injured during a lifting operation at Mongstad. A stark reminder that we cannot rest until everyone returns safely home from work every day. Our safety trend reflects years of good work from the people in our organization and our suppliers. Safety remains our first priority. Throughout 2025, we have delivered strong performance despite geopolitical uncertainty, high inflation in the supply chain and lower commodity prices. This results in all-time high record production, thanks to good operational performance and new fields on stream. We have matured a competitive project portfolio across the Norwegian continental shelf and internationally. With Johan Castberg on stream, we opened a new region in the Barents Sea. In Brazil, we started production from Bacalhau, the first pre-salt operator ship awarded to an international company. We continue high-grading our portfolio, and we maintained cost and capital discipline. All this has enabled us to deliver industry-leading return on average capital employed of 14.5% and $18 billion in cash flow from operations after tax. We have delivered $9 billion in capital distribution to our shareholders, as we said at the start of the year. Last year, we received 2 stop-work orders for Empire Wind. In our view, both are unlawful. The first one was lifted by the UN administration in May. The second stop-work order came just before Christmas. This cited national security reasons, already a central part of an extensive approval process where we have complied with all requirements. In January, we were granted a preliminary injunction allowing us to resume construction. There will be a continued legal process, and we remain in dialogue with U.S. authorities to resolve any issues. Despite the significant challenges caused by the stop-work orders, the project execution is according to plan. The project is now over 60% complete. We have successfully installed all monopiles, the offshore substation and almost 300 kilometers of subsea cables. The total CapEx for Empire Wind is now expected to be around $7.5 billion. Around $3 billion is remaining, and we, like other companies, remain exposed to uncertainty when it comes to possible future tariffs. The project qualifies for tax credits as decided by the U.S. Congress. The cash effect of these is expected to be around $2.5 billion. So far, we have drawn $2.7 billion from project financing. We expect to draw the remaining $400 million this year. For 2027 and '28 combined, we expect around $600 million in cash flow from operations. Combined with the ITC, this covers the remaining CapEx in the period. We have continued high-grading our portfolio. We announced the latest move earlier this week, divesting onshore assets in Argentina for a total consideration of $1.1 billion, unlocking capital for high value creation opportunities. The establishment of Adura was a major milestone last year. Our joint venture with Shell has created a leading operator on the U.K. continental shelf, fully self-funded, covering all Rosebank CapEx and well positioned for growth. The JV company expects to distribute more than 50% of cash flow from operation to its shareholders, starting from the first half of 2026. Based on Adura's plans, we expect total dividends of more than $1 billion for 2026 and '27 combined with growth from '26 to '27. This moves our U.K. portfolio from being cash negative due to CapEx to cash positive from dividends. These 2 transactions build on previous high-grading of the portfolio, divesting mature assets and invest more in long-term gas production onshore U.S. Through this, we have created a more future-proof international portfolio, focusing on prospective core areas, increasing free cash flow, strong production, lowering cost and a portfolio with low carbon intensity. Now on to our strategic priorities for 2026 and '27 and how they guide our capital allocation. The world is changing, but one thing remains firm. Energy demand continues to grow. We are well positioned to contribute to energy security, affordability and sustainability. So first, after more than 50 years of developing the Norwegian continental shelf, we are uniquely positioned for value creation here, and we continue to invest. The Norwegian continental shelf remain the backbone of the company. In 2026, the NCS will contribute to our production growth, and we work to maintain strong production well into the next decade. In the future, as you know, we expect to make more but smaller discoveries. To ensure commerciality, we will work with partners, suppliers, authorities and unions to change the way we operate on the Norwegian continental shelf. We will develop future discoveries faster, become more efficient and increase return while improving safety further. Next, we are set to deliver strong production and cash flow growth from our high-graded internationally -- international oil and gas portfolio. We are progressing project execution and exploration across key geographies, adding new volumes and opportunities for longevity in the portfolio. On power, we combine our renewable portfolio with flexible power to build an integrated power business and strengthen our competitiveness. We are value-driven in all we do and disciplined in execution and capital allocation. The main focus for '26 and '27 deliver safe operations and strong project execution of already sanctioned portfolio. All this, Norwegian oil and gas, international oil and gas, power are tied together by our marketing and trading capabilities, creating value uplift across our business. We are positioned to create value within low carbon solutions like carbon capture and storage, but markets are developing at a slower pace than anticipated. In addition to the execution of Northern Lights and Northern Endurance, we will continue to mature a few selected options and markets at low cost. We will be positioned to invest as markets develops, customers are in place and returns are robust. We grow our production to even higher levels in 2026 from a record high production level in 2025. For the year, we expect a production growth of around 3%. We are ramping up new fields, which more than offset divestment and natural decline. We are replenishing our portfolio and have 3-year average reserve replacement ratio of 100%. On the NCS, we made 14 commercial discoveries last year, mainly close to existing infrastructure, adding to longevity. And we continue to explore. We have added attractive acreage in Norway, Brazil and Angola, where we expect to drill around 30 exploration wells in 2026. We expect to reduce our unit production cost to $6 per barrel. We continue to focus on delivering a carbon-efficient portfolio with a CO2 upstream intensity of 6.3 kilo per barrel. We take firm actions to strengthen our cash flow and further increase resilience facing higher market uncertainty. In 2026, we expect around $16 billion in cash flow from operations after tax. This reflects a lower price outlook and is also impacted by the tax lag effect in Norway. A flat price assumptions is growing to around $18 billion in 2027. We have strengthened our investment program for 2026 and '27, reflecting market realities. We have reduced our CapEx outlook for these 2 years with around $4 billion, mainly within power and low carbon. This also influenced our net carbon intensity reduction for 2030 and 2035, no change to 5% to 15% and 15% to 30%, respectively. We maintain a stable investments of around $10 billion annually to oil and gas. Our CapEx guiding for 2026 is around $13 billion. This includes Empire Wind, where we, in 2027, expect to monetize investment tax credits for around $2 billion. With this, we indicate CapEx of $9 billion for 2027. In the current situation for the offshore wind industry, we are focusing on projects in execution and have a high bar for committing capital towards new offshore wind projects. This includes our ownership in �rsted. We will continue driving cost improvements, including the portfolio high-grading we have done. We aim for 10% OpEx reduction in 2026, even while growing production. We continue with strategic portfolio optimization to strengthen future cash flow. Proceeds from the divestment of Peregrino and onshore Argentina assets is expected to contribute more than $1.1 billion this year. The action we take to strengthen our cash flow and robustness support sustainable, competitive capital distribution. This is important to me and a priority for the Board of Directors. The starting point is the cash dividend. We have set an ambition to grow the quarterly cash dividend with $0.02 per share on an annual basis. We continue to deliver on this. It represents an industry-leading increase of more than 5%. We also continue to use share buybacks to deliver competitive total distribution. For 2026, we announced a share buyback program of $1.5 billion, including the state share. The first tranche of $375 million starts tomorrow. As previously communicated, we see true timing effects like the tax lag in Norway and the phasing of Empire Wind and lean on the balance sheet to deliver competitive capital distribution in 2026. In 2027, we have taken action to deliver stronger free cash flow. This is important to ensure that we can deliver competitive capital distribution in a long-term sustainable manner. So with our guiding in the background, I will give the floor to Torgrim that will take you through -- further through the details. And then I look forward to questions together with Torgrim when he is finished. So Torgrim, please. Torgrim Reitan: So thank you, Anders, and good morning and good afternoon, and thank you for joining us here today. So 2025 was a good year for Equinor. We delivered strong performance and record high production. But before we dive into the financial results, I want to expand on how we will manage through a period of volatility. So we are prepared for lower prices with a strong balance sheet, lower cost and CapEx and an attractive project portfolio. Our financial framework sets the boundary conditions for how capital allocation -- for our capital allocation and how we manage our company. So to start, our highest priority will be to deliver a robust and a growing cash dividend, in line with our dividend policy, and this reflects growth in our long-term underlying earnings. Then we will continue to invest in an attractive and high-graded investment portfolio with low breakevens and strong returns in line with the following priorities. First, our unique position on the Norwegian continental shelf gives us competitive advantages. And this is why we will continue to prioritize developing this area and allocating almost 60% of our investments to an area we know better than anyone. In '26, we have 16 projects in execution in Norway. Many of these are tie-ins to existing infrastructure with low cost and very low breakevens. Then we will allocate 30% of our capital to our international oil and gas business. This is mainly to sanctioned projects, and we expect to increase production to more than 900,000 barrels per day in 2030. And then around 10% of our capital will be allocated to building an integrated power business where the main focus is on delivering our offshore wind projects in execution safely, on time and on cost. Outside these 3 areas, we expect limited investments over the next 2 years. As you know, we will prioritize having a strong balance sheet and liquidity necessary at all times. And this is important to manage risk and to continue to deliver value. Over the next 2 years, we will see through the timing effects such as the NCS tax lag and the tax credit on Empire Wind impacting our cash flow from operations, and we will lean on the balance sheet. We will lean on the balance sheet in 2026 to cover CapEx and distribution. Next year, in 2027, cash flow from operation is stronger, and we have lowered CapEx, significantly improving the free cash flow. So we will manage the balance sheet through this period and continue to deliver competitive capital distribution, including share buybacks. For more than a decade, we have consistently delivered an industry-leading return on capital employed. And if you ask me, that is a premium KPI that we hold very high in our company. And with this financial framework, we expect to deliver around 13% over the next 2 years, now using a lower price deck than what we have used earlier as such. So that is comparable to what we have said earlier. We are used to managing volatility and deliver value through cycles. First, to manage cycles, we have to run with a strong balance sheet and a robust credit rating, and we have that. We have that. And having liquidity available is key. We have close to $20 billion for the time being. Second, a low cost base is important to ensure that we make money at low prices, and we continue to reduce our costs. We have a low unit production cost. And in 2026, we will further reduce it by around 10% to $6 per barrel. We are the lowest cost supplier of pipe gas to Europe with our all-in costs of less than $2 per MBtu, and we are sure that we will create significant value in any price scenario in Europe. Through strong cost performance and portfolio high-grading, we aim to reduce OpEx and SG&A by 10% in 2026. This corresponds to a flat underlying cost development, overcoming inflation while growing production. We are addressing costs in all parts of the organization. And I want to highlight that in 2025, we brought down OpEx and SG&A in renewables by 27%, mainly due to reductions in early phase costs. And then thirdly, it is key to have a competitive project portfolio that makes sense at lower prices. And we operate a majority of our projects, giving us the flexibility needed to adjust when we want to do that. Through portfolio flexibility and high-grading, we have reduced CapEx over the next 2 years by $4 billion, made divestments totaling more than $6 billion since 2024 and strengthened the quality of our portfolio. Our average breakeven is around $40, and we see an internal rate of return of 25% in the portfolio at $65 oil. We remain a leader on CO2 efficiency and an average payback of 2.5 years. So I will call this a robust, low-risk and high-value project portfolio that will create value also at low prices. In periods of volatility, our NCS position and our international portfolio complement each other. In Norway, we are more robust to lower prices, while internationally and particularly in the U.S., where we have strengthened our gas position, we have a large exposure to upside in prices. So Norway first. We have immediate deductions for CapEx against the special petroleum tax. And with full consolidation between fields and no asset ring-fencing, our pretax CapEx of around $6 billion translates into an after-tax investments of less than $1.5 billion. And when prices change, 78% of the effect on the revenue is absorbed by reduced taxes. So this makes the NCS less exposed to lower prices than other basins. So what happens if prices change? With a $10 move in oil prices, the cash flow is only impacted by $1.2 billion, and this is across the global portfolio and adjusted for tax lag. For European gas, a $2 change equals $800 million. What is particularly interesting is the U.S. gas, where the production is now 1/3 of our Norwegian gas position. But still, a $2 movement in gas price has a similar effect on cash flow after tax as in Norway. So let me elaborate more on the U.S. gas as that has become even more important to us. So in 2025, we delivered around $1 billion in cash flow from operations out of that asset. Production increased by 45% on back of well-timed acquisitions to around 300,000 barrels per day, capturing gas prices that were more than 50% higher than in 2024. We have a low unit production cost for U.S. gas around $1 per barrel, and we are well positioned to benefit from robust power load growth and increased demand in the Northeast. We are marketing our gas ourselves, and we are able to add value through trading, pipeline capacity and access to premium markets such as New York City and Toronto. So in January this year, gas prices in the Northeast reached very high levels driven by the winter storms, and we used our infrastructure and trading to capture quite a bit of value out of that volatility. Okay. So now to our fourth quarter and full year results. These slides sums up the key numbers you heard from Anders. Safety is our first priority. We see strong safety results, but we need to continue improving with force. Return on average capital employed in '25 was 14.5%. Cash flow from operations after tax came in at $18 billion, and earnings per share was strong at $0.81. For the year, we produced 2,137,000 barrels per day. This is record high and up 3.4% from last year, driven by ramp-up on Johan Castberg and Halten East on the NCS, U.S. onshore gas and new wells coming on stream. In the quarter, production was up 6% despite some operational issues in Norway and in Brazil. On the NCS, Johan Sverdrup had another strong year. For power, we produced 5.65 terawatt hours and renewables power generation was up by 25%. So then to financials. Adjusted operating income from E&P Norway totaled $5 billion, driven by increased production at lower prices. Depreciation was up compared to last year due to new fields on stream. Our E&P International results were impacted by portfolio changes and an underlift situation in the quarter. In the U.S., results were driven by significantly higher gas production, capturing higher prices. And in our MMP segment, results were driven by gas trading and optimization and a favorable price review result in January. So the result of this price review explains the difference from the MMP guidance. So this is a one-off. However, important enough, and the cash flow impact will be somewhat higher than the accounting effect, and it will come in 2026. On a group level, we had net impairments of $626 million and losses on sale of assets of $282 million. These do not impact adjusted numbers. A significant part of this relates to the Peregrino and the Adura transactions, and they are mainly driven by accounting treatment of these transactions, more of a technical nature. Adjusted OpEx and SG&A was up 7% compared to the same quarter last year and up 9% for the year. These are driven by transportation costs, insurance claims and currency. For the year, underlying OpEx and SG&A was up 1%. And if you adjust for currency headwinds, it was actually slightly down. For the year, our cash flow from operations came in at $18 billion after tax, in line with our guidance when we adjust for changes in prices. Organic CapEx for the year was $13.1 billion, also in line with what we said. Our net debt to capital employed ended at 17.8%. This increase from last quarter is mainly driven by NCS tax payments and �rsted rights issue participation and somewhat increasing working capital. So let me conclude with our guiding. For 2026, we expect $13 billion in organic CapEx and a 3% growth in oil and gas production. We have increased our quarterly cash dividend by more than 5% now at $0.39 per share and announced a share buyback of up to $1.5 billion for the year, starting with the first tranche tomorrow. So thank you very much for the attention. And now I will leave the word back to you, B�rd, for the Q&A session. So thanks. Bård Pedersen: Thank you, both Anders and Torgrim. We will now start the Q&A. [Operator Instructions] So then we'll start. And the first hand I saw was Teodor Sveen-Nilsen from Sparebank. Teodor Nilsen: Congrats on strong results. So 2 questions. First on CapEx. You obviously reduced the guidance for 2027. I just wonder how we should interpret the run rate into 2028. Should we also assume that 2028 CapEx will be well below the $13 billion you previously announced? Or is that too early to say anything about? And second question, that is on MMP. Could you just explain what's behind the price review that boosted the results? Anders Opedal: Thank you very much. So you can think about the price review, Torgrim, while I'm talking about the CapEx. Yes, you're right. We have reduced the CapEx. We have -- when we are looking into the CapEx profile over the last years, we have had consistency. You have seen that we have consistency investing into Norwegian oil and gas and in international oil and gas. And last year and this year, we are reducing the CapEx outlook for our renewables and low carbon solutions. And this is due to that 2, 3 years ago, we had a different market view than we have today. We don't expect that this market will change dramatically over the next years. We intend to continue focusing, investing consistently into our attractive oil and gas portfolio that Torgrim demonstrated and be market-driven and invest in low-carbon solution and power when the time is right, the profitability is right and the market comes. So I cannot give you the guiding for '28 already. But with this consistency investments in oil and gas and this change we have done in the CapEx for renewables and low carbon solutions and the market will probably not change very much over the next years, I think you will see somewhat consistency in our CapEx guiding going forward, and we will come back to more details about this in June. Torgrim Reitan: And thanks, Teodor. On the price review, that is a normal mechanism in many of the gas contracts where sort of if the price in the contract dislocates from what the market should have been and the price should have been, we have a mechanism to renegotiate or open up that. We often disagree with customers in processes like this. And often, we take such things into arbitration as we have done in this case. So that has gone on for a while, and we won in that arbitration. Over the year, we have accrued revenue related to that because we consider that we had a strong case. We had an even better outcome than what we accrued as such. So this will be a one-off payment during the year. And from now on, there is a new mechanism in place on that contract as such. Bård Pedersen: Sorry, Teodor, I need to stick to the 2 questions because we want to cover as many as possible. And the next one is on my list is John Olaisen, ABG Sundal Collier. John Olaisen: First question is regarding Johan Sverdrup... Bård Pedersen: John, please use the microphone so people can hear you online. John Olaisen: Okay. Sorry. It's John Olaisen from ABG. My first question is regarding Johan Sverdrup. Anders, you quoted in the media today saying that you expect it to decline by more than 10% this year. I wanted to elaborate a little bit more on that. How much more? And do we expect the same for the next few years? So that's my first question on Johan Sverdrup production profile. The second question is regarding M&A. You've sold a lot of assets internationally. So I wonder, do you still have assets on the sales list internationally? And also secondly, it's a long time since you bought assets internationally. Do you have -- are you looking at potential acquisitions internationally? Those are the 2 questions, Sverdrup and M&A. Anders Opedal: Thank you. First of all, when it comes to Sverdrup, I think we have demonstrated over many, many years how we've been able to keep up the production, even increase it due to the fantastic work that is done by the people working with Johan Sverdrup. Then a field like this is like all other fields, eventually, it will come into decline, and we see that now. So we see a decline in Johan Sverdrup for 2026, which is more than 10%, but well below 20% and that is what we put into our numbers. Still, we will have a growth in Equinor of 3% for 2026 and actually also a growth both on the Norwegian continental shelf and internationally. And of course, based on all the good work, drilling new wells, placing the wells better, retrofitting the wells, high production efficiency, have a high water cut and flow through the separators. The team is working to make sure that this decline is as low as possible. But above 10, well below 20 is what we see and kind of planning for in 2026. Well, we don't have a specific list of M&A sales candidates and targets that we disclose. But I think what you have seen, what we have done in the past, we have been active both in divestment where we think the timing is right to create value and where we see that future investment can be used better elsewhere that we have monetized those assets. And when we have seen opportunistic opportunities to invest, we have done it like twice in the U.S. gas in the Marcellus. You can expect us to be active going forward. And we have had a strategy of optimizing the international business, and we have optimized it now and set it clear for growth. And now is the focus to deliver on that growth finding more attractive exploration opportunities within those selected areas and at the same time, be open for value-accretive opportunities in the market. Bård Pedersen: Thank you. Next on my list is Henri Patricot from UBS. Henri Patricot: Two questions from me. The first one on the cash flow guidance for '26, '27, you do show this meaningful improvement in '27 to $18 billion. Could you give us a bit more of a breakdown behind this improvement? I think you mentioned Empire Wind starting up, some tax lag effect. What else is contributing to this sharp increase? And then secondly, I was wondering, there's uncertainty still around Empire Wind 1. What would be the impact to the financial framework you presented today if the project does not complete or implications for the broader CapEx and shareholder returns? Anders Opedal: So if you, Torgrim start with Empire Wind, then I can take on the CapEx reduction for '27 afterwards. Torgrim Reitan: Okay. So thanks, Henri. On the Empire Wind, clearly, we are steered by sort of forward-looking economics and forward-looking cash flows when we make up our mind. So from now on, the remainder of investments will be covered by the ITC and cash flow from operations over the next 2 years in a way. So the threshold for not moving forward with it is extremely high in a way. I mean the total economics of that project life cycle is something else. But clearly, the decision that we have to make is actually how it look going forward. And going forward, it's actually pretty solid. So the threshold for stopping it is very high. Our job is to deliver this on time and schedule. And I must say, I am extremely proud of what that project organization has been able to do through all of this volatility this year to keep it steady on the track. So we are on track to deliver, and we have no other plans than that. Anders Opedal: Yes. And then the cash flow from operation that is increasing from $16 billion to $18 billion towards '27. This is based on flat price assumption, $65 on the oil price and $9 and $3.5 for Europe and U.S., respectively. And the answer here is that this is the tax lag. We are this year paying a higher tax based on higher prices last year on the Norwegian continental shelf. And it's also a 3% production increase in 2026 that will also contribute to a higher cash flow. Bård Pedersen: Good. I have a long list also online. So let's take a few from there. The first one to raise his hand was Biraj Borkhataria from RBC. Biraj Borkhataria: Just the first one is a follow-up on Johan Sverdrup. You mentioned the decline for 2026. What is in your base case for 2027 and beyond? Because obviously, it's quite a big part of your portfolio. It'd be good to get some clarity there on the decline rates. And then the second question is just on the Empire Wind budget has obviously gone up a little bit. How should we think about how much contingency you have in that new $7.5 billion budget? Anders Opedal: Well, when it comes to -- we are guiding now on Johan Sverdrup for 2026. And to say what it will be in '27 is too early. As I said, we have a fantastic team there that will do everything they can to reduce this decline. We will drill new wells. And I also remind you that in the end of '27, we will have Johan Sverdrup Phase 3 coming on stream as well. We have ramp-up of other fields on the Norwegian continental shelf, meaning that despite this reduction in '26 decline in Johan Sverdrup, we will still have a production growth. And then we will see now how Johan Sverdrup behave during the first part of the decline and how we are mitigated and then we will come back to it. So it's too early to say. When the increases on the Empire Wind, it's very much related to 2 elements, is tariffs that has been imposed to the project and is also an effect of the first stop-work order that we had. The second stop-work order, we were able to execute part of the project, most of the project in the beginning of the stop-work order. And the most important parts of the progress, we were able to do after the preliminary injunction. So very little effect of the project. So it's the execution part of it -- it's going well in terms of CapEx -- use of CapEx in this project, but there is a remaining uncertainty on tariffs. You might remember a couple of weeks ago, a 10% tariff due to Greenland that was removed a little bit a few days later, and that is some of the uncertainty that we are facing with this project. Bård Pedersen: The next one on the list is Alastair Syme from Citi. Alastair Syme: Just one question really to Anders. I just wanted to reflect on the journey that Equinor has been on in recent years with respect to the transition because you are signaling today a further scaling back in ambitions with a lower CapEx and look, I know you're not alone in doing this in the industry. But if I go back a few years ago, you had outlined a competitive position where Equinor could be differentiated in the transition space. So I guess my question is, what are your reflections on this journey? And what do you think has happened that is different to what you anticipated several years ago? Anders Opedal: Thank you. It's a really good question. And I think kind of this is where we were saying today that we are signaling a consistency. We have over the last 5 years, been extremely consistent in our communication around oil and gas and how we will develop the oil and gas portfolio, optimize it, and we have delivered on that. But we also had a different market view on offshore wind and the transportation and storage of CO2 in particular. This is where we were -- had experience. We saw a market growing for transportation and storage of CO2 going faster than we actually have seen. We -- for instance, also for hydrogen, a couple of years ago, we actually had head of terms contracts with customers. Those has been canceled, meaning that we have not been able to progress a lot of these projects within that area. But keeping in mind, we were able to -- been able to do Northern Lights -- Northern Lights Phase 2, Northern Endurance. So we see now that the licensing for or support regimes and applications for capturing CO2 goes slower despite that the framework and the laws are much more in favor of CO2 now than it was before. So to summarize very quickly, we had a different market view some years ago based on real discussions with governments and potential customers than we have today. 3, 4 years ago, customers called us to buy natural gas and was also asking for potential hydrogen and transportation and storage of CO2. Today, they continue to buy natural gas, but they have postponed their own targets for reducing emissions beyond 2030. Some years ago when everyone had a 2030 target, much more focus from customers to have this market up and running very fast. Now with different targets beyond 2030 to collect enough CO2 to have long-term contracts we have found it very difficult. That's why we are allocating no more CapEx into that area due to the market conditions. So that is what had happened. And we have focused on business-to-business with hard-to-abate industry that has postponed the targets. Bård Pedersen: Next question is from Irene Himona from Bernstein. Irene Himona: My first question is one of clarification really. You referred to your objective to build an integrated power portfolio. Typically, when your peers refer to integrated power, they mean essentially adding gas-fired power generation to renewables. So I wanted to ask what does integrated power mean for you? And how does �rsted fit in that? My second question, just going back to the share buyback. Previously, in the past, you had guided to a long-term sustainable through-the-cycle share buyback of around about $2 billion. Today, you lowered that to $1.5 billion. I'm just trying to understand what has changed between then and now essentially. Anders Opedal: You can start with that, Torgrim, and I'll do the integrated power. Torgrim Reitan: Okay. Thanks, Irene. So well, we have said at earlier years, $1.2 billion as sort of the sustainable level in a way. So $1.5 billion is actually above that. We retired the $1.2 billion a bit back. To give a little bit more context, Irene, it's the concept of having a stable share buyback through a cycle, comes a little bit theoretical. We're just coming out of a super cycle, and we have returned $54 billion over the last 3 years based on that in a way. So where we are now, we are actually the first year where the balance sheet is normalized, and we aim to manage within our means. So the number that we put forward today is $1.5 billion. We are leaning on the balance sheet this year, but you have seen in 2027. So we want to sort of give you an outlook for -- over a couple of years here. So the way you should think about share buyback is that it is a natural part of the capital distribution. It is something that is regular and is on top of the cash dividend. And the cash dividend, you should see -- consider as bankable. Share buyback clearly will be more dependent on macro environment as we move forward. Anders Opedal: When it comes to integrated power, for us, that means both intermittent power like offshore wind, onshore wind, solar, in addition to flexible power, batteries and CCGTs. We do have exposure in all of this. We have gas to power in U.K. We have battery in Poland and onshore and offshore and solar. This was divided in different business area. Now everything is integrated into one business area power. And then we have Danske Commodities that are able to integrate this totality and add additional value to this. Having said that, the priority within Integrated Power over the next year is to deliver on the already sanctioned projects. And from that, we are able to potentially if we have the right investment opportunity to expand further on the integrated power. But of course, with our gas position in Europe and U.S., we are, of course, well positioned also for gas to power if we see the right opportunities in the future. �rsted and working together with �rsted and collaboration with �rsted, as we have said, fits into this type of integrated power. We can be exposed in offshore wind in different ways and working together with �rsted, collaborating with �rsted will fit into an integrated power in different types of potential structures. Bård Pedersen: Thank you, Irene, for that. I'll take one more on the phone and then return to the room here. The next one is Paul Redman from BNP Paribas. Paul Redman: My first question is just how do you think about growth at Equinor? The reason I asked that question is at the Capital Markets Day last year, you highlighted a flat to decline in production 2026 plus. And I'm assuming that included some Vaca Muerta production as well. You're heavily cutting the renewable portfolio spend. So just how do we think about growth going forward from here? And then secondly, when I look at MMP, I guess the long-term -- well, the annual guidance was $1.6 billion, $400 million a quarter. You generated about $1.25 billion to $1.3 billion for the quarter if I take out the long-term gas contract review from this quarter. Is there any reason the guidance isn't updated? And how should we think about MMP going forward? Anders Opedal: I'll start with the growth, and we divide it so you can take the MMP. Well, let's start with the renewables. We have said that we don't want to invest more than what we have already sanctioned, but that will create a growth. We had a 45% growth quarter-to-quarter on the renewable business this year, 25% on the annual -- in 2025. So still growth in Integrated Power over the next year. And then as I said, we will have to think how we can create further profitable and disciplined growth into that area. When it comes to the international business, we have repositioned that portfolio. And you can expect from today's level towards 2030, growing this production towards 900 million barrels a day. So it's clearly a growth in there, growth in production, growth in free cash flow. On the Norwegian continental shelf, we will continue to explore. We -- it will be difficult to create further growth in -- on the Norwegian continental shelf, but we have received attractive acreage. We will drill 26 exploration wells on the Norwegian continental shelf next year. We're working on reducing the time from exploration to production from 5 to 7 years to 2 to 3 years, enabling more efficiency to be able to keep the production at the highest possible level on the Norwegian continental shelf and growing free cash flow from that portfolio. And that is what we're aiming for, for Norwegian continental shelf internationally and integrated power. Torgrim Reitan: Thanks, Paul. On MMP. So if you strip away the price review, you get to around $400 million in the fourth quarter, which is very much around sort of what we guide at. So that's sort of -- that's what you should, in a way, expect on a quarterly basis. However, there will be fluctuations as you very well know. What typically drives results are volatility in commodity markets and also contango versus backwardation. I can give you one example actually from January, where there has been a lot of volatility in the gas market. And in Europe, we have a 70% day ahead exposure and a 30% month ahead exposure. So you can rest assure that sort of the spikes you have seen in January, it finds its way to our P&L in Europe. In the U.S., we don't have -- we don't sort of have a firm exposure that we want, but clearly, the traders keep a certain part open. So when going into January, in the U.S., our traders left 30% exposed to the prompt or cash prices as such. So at the most extreme, for instance, the in-basin price for Marcellus gas was $60 per MBtu, and we took that. And then we have a transportation capacity into New York, actually coming up at Penn Station. And we achieved more than $100 per MBtu in that weekend as such. So just examples of when you see volatility, you should expect us to be able to get it in a way. So that's why these results typically fluctuates. Bård Pedersen: Thank you, Paul. Vidar Lyngv�r from Danske Bank. Vidar Lyngvær: First, just another clarification on the renewable spending in 2027. You're reducing CapEx by $4 billion. I get the tax credit part. Could you add some more color on where the remaining cut comes from? Second, Johan Sverdrup, you mentioned the decline rates there. Are those exit to exit, so exit '25 to exit '26? Or is it average production decline in '26 versus average in '25? Torgrim Reitan: Johan Sverdrup exit to exit or -- let's come back to the specifics on that. But I do think it is when you compare sort of the last year production with next year production as such. And just -- yes, and team is nodding there. So that is the way it works, yes. Anders Opedal: Yes. Yes, a little bit more color to this. As I answered earlier, we had a different market view. So we had, for instance, potential hydrogen project, transportation of CCS project in the CapEx outlook that we showed last year, those projects are not materializing. In addition, we have reduced our onshore renewable CapEx as well. And in total, this adds up to those $4 billion and together also with the ITC as you have seen. Bård Pedersen: Good. Steffen Evjen from DNB Carnegie. Steffen Evjen: On the ITC, just could you please remind me on the milestones they are required for that payment to come in, in terms of first power and any other things that has to be fulfilled? My second question is just a clarification on Adura. I think you said $1 billion in dividends. Is that your share? Or is that the total share to both shareholders? Torgrim Reitan: It's our share and then the ITC. ITC, yes. So the way it works is that you can recognize it when you start production and sort of that is sort of scale as you continue to start up the various turbines. So what we have assumed is that we recognize all of this in 2027 because that's sort of the plan. There is an upside that there is some ITCs recognized in 2026. We haven't based our analysis on it. So that is sort of the recognition part. And then there is -- so what is the cash flow impact of it. And it will take some time from we recognize it to the cash flow is in our account. So what you see on the slide is that we have assumed $2 billion impact of the ITC in '27, while the total number, the absolute number is $2.5 billion. So that sort of give you a little bit of a perspective around this. It is a significant financial operations to manage all of this, as you would know, but there is a large and growing market for ITC in a well-functioning market in the U.S. for this. Bård Pedersen: Next one is Martijn Rats from Morgan Stanley. Martijn Rats: I've got 2, if I may. I wanted to ask you again about the CapEx reductions. I know there have been a few questions about it already. But when Equinor took the initial 10% stake in �rsted, very soon thereafter, we also had a reduction in the CapEx outlook for offshore wind, renewables in general. And in many ways, that had the character, therefore, when you put these 2 things together, it's like, well, we do less organically and we do more inorganically. It was sort of not a total reduction, but it had an element of we're swapping one type of spending for another type of spending. And I was wondering how we should interpret this reduction in CapEx on this occasion. If power and low carbon CapEx goes down, is that -- should we interpret that as well, the company is just going to do less of that stuff? Or should we anticipate that in the fullness of time, this also turns out to be a swap, less organic, but more inorganic. I was hoping you could say a few things about that. And then the other question I wanted to ask is about the 10% OpEx and SG&A reduction target. Like 10% in a single year is quite a significant amount and also because Ecuador has already been very focused on that for some time. I was positively surprised that there's still sort of that type of opportunity available. Could you talk a little bit about the key levers, where that spending can be reduced? And also just for the avoidance of 10%, how does that translate into absolute sort of absolute dollar amounts, that would be helpful? Anders Opedal: Let's start with that question first, and Torgrim. Torgrim Reitan: Okay. Thanks, Martijn. So on the 10% reduction. So over the last years, we have been able to maintain OpEx and SG&A flat even if we have grown our production and despite the inflation as such. So our people and organization has done a good job. Next year, we expect that number to come down by 10%. That is a very big number. However, it is a significant impact of divestment of Peregrino and the establishment of Adura that will be equity accounted as such. So the reported numbers will be down 10%. But when you adjust for structural changes, we expect to maintain OpEx and SG&A flat, growing by 3% and still inflation as such. So this comes from many sources. First of all, activity level. Clearly, we have taken down and prioritized that very hard. That has a direct impact on it. We have taken down early phase costs significantly in the portfolio, also a significant contributor. Staff are continue to high grade and take out efficiencies. And then the business areas are clearly working on this. So -- but on your question, is there more to come? And the answer is yes, we are never satisfied with where we are on this. And I can give you 2 examples of what to come. One is the work around NCS 2035. We do see a significant cost impact of that. So we hope to show more on that in June. The other one is actually artificial intelligence. So we have already see that in our numbers, NOK 1 billion or so, which is good. However, this is early days. And we do believe that with our large operations and our ability to take out effect across assets that AI can really be a significant contributor to further cost improvements. So we'll continue to fight and work this -- but the 10% is clearly colored by the inorganic moves we have done. Anders Opedal: Yes. So -- and thank you for that CapEx question, Martijn. And let me elaborate a little bit how I think around this because you probably see now that several times, we have taken down the renewables and low-carbon solution CapEx. And it's not necessarily because we have done any inorganic moves. It's also because we have not been successful in some of the bidding because we have raised the bar for winning future CFDs. And a couple of years ago, we had several projects inside our CapEx outlook that is now not inside the CapEx outlook due to deliberately not being successful in those auctions. So a more positive view some years ago, as we said during the �rsted acquisition of 10%, we found it more value creating at that point in time, do an inorganic move than do organic move. This -- we have further taken down the CapEx for offshore wind, but also on onshore renewables. A couple of years ago and last year, we had a much more positive market view and direct discussions with customers for CO2 highway and the hydrogen project in Eemshaven, which are now pushed further out in time. And actually, the hydrogen projects in Eemshaven is stopped before FEED, and we will not move forward. And in these areas, I don't think there are many inorganic moves to be done that will create value. So you should not expect us to work much on this. We will continue to work on being a leading company in terms of transportation and storage of CO2, building on Northern Lights 1, 2 and Endurance, but we will not make investments before we see -- we have long-term contracts, we have seen costs coming down and we see profitable projects. And that means that there needs to be a better market than we see today. Bård Pedersen: Thank you, Martijn. Next one is Nash Cui from Barclays. Naisheng Cui: Two questions, please. The first one is on your upstream reserve life. I wonder how do you think about a reasonable level of upstream reserve life in the medium to long run, please could better technologies like AI to help extend base? Then my second question is on �rsted. I think earlier, you mentioned that you could collaborate more with �rsted in kind of different types of potential structures. And I wonder if you could elaborate what you mean by the potential structures? Anders Opedal: Well, you have seen what we have done, just an example with Shell in U.K. There's always way to work together to create value for both shareholders. But there is no discussion at the moment, but we see that a further collaboration with �rsted could benefit both companies, but nothing new to elaborate today. When it comes to reserve life, I think this will also -- the ROP will be affected in the years to come that we have many more exploration wells, smaller discoveries and faster time from discoveries to production, meaning that the ROP will be lower than traditionally when we had the big elephants on the Norwegian continental shelf. At the same time, we are comfortable with our ROP where we see it today around 7 because we have so many exploration wells, we have discoveries. And last year, we had 14 discoveries, adding in total 125 million barrels in new resources. Lofn and Langemann, which is in Sleipner area is in an area where we thought there was nothing more to be found, but new technology, new seismic, use of AI has enabled us to make more discoveries. We have seen the same in the Ringvei Vest area. So we will continue to implement AI in exploration to ensure that we are able to discover new resources that was overseen in the past that we now can drill and bring to market in a quicker way. And by using AI, not only on exploration, but also in operations, and so on. We saved $130 million last year, and this is accelerating. So as Torgrim said earlier, we are really focusing on implementing AI to create value in the company. And this is something that you will hear more about in the future. Bård Pedersen: Next is Jason Gabelman from TD Cowen. Jason Gabelman: I wanted to first go back to the Empire Wind guidance. And I'm wondering if the $600 million of cash flow, is that what Equinor expects to receive? Or are there going to be some repayments on the project financing that are going to minimize that in the earlier years? And I wonder if you have a similar number for the Dogger projects. And then my follow-up is just on kind of broader exploration opportunities beyond what you've discussed. And we've seen companies kind of going back into regions where fiscal terms have improved like the Middle East and West Africa. I wonder if you look at those regions as potential opportunities for the company to exploit or given kind of the lack of footprint in those regions, is it not a core focus? Anders Opedal: Yes. I'll start with that question, and you can do the $600 million and the synergy effects there. So basically, what you have seen, what we have done in the international oil and gas portfolio is to focus it. We were in 30 to 40 countries, high cost, high exploration cost. And we have concluded that we were not successful with that strategy, adding too much cost and too little of progress in putting new resources into the inventory. So we have worked very hard to focus and building an attractive exploration portfolio in those focused areas like in Angola, in Brazil and in U.S. offshore. And of course, Bidenor East Canada, we're working on the Bidenor field, where this will also have attractive exploration opportunities around it, similar to what we see on Castberg and other new fields. Then, of course, we will, of course, always be open for ideas and value-adding exploration activity outside this core, but the bar is high. We will not have a global exploration strategy moving around in all parts of the world. We have areas where we see now we have learned the basin. We have experience, and we think we can expand quite a lot on that one. Brazil, for one instance, by Bacalhau, the Raya, we have an attractive exploration opportunities there now, the neighbor block to the Bumerangue discoveries for BP. We have a block close to Raya, and we're maturing up to see what kind of exploration program we can have in that area. And next -- and in this year, we will actually also drill exploration wells in Angola. So we are curious about other areas, but we'll have most of our focus in the focused area. Torgrim Reitan: And then Jason, on the $600 million in cash flow related to Empire Wind, that is related to our equity as such. There's no sort of money of that, that goes to the lenders. A couple of things. There is a portfolio effect in addition to the cash flow within the project. And that is related to that the depreciation that we have in Empire Wind goes into the IFRS results and the minimum tax in the U.S. is based on IFRS results. So it sort of reduces the minimum tax payments in the states as such. So there's a portfolio effect coming on top of the direct cash flow in the project as such. Bård Pedersen: Just to clarify in the CFFO, the interest payment is included, but not the payment to the lenders, as you said. Thank you, Jason. Kim Fustier from HSBC is next on my list. Kim Fustier: I had a couple on the NCS, please. Firstly, I believe that back in November, you announced a reorganization of your NCS business along centralized functional lines like subsea drilling, et cetera. Could you give a bit more color on this? And how does that move help to set you up for a future on the NCS with fewer big developments, but more small developments? And then secondly, could you give an update on a couple of pre-FID projects, Wisting and then Bay du Nord in Canada, where there seems to have been some technical progress lately? Anders Opedal: Yes. Thank you. So the Norwegian continental shelf is changing. With after Johan Sverdrup and Bacalhau, we have, as I said, much more smaller discoveries, smaller fields. Most of the developments will be now subsea tie-in projects. We actually have 75 of those in our portfolio over the next 10 years. So it's about making sure that we're able to execute on these projects faster. We are going -- that we can drill more exploration well faster, and we can create more value. So then we have actually started with looking into how we work. how is our work processes, all the way from working together with partners, internal approval processes, field development processes for subsea tie-in and so on. We have looked at 70 work processes, how to -- for drilling to development and so on. We have simplified those work processes, and we have looked at them together such that all these processes are streamlined end to end. And just to say a change that I will do, instead of making 7, 8 individual decisions on these projects one by one, we will group the decision. And twice a year, I will make a lump decision of several projects, enabling faster decision-making processes and ensure that we're able to move this project faster. Based on changing the way we work, we are also reorganizing both the project organization, the drilling organization and the operation units on the Norwegian continental shelf, not offshore, but all the onshore function, enabling to work according to the new simplified work processes. So this is actually one of the largest changes we have done developing the Norwegian continental shelf since we established the StatoilHydro company and merged StatoilHydro back in 2007, 2008. So it's actually changing the way we work because the geology and the reserves on the Norwegian continental shelf changes. And what do we want to achieve? Well, we want to move time from discovery to production from 5 to 7 years to 2 to 3 years, and we need to increase the volumes that we are able to find during exploration, meaning that we need a 200 to 300 efficiency gains on the Norwegian continental shelf. When it comes to Wisting, this is far in the north in the Barents Sea, challenging projects. We're working hard to simplify it. We have made a lot of progress in that respect. We will work on concluding on the concept during first half of 2026 or in 2026 and then move towards hopefully a DG3 during 2027. But let me underline this. We are not schedule driven. This is a project where we have to make sure that this is the right project, right financial, right breakeven, NPV, and we have everything in place because this is a very, very challenging project. On the Bay du Nord, we are approaching also a concept selection at what we call Decision Gate 2. We have a good engagement with local authorities and the government of Canada to -- so we can work together. This is a very good project. We have worked well together with suppliers for a long time to take down the cost and the breakeven as much as possible. And if we are successful now over the next months, then we can bring it towards an investment decisions over the next -- over the next years. And both these projects, if we are successful, will contribute to high production beyond 2030. Bård Pedersen: Thank you, Kim. I have a few left on my list, and I want to cover as many as possible. So I ask that you limit yourself to one question to give as many as possible the opportunity. Next one is Chris Kuplent from Bank of America. Christopher Kuplent: I'll keep it to one question for Torgrim, and please forgive me for some quick mental math. But when you set your $1.5 billion buyback, are you effectively arguing over the course of '26 and '27, considering the lumps and bumps in your CFFO as well as CapEx, you're targeting to be free cash flow neutral after dividends and buybacks. Am I putting too many words in your mouth? Or is that a fair characterization of what you're trying to do over the next 2 years? Torgrim Reitan: Well, Chris, I think I need to be very precise here. So I mean, you're on to it. So clearly, you should look across those 2 years when you think about sort of our free cash flow generation that we have available to cash dividend and share buyback. We aim to run with a solid balance sheet. However, we are going to lean on the balance sheet in '26, well aware that next year is a larger free cash flow. So it makes sense to look across those 2 years. And we have done that when we have set the share buyback level for '26 as such, we have. Bård Pedersen: Thank you, Chris. Matt Lofting, JPMorgan. Matthew Lofting: Just one on Empire Wind and read-throughs from it. I mean it seems Equinor has done a good job keeping the project execution on track amid the past hold orders. But I just wonder how the company reflects on implications from this and having retained 100% equity stake through it for best assessing risk management and risk-adjusted returns, let's say, on future capital allocations. Are there learnings that are emerging from Empire Wind for optimal sizing, taking into account perhaps above as well as belowground factors? Anders Opedal: Thank you. That's a really good question. And yes, this is definitely something to reflect on. And we normally don't take 100% in any license, not on oil and gas and not in offshore wind. But due to a deal with BP, they took some and we took this. We derisked it somewhat with higher strike prices with a financing package. And then as you have seen, the political risk with the new administration was higher than anticipated. This is a trend we see now in several countries that energy investments are more and more politicalized and polarized. And we see it in Norway. We see it in U.K., we see it in U.S. And definitely, for us, this brings some reflections about what is the above-ground risk you can take. And for myself, I reflected quite a lot about to see bipartisan support for future projects. If there is a kind of a strong division for potential projects, then we need to think twice and really understand the political risk. And this is something new. It's not only in U.S. This is something new that we have seen lately in several countries. And kind of we need to adapt the learning, and we need to bring into future decision processes definitely. Very important question you raised there. And with the political changes we have seen, which were kind of outweighted all the other factors that was reducing the risk, we would have probably thought differently about Empire Wind in the past. Bård Pedersen: Thank you. We are on the hour, but let's take one more and hope is short and then we'll round it off, and that is you, James Carmichael from Berenberg. James Carmichael: Just one last quick one, I think. Just again on Empire Wind. I was just wondering if you could clarify your sort of best case estimate on the timing of the underlying court case and when we might be able to sort of put any uncertainty to be around sort of future hold orders, et cetera. Anders Opedal: Yes. This is a little bit early to say kind of because it's a judge in U.S. to decide that timing when this -- the merits of the case will come up for the court. There's been indication that will happen fairly quick with some couple of months, and that gives us opportunity to elaborate on the case in a good way. I just want to also remind you that all the 4 other operators we're doing exactly the same thing, challenging this in court and all of them were granted a preliminary injunction. We mean that this stop-work order was unlawful. And at least with so consistent preliminary injunction, I think also we have a strong case moving forward. But I'm an engineer and not a lawyer. So -- but yes, we are moving forward with a strong belief that we will have a good case in the court, strong case. Bård Pedersen: Thank you. I would like to thank you all for participating and for asking your questions. We didn't manage all the way through the list, but I want to be respectful for everybody's time. And as always, the Investor Relations team remain available for any follow-up questions during today or later in the week. Have a good afternoon, everybody, and thank you for joining.
Operator: Good day, ladies and gentlemen, and welcome to TomTom's Fourth Quarter and Full Year 2025 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn over to your host for today's conference, Claudia Janssen from Investor Relations. You may begin. Claudia Janssen: Thank you. Good afternoon, everyone, and welcome to our conference call. In today's call, we will discuss the fourth quarter and full year 2025 operational highlights and financial results with CEO, Harold Goddijn; and CFO, Taco Titulaer. Harold will begin with an update on strategic developments. Taco will then provide further insight into our financial results, our Automotive backlog and our outlook. After their prepared remarks, we will open the line for your questions. As always, please note that safe harbor applies. And with that, Harold, let me hand it over to you. Harold Goddijn: Yes. Thank you very much, Claudia, and good morning, good afternoon, everybody. 2025 was an important year for TomTom as our product strategy clearly matured and we gained commercial traction. We introduced several new products with our Lane Model Maps standing out as a major milestone. Orbis Lane Model Maps provide lane-level intelligence, including geometry and lane markings, but at a true urban scale. And by leveraging our AI-powered map factory, we can now produce lane accurate maps with exceptional efficiency and freshness, and this has been proven to be a differentiating capability. A strong validation is that we secured a record amount of new business, and that includes a collaboration with CARIAD where TomTom Orbis Lane Model Maps were selected as a core component of the automated driving system supporting the Volkswagen Group brands. In Enterprise, Orbis Maps broadened and diversified our customer base. In the beginning of 2025, we announced a new cooperation with Esri, through which we provide maps, traffic data to support businesses and governments with location intelligence, addressing various use cases from maintaining critical infrastructure to analyzing traffic flows. And more recently, we deepened our global partnership with Uber, expanding our collaboration to enhance on-demand travel experiences worldwide. Looking ahead to 2026, I'm confident that continued advancements in our product portfolio will further strengthen our commercial traction across both our Automotive and Enterprise business, supporting top line growth over time. We will continue to expand and enhance our product offering, and we will make it easier for developers and for businesses to access our data, which will support future growth. We see meaningful commercial opportunities emerging in automated driving and infotainment as well as in high potential verticals such as insurtech and state and local government. Thank you very much. This is my part of the presentation. I'm handing over to Taco. Taco Titulaer: Thank you, Harold. I will cover our financial performance, the key trends we're seeing, an update on our Automotive backlog and our outlook. After which, we will take your questions. Automotive IFRS revenue for the fourth quarter amounted to EUR 77 million, down 3% year-on-year. Automotive operational revenue was 12% lower compared to Q4 last year. The Enterprise business delivered EUR 39 million, a 10% decline versus the same quarter last year. Approximately half of this decline is explained by a weaker U.S. dollar versus the euro year-on-year as around 3/4 of our Enterprise revenue are U.S. dollar-denominated. The remainder of the decline reflects a continued phase out of a large customer, partly offset by a broadening of our customer base over the course of the year. Gross margin was 89% in the fourth quarter, a 2 percentage point improvement compared with Q4 2024, mainly driven by a lower proportion of hardware in our revenue mix. Operating expenses were EUR 110 million, a reduction of EUR 21 million compared with the same period last year, reflecting the combined effect of capitalizing development costs associated with our Lane Model Maps and disciplined cost management. For the full year 2025, we recorded group revenue of EUR 555 million, 3% lower than in 2024. Automotive IFRS revenue was EUR 323 million, down 2% from last year due to lower car volumes at some customers and the phaseout of certain car lines, partly balanced by new model starting production. Operational revenue in Automotive dropped 1%, staying largely stable versus 2024. Our Enterprise revenue for the year was EUR 159 million, 2% lower year-on-year. For the full year, the picture is similar as in the quarter, normalized for the currency fluctuations. Enterprise revenue showed a marginal increase compared with last year. For the full year, gross margin was 88%, an improvement compared with 2024. This continued shift away from consumer hardware structurally strengthened our gross margin from 85% in 2024 to 88% in 2025, and we expect it to move north of 90% in 2026. Operating expenses decreased to EUR 489 million, a EUR 19 million reduction, same as for the Q4 trend. This reduction was due to capitalization of our map investment, lower amortization charges and reduced personnel costs from the second half of 2025, partly offset by the reorganization charge booked in Q2 2025. Looking ahead, the quarterly OpEx run rate entering in 2026 will likely be a few minutes -- a few million euros higher than what we saw in Q4. But for the year as a whole, we expect the total operating expenses to remain below 2025 in 2026. Free cash flow, excluding the cost for the reorganization we announced halfway in the year, EUR 19 million. This was an inflow of EUR 32 million compared with EUR 4 million outflow last year. Having covered our results, let's move on to the Automotive backlog. Our Automotive backlog at the end of the year reached EUR 2.4 billion, a net increase of EUR 300 million compared with the end of 2024. Our Automotive backlog represents the expected IFRS revenue from all awarded deals. Accordingly, the backlog decreases as revenue is recognized and increases when new deals are won. Its value can also fluctuate when customers revise their vehicle production forecast and with ForEx revaluations. The increase in backlog this year was driven by a record level of new deals. Our book-to-bill ratio was well above 2 last year, partly offset by negative impact from ForEx revaluations, which has a more pronounced than usual effect on the backlog valuation. A large portion of the Automotive revenue we expect to report in 2026 and '27 is already covered by the backlog generated from prior year's order intake. The majority of the value from the 2025 order intake is expected to start being recognized from 2028 onwards. From a product perspective, we see Automotive RFQs increasingly gravitating towards Lane Model Maps, the maps that enable autonomous driving functionality and support a growing range of advanced safety features. The products accounted for approximately half of last year's order intake, and we expect this [ should ] continue to grow. OEMs are clearly increasing their product and engineering focus in this area as Lane Model Maps enable both improved vehicle performance and meaningful differentiation. Our strong positioning in this area reflects a decade of sustained investment in these capabilities, and we're now seeing those investments translate into tangible commercial results. An additional benefit is that securing Lane Model Maps deals opens the door to road model map awards for the navigation use cases, supporting further market share gains. Now let's move to the 2026 outlook. Looking ahead to 2026, our revenue will reflect the transition of some customers. However, this impact is temporary. 2026 group revenue is projected to be between EUR 495 million and EUR 555 million, with Location Technology contributing EUR 435 million to EUR 485 million. We expect our operating result to improve year-on-year, while free cash flow is expected to turn temporarily negative due to the sustained investment in our Lane Model Maps. Operating margin is expected to be around 3% of group revenue. A return to top line growth is foreseen in 2027. Higher revenues combined with disciplined cost control are set to drive a further step-up in operating margin as well. To conclude, let me summarize our prepared remarks. We closed 2025 with a strong strategic momentum, marked by a record Automotive order intake and an expansion into automated driving. Despite modest top line declines driven by market conditions and customer transitions, EBIT and cash generation improved meaningfully. With an expanded EUR 2.4 billion Automotive backlog, new product launches and strengthening commercial partnerships, TomTom enters 2026 well positioned for a return to growth in 2027. And with that, we are ready to take your questions. Please, operator, please start the Q&A session. Operator: [Operator Instructions] And our question come from the line from Marc Hesselink from ING. Marc Hesselink: Yes. I have a couple of questions on the lane model. I think this is the new product versus the HD Maps that you previously had. But I think under the hood, a lot changed in the way you build your process, you build your map, how you can integrate with the client. Just if you can explain how this product currently looks like? And also how are your clients going to integrate it? And if you can also talk about what is your competitive position there? Is this now something that is really unique for TomTom that none of the competition has something like this? And if you then compare it, there's always sometimes still the debate between for this kind of functionality, do you need a map, yes or no? What's the status there also with things like the redundancy of the safety features? Harold Goddijn: Yes, Marc, thank you. Yes. So the lane model is fundamentally different from a road model map because it is a representation of the actual road and all the lines on that road and the dividers and whatnot. So you get a replica encoded of what is the road surface, what the road surface looks like. And the problem with building that map is that it's always been very expensive and not -- didn't scale very well. But with new advances in technology and new data that are becoming available, we can now produce those maps to a high degree of automation, not completely automated, but there's a high degree of automation is possible now. And that means that it's becoming economically viable to do this on all roads, not just the motorways. And it also means that you have a process for upgrading and change detection. So you can build maps that are fresher. All those capabilities are critical for self-driving and automated driving. We see that those maps are used in those systems as not only as backup, but also as a sensor. The challenge for self-driving technologies is to reduce the number of interventions of the driver of the vehicle and maps data play a very critical role in reaching that objective. Marc Hesselink: Yes. And the competition at this stage? Harold Goddijn: Well, so we don't have full visibility, but we believe that the method that we are deploying is novel, differentiating, leads to better results, scales better than what our competitors are capable of producing. Marc Hesselink: Okay. And if we look at the client side, you obviously have a big success with the CARIAD. But what about the discussions with other OEMs? Is this something that you -- I'm sorry. Harold Goddijn: Yes, go on, Marc. Marc Hesselink: Yes, I said -- and I wanted to add to -- do you speak to many other clients, including also the Chinese OEMs? Harold Goddijn: Yes. So the interest is coming from a broad range of car brands. People of carmakers want this. They can see the value of having that dataset available for the self-driving function, and that is broadly shared amongst all our customers and also potentially new customers. So we see a profound deep interest in understanding what's going on and how this technology can help them to make those cars and bring the level of automation to the next level. And next to that, we also see interest from software developers who are developing the self-driving software stack. There are a number of independent software developers who are doing this, but some based in -- mostly based in China. And they also show strong interest in understanding what this technology can bring and how it can help them to mature their own technology stack. Operator: [Operator Instructions]. Claudia Janssen: Let me -- if there's no -- I see -- if there's no further questions, let me give the opportunity to some of the analysts if they want to take the questions. If not -- no. If there's no additional questions, I want to thank you all for joining us today. And operator, you may now close the call. Unknown Executive: There is... Claudia Janssen: Oh, sorry. Andrew, sorry. Operator: I have a question that's come through now. So we are now going to take the next question from Andrew Hayman from Independent Minds. Andrew Hayman: Yes. Could you maybe give some guidance to how negative you think the free cash flow will be in 2026? Taco Titulaer: Yes. Thank you, Andrew. So 2 things I want to say about that. One is -- the second thing is to answer your question. But the first thing is that we introduced new guidance metrics in 2020. So we gave guidance on the top line and the bottom line. The top line was the group revenue and the Location Technology revenue. And the bottom line, we chose free cash flow because free cash flow at that time was the best tracker of our profitability. That had to do with the disparity -- the difference between operating and reported revenue in Automotive and the big delta between amortization and CapEx that we saw in the OpEx line resulting from the acquisition of Tele Atlas. Now both effects are kind of gone. So you also saw last year that reported revenue and operational revenue in Automotive is at parity. They're kind of almost the same. And also, we have -- we don't have any amortization left that's related to the Tele Atlas acquisition. So we want to normalize our guidance towards a revenue and an EBIT forecast. And that said, as we also have -- and then coming into your second or your primary question, the fact that Automotive is declining next year temporarily and we sustain our investment at the same level as we had last year, we will see free cash flow being negative in this year. How large it will be, I don't know exactly, but I expect it will be above EUR 10 million, but not much more than that. And then if our revenue, our top line is recovering in 2027, I expect that free cash flow will be positive again as of 2027 onwards. But an official guidance will follow in 12 months from now about that. So we'll continue to provide direction about free cash flow, but the primary guider or primary KPI for profitability will be EBIT. Andrew Hayman: Okay. And then in terms of the bookings that came in, how much of that is new customers? And how much is just more business from existing customers? And then maybe just tied in with that, how does the funnel of business look for 2026? Is there going to be -- is it a bit quieter after so much activity in 2025? Taco Titulaer: Well, yes, so if you look at order intake, you can make a 2x2 matrix. In the horizontal, you say existing customers and new customers. On the vertical, you say lane model or road model, where lane model is the automated driving and safety use cases and where road model is more for the driver itself to navigate from A to B. What I already mentioned in my prepared remarks is that what we've seen is that if you break down the order intake of last year that roughly half of that order intake is related to lane model. And that percentage will only grow further. So also for 2026, we think that the proportion of lane model RFQs and potential wins will be tilted towards lane and not so much road. Road models can be a tag-along deal. Increasingly, OEMs want to focus on securing the right quality and the right vendor of lane models. And also that gives us opportunities to also secure extra deals in road modeling. The majority -- yes, CARIAD is an existing customer, of course, because we already do software with them. So in that sense, the majority of the order intake was with existing customers. Harold Goddijn: But I want to add to [Audio Gap] first time that we deliver map data at scale to the VW Group. Taco Titulaer: Yes, that's different. But before it was navigation software and traffic, et cetera, but now it is also including map data. Andrew Hayman: Okay. And how does the funnel of potential sales look for this year? Because it looks like -- I mean... Harold Goddijn: There's a broad and deep book of opportunities out there, not dissimilar from 2025. So the activity is really -- is there from what we can see now. But what we also have seen in 2025 is that timing is very difficult to predict also because of ambiguity in product planning in all sorts of market conditions. But I think the way we look at it now, there is substantial opportunity available again in 2026 for further building of the backlog. And there are also opportunities available to us for extending and growing our market share. Operator: And the questions come from the line of Marc Hesselink from ING. Marc Hesselink: A follow-up. One on the Enterprise segment. I think in previous calls, we've discussed a lot about the momentum for the small clients being quite good. But then for the bigger, longer sales cycles, is that still ongoing? Are you still talking to these bigger potential clients? And would we expect something beyond '26 in the '27 period? Is that likely? Harold Goddijn: I don't think there's -- we don't anticipate a big shift in market opportunities in 2026. No extraordinary, but we think that the momentum we have to an extent in the long tail opportunities, that will continue throughout 2026. The composition -- yes, so there's a lot to go after in -- also in the Enterprise sector. Marc Hesselink: Okay. And -- but the big clients, they sort of stick to their own products or... Harold Goddijn: Well, we have a good market share with the big tech companies already. There are not that many of them, but our market share there and our representation with big tech is significant. So the growth and the expansion need to come from companies below that tier. There's a lot of them in the EUR 10 million kind of category. There are a lot of them in the -- between EUR 1 million and EUR 10 million category that are available to us to win. Marc Hesselink: Okay. Okay. That's clear. And then the second follow-up was on -- you mentioned also for next [ year, so '27 ] to be cautious on the cost side. And I just want to understand that a bit because I think that you say you're moving towards the more automated process. It's almost now already almost fully automated. Is that something that you can still take a bit of steps there to further automate it and at that stage, decrease the cost a bit? Harold Goddijn: Yes. Well, we -- so there's a number of things that we can achieve through -- on the cost side. I think the most important one is that our product portfolio is maturing and coming together. And we're more product-driven than in the past. And that means that we can do things more effectively, better at higher quality and we can leverage that software much better than we've ever been able to do in the past. We see also opportunities to further leverage the power of AI, especially in the engineering side. We're making some meaningful progress in that area. So the combination of a simpler product portfolio at a higher quality that is reaching completeness now after a long period of transition, those are all indicators that we can do things more faster at higher quality, but also with -- allow us also to keep a lid on the cost and not let that grow. There will be additional costs in maturing lane level product, as Taco already indicated. But all in all, I think we are in a good position not to let the cost and the OpEx run away from us, but rather contain it and manage it carefully without that giving strong limitation on our ability to get things done. Claudia Janssen: Okay. With that, I want to thank you all for joining us today. And operator, now you can really close the call. Thank you. Operator: Thank you. This concludes today's presentation. Thank you for participating. You may now disconnect.
Operator: Good morning. My name is Nikki and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe Fourth Quarter and Year-End 2025 Earnings Conference Call and Webcast. [Operator Instructions] I will now turn the call over to Keith McCue, Senior Vice President of Finance and Investor Relations. Please go ahead. Keith McCue: Thank you, Nikki. Good morning, and welcome to RenaissanceRe's Fourth Quarter and Year-End 2025 Earnings Conference Call. Joining me today to discuss our results are Kevin O'Donnell, President and Chief Executive Officer; Bob Qutub, Executive Vice President and Chief Financial Officer, and David Marra, Executive Vice President and Group Chief Underwriting Officer. To begin some housekeeping matters. Our discussion today will include forward-looking statements, including new and updated expectations for our business and results of operations. It's important to note that actual results may differ materially from the expectations shared today. Additional information regarding the factors shaping these outcomes can be found in our SEC filings and in our earnings release. During today's call, we will also present non-GAAP financial measures. Reconciliations to GAAP metrics and other information concerning non-GAAP measures may be found in our earnings release and financial supplement, which are available on our website at renre.com. And now I'd like to turn the call over to Kevin. Kevin? Kevin O'Donnell: Thanks, Keith. Good morning, everyone, and thank you for joining today's call. The company we have built is fundamentally different from what it was just a few years ago. We are larger and significantly more diversified, geographically by line of business and by source of income, with much larger contributions from investment and fees. I begin with this context because this time last year, a few would have predicted the strong financial performance we delivered in 2025. Our industry faced multiple headwinds, including the California wildfires, a softening reinsurance market and lower interest rates. In the face of these headwinds, our larger size and greater diversification allowed us to deliver strong financial results. Bob will, of course, walk through the financials. But first, I would like to highlight some of the most notable achievements. Operating income was $1.9 billion. Operating ROE was 18% and tangible book value per share plus accumulated dividends, our primary metric grew by 30%. This is the third year in a row where we have grown this metric by over 25%. As a result, over the last 3 years, we have more than doubled tangible book value per share. Capital management was also notable. We repurchased $650 million of our shares during the fourth quarter, 13% of our shares over the course of 2025 and 17% of our shares since the first quarter of 2024 when we began repurchasing post Validus. I am pleased to report that we have now repurchased more shares than we issued in connection with the Validus acquisition. The cumulative return on our share since then a little over 2 years ago has been around 30%. This demonstrates our ability to raise capital and we have an attractive opportunity, reward investors by returning capital as we realize its benefits and execute transactions with minimal long-term dilution. Bob will speak to you in greater depth regarding our financial results, but overall, I am proud of our performance. Moving now to address strategic results in 2025. Strategically, if 2024 was about retaining the Validus portfolio and successfully integrating the company, 2025 was about maintaining our underwriting book and optimizing our larger and more dispersed operations. We undertook a number of internal initiatives to improve efficiency and effectiveness and better manage our increased scale. We are upgrading our underwriting system to be more customer-centric and enhancing the architecture to be more efficiently organized to benefit from the growing influence of artificial intelligence. Moving now to some remarks on our Casualty & Specialty segment. Aggregate underwriting profits on the portfolio have been almost $500 million over the last 5 years without the impact of purchase accounting. As we have discussed, however, earnings from this business emanate from 3 separate income streams, underwriting fees and investments. It's harder to see the full benefit of Casualty because fees are offset in our NCI and investments are not split by segment. This year alone, Casualty & Specialty contributed about 1/3 of our operating income across our 3 drivers of profit. The goal of any line of business is to grow tangible book value per share over time. In Casualty, there is a trade-off between underwriting results and investment results. Typically, when one is high, the other is lower and vice versa. Over a 10-year cycle, this balance of profit shifts back and forth, but nevertheless contributes to growth in tangible book value per share. Currently, the balance within the officially portfolio is heavily skewed toward investment returns. As a result, the market has tolerated rising technical ratios. This reduces underwriting margins available to compensate for inherent volatility. My belief is that technical ratios will fall, but is difficult to predict when. For now, we will continue to monitor this class closely and make appropriate adjustments. That said, while margins are tight, Investment in fee income from Casualty are currently a substantial driver of book value growth. So we are not recognizing much underwriting profit today, which we think is the right approach in the current environment and are still making a strong overall return. I want to briefly touch on the January 1 renewal and our outlook for 2026. David will address this in more detail. Property CAT rates for us were down low teen percentages. We found some opportunities to grow, which should keep top line premium in Property CAT down only mid-single digits, excluding the impact of reinstatement premiums. Terms and conditions mostly held solid including retentions. As I previously mentioned, we are a larger and more diversified company. Two drivers of these changes occurred in 2023. The step change in Property CAT and our acquisition of Validus. So I think a comparison of our present opportunity set to the pre- '22 to 2023 period is constructive. To begin, rates in Property CAT remain attractive and well above return levels realized in the years before 2023. Equally important, most of the structural changes made in 2023 are still in place. As a result, our reinsurance portfolio in 2026 is still one of our best, a few other favorable comparisons to 2022. Our underwriting portfolio is roughly 1/3 larger. Our retained net investment income has tripled and our fee income has more than doubled. In aggregate, when we look at our current state versus where we were before 2023, all points of comparison are favorable. Our increased scale and diversified sources of income mean we are more resilient to loss. This gives us great confidence in our reinsurance portfolio and our continued ability to deliver consistent, superior returns to our shareholders. I'd like to finish my comments with a discussion about how we plan to continue growing tangible book value per share this year at an attractive pace by employing a similar strategy to last year. This strategy was something I discussed last quarter and was composed of the following factors: first, to maintain or grow our property business; second, focus on preserving underwriting margin; third, prioritize Casualty cedents who focus on claims handle practicing over those who solely focus on rate; fourth, continue to grow fees in our capital partners business; fifth, continue to grow invested assets; and finally, continue returning capital to our shareholders by repurchasing shares at attractive valuations. I should add one more point to this list, which is continue to execute our gross-to-net strategy to arbitrage competitive cap on market and retro markets. As you can see, we have quite a few strategic levers to keep returns attractive. This is the playbook we successfully ran in 2025 and is the one we will run 2026. That concludes my initial comments. I'll turn it over to Bob to discuss our financial performance for the quarter and for the year before Dave provides a more detailed update on renewal in our segments. Thank you. Robert Qutub: Thanks, Kevin, and good morning, everyone. In 2025, we demonstrated the efficacy of our strategy and the persistence of our earnings profile, delivering operating income of $1.9 billion, even with a $786 million net negative impact from margin. My comments today will focus primarily on the drivers and sustainability of these annual results. I also want to touch on some highlights from the fourth quarter, where we delivered operating earnings per share of $13.34 and an operating return on equity of 22%. In the quarter, all 3 drivers of profit produced strong results, specifically, underwriting income was $669 million with a combined ratio of 71%, fee income was $102 million and retained investment income was $314 million. Both fees and retained net investment income are among the highest we have ever reported and demonstrate that we have continued to optimize these drivers as our underwriting portfolio has grown. Building on this, there are 4 numbers I have consistently highlighted that demonstrate the strength of our earnings profile and our ability to absorb volatility. The first number is 15 points which is the annual aggregate contribution to our overall return on average common equity from our investment and fee income in 2025. This is consistent with 2024 and creates a stable base of earnings each quarter, which we then build upon. The second number is $1.3 billion, which is the underwriting income we generated in 2025 including a $1.1 billion underwriting loss from the California wildfires. Underwriting is the core of our business and provide significant upside to the earnings base from fees and investments. The third number is $1.6 billion which is the amount of capital we return to shareholders in 2025. Throughout the year, we purchased over 6.4 million shares. The average price of these share repurchases was near book value, essentially returning all of our operating income with minimal dilution. We believe that our stock represents excellent value at current levels and expect share repurchases to continue in 2026, in line with our long history of being good stewards of our shareholders' capital. And finally, the fourth number is 31%, which is the amount we grew tangible book value per share plus change in accumulated dividends in 2025. As Kevin highlighted, we have more than doubled this metric over the last 3 years through a combination of strong retained earnings and disciplined capital management. Now I'd like to turn to a detailed view of our three drivers of profit, starting with underwriting where we delivered excellent results with an adjusted combined ratio of 85% for the year. This performance is particularly strong, given that we absorbed several large losses across both segments. For Property Catastrophe specifically, we reported a current accident year loss ratio of 64% for the year and an adjusted combined ratio of 60%. This current accident year loss ratio included 50 percentage points of losses from the California wildfires and 3 percentage points of losses from Hurricane Melissa. Property catastrophe also benefited from 24 percentage points of prior year favorable development primarily from large events in 2022 through 2024 and changes to attritional loss estimates. Note that in the fourth quarter, in Property Catastrophe, we reduced our total estimate of net negative impact from the California wildfires by $42 million driven by lower case reserves reported by our cedents during the renewal process. In Other Property, we delivered exceptional results in 2025 with a current accident year loss ratio of 62% and an adjusted combined ratio of 60%. This is the lowest annual combined ratio we have delivered since we started reporting the Other Property class of business. The Other Property current accident loss year ratio for the year included 8 percentage points from the California wildfires and 2 percentage points of losses from Hurricane Melissa. Other Property had 33 points of favorable development from prior years, primarily related to attritional losses. In Casualty & Specialty, we reported an adjusted combined ratio of 102% for the year. This includes 4 percentage points from large loss events in 2025. In the fourth quarter specifically, we reported losses on two recent events, the UPS aircraft crash and the Grasberg mine landslide in Indonesia. These 2 events impacted our quarterly adjusted combined ratio by 4 percentage points, pushing it to 102%. Prior year development and Casualty & Specialty on a cash basis was slightly favorable for both year and the fourth quarter, before the impact of 50 basis points of purchase accounting adjustments. Across our underwriting portfolio, gross premiums written for the year were $11.7 billion and net premiums written were $9.9 billion. Both roughly flat compared to 2024. In Property Catastrophe, we leaned into opportunities in the U.S. and grew gross premiums written by 5% this year and by $17 million in the fourth quarter in both instances without the impact of reinstatement premiums. Gross premiums written in Other Property declined by 11% in the year. We have been holding exposure flat in this class while managing a declining rate environment. This book continues to produce strong results. In Casualty & Specialty, gross premiums written in 2025 were roughly flat compared to last year. We found opportunities to grow our credit book, primarily through seasoned mortgage deals. This offset declines in Casualty, where we have been optimizing the book and negative premium adjustments in Specialty, largely from rate deceleration in cyber. Looking ahead to the first quarter, we expect other property net premiums earned to be approximately $360 million and attritional loss ratio in the mid-50s. In Casualty & Specialty, net premiums earned of around $1.4 billion and adjusted combined ratio in the high 90s, absent the impact of large losses. Moving now to our second driver of profit, fee income in our Capital Partners business. Fees were $329 million for the year, up from 2024. Within this management fees were $207 million and performance fees were $121 million. This performance is particularly impressive given that the California wildfires suppressed fees in the first quarter. We fully recovered from this event in the first half of the year and performance fees have surpassed our expectations for the last 3 quarters due to strong underwriting results and favorable prior year development. Capital Partners produced excellent results throughout 2025 and continued strong engagement from our third-party investors and fees should remain a key driver of our financial success. Looking ahead to the first quarter, we expect management fees to be around $50 million and performance fees to return to around $30 million, absent the impact of large catastrophe losses or favorable development. Moving now to our third driver of profit, Investments where our retained net investment income for the year was $1.2 billion, up 4%. We increased retained net investment income every quarter starting at $279 million in the first quarter and rising to $314 million in the fourth quarter. This outcome is primarily the result of net growth in underlying assets as well as proactive actions to selectively add credit throughout the year. This included increasing exposure to investment-grade credit, agency mortgage-backed securities and high yield. Additionally, we have retained mark-to-market gains of $1.1 billion, driven by gains from equities, interest rate movements in our fixed maturity portfolio, and commodities, mainly gold. As we have previously discussed, we took a position in gold at the end of '23, which we added over the last 2 years as an inflationary and geopolitical hedge. Since we made the investment, gold has doubled in price and led to over $400 million in retained mark-to-market gains this year. Our retained yield to maturity of 4.8% reduced from 5.3% in December of 2024 due to falling short-term yields. And our retained duration decreased from 3.4 years to 3 years. This was primarily related to our decision to reduce duration at the long end of the curve, while increasing exposure to securities with a 3- to 5-year duration. Looking ahead, we expect investment income to remain a persistent and meaningful contributor to our results and anticipate retained net investment income around similar levels in the first quarter. Now moving to some comments on tax. 2025 was the first year we incurred a 15% corporate income tax in Bermuda, and we demonstrated our ability to continue producing excellent returns in a higher tax environment. As a reminder, our overall effective tax rate on our GAAP net income is often lower than this 15%. This is related to noncontrolling interest, which is subject to a minimal amount of income tax. You'll see this in the rate reconciliation in our 10-K when it's filed. In the fourth quarter, the Bermuda government introduced substance-based tax credits designed to encourage investment in Bermuda. There are two main components of the credit. Compensation-related and expense-related. The credits will be phased over time, scaling from 50% of the benefit in 2025, increasing to 100% in 2027. We have a significant presence on the island and the credits provide a positive tailwind to our results, acting as an offset to certain operating and corporate expenses. Due to the timing of the legislation, we recognize all the 2025 credits in the fourth quarter, that were applied at the phase-in rate of 50%, and you can see the benefit to our expense ratios. Specifically, the credits reduced our annual operating expense ratio by about 60 basis points and our annual corporate expenses by about 15%. Starting in 2026, we will recognize the credits on a quarterly basis at 75% of their value and then their full value in 2027. We also recognized about $70 million in cash benefit from our Bermuda deferred tax asset in 2025. This is in addition to the tax credits I outlined above. Next, moving to expenses, where our operating expense ratio for the year was 4.7%, down slightly from last year. This reduction is largely driven by the substance-based tax credits I just discussed and partially offset by continued investment in our business and the year-end bonus accruals. Looking ahead, we expect our operating expense ratio to average between 5% and 5.5% as we continue to invest in the business. In conclusion, we delivered strong results in the fourth quarter and throughout 2025, driven by meaningful contributions from all three drivers of profit and disciplined capital management. As we look forward, our three drivers are positioned to produce similarly strong results in 2026 for the benefit of our shareholders. And with that, I'll turn the call over to David. David Marra: Thanks, Bob, and good morning, everyone. As Kevin and Bob both explained, we have maintained profitability throughout a wide range of market conditions because of the diversification across our 3 drivers of profit. Strong underwriting underpins the stability of our earnings because each of our 3 drivers of profit are ultimately fueled by our portfolio. I'm proud of the underwriting portfolio's contribution to our financial results in 2025 and equally proud of our execution at the recent renewals, which will support sustainability of strong returns going forward. I will expand on both topics, beginning with our 2025 performance and how superior underwriting supported strong results across each driver. Starting with underwriting income. During 2025, we shaped our already attractive portfolio to make it even better, growing Property CAT, holding our profitable positions in other Property, Specialty and credit and reducing in the Casualty lines that were most exposed to high levels of claims inflation. As a result, in 2025, our underwriting portfolio generated $1.3 billion in income with solid current year performance despite several large Property and Specialty events. Prior year performance was highly favorable, reflecting the strength of our historical underwriting decisions and a disciplined reserving approach. With respect to fee income, we deployed efficient partner capital in both Property and Casualty & Specialty. This enabled us to trade broadly across programs with large capacity while also resulting in $329 million of fee income for the year. With respect to investment income, our underwriting portfolio has generated a $22 billion diversified pool of reserves. These reserves are our primary source of float, which gives us meaningful investment leverage and result in substantial sustainable net investment income for our shareholders. Both segments contributed significantly to our overall return on equity through these 3 drivers of profit. Property contributed primarily to underwriting and fee income and Casualty & Specialty contributed primarily to investment and fee income. This was by design. And as our results demonstrate, it was a highly profitable to construct our portfolio in this market. Moving on to the January 1, 2026, renewal. As an underwriting team, we have 2 primary goals at each renewal. First, deliver our market-leading value proposition to clients and brokers. This ensures a sustainable pipeline of renewable business, first call status and favorable signings, which are resilient to competition. Second, construct the optimal underwriting portfolio across business segments to feed each of our drivers of profit and generate capital-efficient risk-adjusted returns in any given year and over the cycle. I believe we achieved both objectives at January 1. Competition follows favorable reinsurance results, and we saw increased supply of reinsurance capacity with pressure on rates and margins. We were starting from a strong position, however, and remain confident in rate adequacy across the portfolio. As I mentioned last quarter, this is not a market where all risks are equally attractive or equally accessible. We succeeded in building a differentiated portfolio by deploying our underwriting expertise to select the most attractive risks and our broad client relationships to achieve the most attractive signings. We took a deal-by-deal and client-by-client approach, trading our participation on programs holistically across lines and geographies. This resulted in us securing our desired lines when many others were signed down due to competition. It also facilitated targeted reductions in some cases without impacting the lines we wanted to maintain. I'll now walk through our actions at the January 1 renewal in more detail by segment, starting with Property. Our goal in Property Catastrophe was to maintain our existing portfolio and deploy additional capacity into attractive opportunities. Reinsurance supply was up following several years of strong results. This additional supply resulted in increased rate pressure globally with rates down on average in the low teens for our portfolio. Retentions and terms and conditions remain consistent with recent strong levels. We successfully renewed our existing line and deployed new limits selectively across our owned and managed balance sheets. Overall, we expect to see a reduction in gross premiums written in Q1 due to rate decreases, which will be partially offset by growth from new demand. Modeled margin in the Property Catastrophe book remains well above the cost of capital. And as we described last quarter, there are several mitigants to the effect of rate decreases on our net retained business. First, we shape our portfolio with ceded reinsurance, which improves our net result. Ceded rates were down high teens across our portfolio. In addition, we renewed a series of our Mona Lisa CAT bond at a larger size with spread tightening by more than 50% on a risk-adjusted basis. And finally, we share a significant part of our portfolio with capital partner vehicles, which produces fee income, which is less sensitive to rate movement. This strategy has resulted in an average underwriting margin of over 50% over the last 3 years, and we remain confident in our ability to continue producing strong returns in our Property CAT book. In other Property, our goal was to optimize the book to reduce peak exposure and maintain attractive margins. Following several years of profitable results and favorable claims trends, we are experiencing rate pressure. Terms and conditions such as deductibles and policy supplements remain strong. At the January 1 renewal, we maintained our positions across other property but reduced exposure in areas with the most rate pressure and managed net profitability through improved ceded purchases. Shifting now to our Casualty & Specialty book. In Casualty, we aimed to fine-tune our positions to continue to manage exposure to areas most at risk of continued loss inflation. After reducing exposure significantly in 2025, our approach at the January 1 renewal was lighter time. We trimmed back on programs where we saw below average results while continuing to benefit from rate increases across the book. Over the last 18 months, clients have been keeping up with trend in general liability by increasing rates. Many clients are further differentiating themselves through investments in claims handling. These improvements will take time to be reflected in results, but we like the progress that is being made. We measure the success of our Casualty business over a 10-year period and believe we have made the right underwriting decisions for this point in the cycle. Maintaining our Casualty positions on the best panels gives us options to benefit from improved underwriting margins as the market strengthens, while still allowing us to earn a strong return from the float in the interim. For every dollar of Casualty business we write, we benefit from more than $0.20 of investment income. This is the best way to construct our portfolio in this market and makes our casualty portfolio highly accretive to book value over both the short and long term. And finally, in Specialty and Credit, our goal was to hold our positions in profitable lines and shift the balance towards the highest margin classes. In Specialty, we have a strong leadership position across lines, and we're successful in achieving positive differential terms on several placements. Our ability to trade with clients across classes of Property, Casualty & Specialty enabled us to successfully maintain lines despite competition, and we increased diversification by geography and line of business. In Credit at this renewal, we maintained our shares in profitable business and selectively grew into opportunities across the portfolio. We expect profitability to remain strong. We purchased a significant amount of ceded reinsurance in the Casualty & Specialty business and found attractive opportunities at 1/1 to increase our protection. Putting this all together, gross premiums in our Casualty & Specialty portfolio are likely to be down in 2026 compared to 2025. Net premiums will be down more than gross given increased ceded purchases. Underwriting margins remain tight in the segment. We continue to expect an adjusted combined ratio in the high 90s. As I described earlier, however, we are confident that we have effectively balanced trade-offs between underwriting margin and investment income, driving healthy returns for shareholders. In closing, we enter 2026 with deep client relationships and an underwriting portfolio built to optimally support our 3 drivers of profit, all of which position us to continue delivering superior shareholder returns this year and over the long term. And with that, I'll turn it back to Kevin. Kevin O'Donnell: Thanks, David. To close our prepared comments, our performance in 2025 gives me great confidence in the future. We anticipate that each of our 3 drivers of profit will remain robust sources of income in 2026. More importantly, we have the strongest team in the industry, and I couldn't imagine a company better positioned to succeed in any and all market environments. As a result, we expect to continue to deliver outstanding shareholder value over the course of the year. Thanks. And with that, I'll turn it back to you to take the questions. Operator: [Operator Instructions] We will now take our first question from Elyse Greenspan with Wells Fargo. Elyse Greenspan: My first question is on Property CAT. You guys said that you expected, I think, premiums to be down mid-single digits, right? Because due to some changes, right, that's obviously better than the price decline you saw. I just want to confirm, is that -- that's a view for all of '26? And then if that is the case, I guess, what are you assuming within that guide happens for pricing during the other renewal seasons of the year? Kevin O'Donnell: Thanks, Elyse. Yes, that is our expectation for the year. If you look at the supply-demand dynamics at 1/1, we expect them to persist. So we anticipate that there'll be continued rate reductions going into the midyear renewals. That said, if we look at -- I think there's a lot of focus on rate change. If we look at rate adequacy, it's a bit of a different story. There's very strong rate adequacy in the midyear renewals. A lot of those are U.S. focused and many were affected by the wildfires. So we go into that renewal at the same risk-adjusted reduction. So if top line reductions are a little less, I think the rating environment -- a little bit more, excuse me, the robustness of the rate adequacy should serve to produce results similar to what we got at 1/1. Elyse Greenspan: And then I guess my second question, I guess, is just, I guess, a number question for Bob. You guided to an expense ratio, I think, in the range of 5% to 5.5%, right? I think it was 4.7% in '25. Is that including the benefit of the Bermuda tax credits, which I know go up, right, you'll see the 75% in '26? Because I know you said your investments in the business? Or is it before or after? I just want to make sure I'm understanding the numbers correctly. Robert Qutub: That would be after. That would be after giving effect to all things that we understand in 2026 that we'll be investing in and other dynamics. But again, I'll point out, it's still an incredibly low expense ratio. Elyse Greenspan: But then what are, I guess, is it just like talent and underwriting? I guess, what are the things that you guys are investing in that, I guess, that is taking that ratio up a little bit even with the tax credit benefit? Robert Qutub: Sure. That's a good question. We bought Validus. We brought them on Board in 2024. And as we talked about the integration of it. Each year, we layer on another $11 billion to $12 billion of premium. Each year brings more operational complexity, and we continue to invest in that. We have the scale. We've gone through a lot of work internally to be able to process that, but that takes people as we get to scale. But again, we are managing that as efficiently as we can. It comes in through new systems, better efficiency on technology, but we'll continue to manage that. I give you a range. We'll probably be at the low end of that range. Operator: Our next question comes from Josh Shanker with Bank of America. Joshua Shanker: Yes. I'm going to ask 2 questions. I start with the odd ball because it's so interesting. Let's talk about gold. Can you talk about how that appears on your balance sheet, whether the $400 million gain is in the book value? And two, let's just say the political situation on Planet Earth doesn't change. Do you care whether gold is $5,000 an ounce or $10,000 an ounce, you're going to hold it until political circumstances change? Kevin O'Donnell: Let me -- I'll take the second part of your question first, and Bob can answer the accounting question. We looked at -- we put the gold position on in '24 -- '23, sorry, in '23 as we looked at the world and saw different risks emerging, and we think about the enterprise risk that we have to manage. And we thought it was a good hedge against the underwriting portfolio and a good hedge against some of the interest rate risk in the investment portfolio. It continues to serve as a hedge in the portfolio. So whether it's at $4,000 or $5,000, it's something that we're constantly looking at, but we don't have a price target to say that it's an investment and we're exiting at this point. We continue to monitor it actively against the enterprise risk we're managing. Robert Qutub: Josh, on the second question, it represents because these are futures contracts, it's the unrealized gain on the mark-to-market. And we have a modest margin up against it. It doesn't really draw a lot of capital. Joshua Shanker: Okay. And then on the question of capital, there's a lot of companies give us PMLs and things and RenRe does not. It's part of the secret sauce. But can you talk about in any way that we can think how much more aggregate you want to put to work in property risk in 2026 or whether it's going to be a similar year 2025 and the money you make basically can be returned to shareholders? Kevin O'Donnell: Yes. We normally talk more about this at the next call. But our plan as we put together the pro forma for where we're going to structure the business, on a net basis, I would say we'll probably hold risk relatively flat for the hurricane -- Southeast hurricane, which is still our dominant peak. That could change if we see more opportunities or better-than-expected pricing going into the summer renewals. But at this point, I would say our risk will be on a net basis, relatively stable as far as our plan at this point, but that could change. Operator: Our next question comes from Yaron Kinar with Mizuho. Yaron Kinar: Just want to go back to the Property CAT market. Given the declines that we saw in rates in 1/1 renewals, and I think there's some expectation of further declines in 4/1 and 6/1. How are you thinking of expected returns and rate adequacy in that book in 2026? And how are you looking to deploy capacity into that market? What areas would be more or less interesting compared to '25? David Marra: Yes. This is David. I can take that one. I think, first of all, like we said, we did see pressure, but we were starting from a very good spot. So rate adequacy is still strong. I can break that down a little bit more for you and the low teens that we saw in the overall CAT book, that is a bit separate. The U.S. CAT book that renews in Q1 at 1/1, it's about 1/3 of the U.S. CAT book. That was down about 10%, whereas the International and Global portfolio was down about 15%. So part of what we're faced with is not all risks are the same. Both of those risks are attractive in their own ways. But rating level is still high. We also see really strong terms and conditions consistent with the last 3 years. So it's not as much about how will we react to rate decreases. We have a strong level of adequacy, access to all the business and a lot of options to construct the portfolio. We do see growing demand on the U.S. side that we saw at 1/1, and we expect more in Q2 that will present opportunities. But our approach is to select the best opportunities, make sure we get the best signings and construct an attractive portfolio. Yaron Kinar: Okay. And then my second question, on recent calls, we've heard brokers talk a lot about the large opportunity for data centers in the insurance market. And I'd imagine that while a lot of that would fall into the reinsurance market as underwriters in an attempt to be prudent would look to manage their exposures. I guess I'd be curious to hear how you as a reinsurer that has both a traditional balance sheet and a large JV business, how you think about that opportunity and how you go about managing that risk? David Marra: Yes. This is David again. I'll continue to take that. So first of all, data centers are something that we currently reinsure. What's the new opportunity is the fact that there are more mega projects, which do require reinsurance capacity or third-party capacity. So it is early stages of a positive opportunity, and we're working with our clients and brokers to understand the risk as well as we can and how we deploy capacity. Our focus first is to get the underwriting and pricing right and get terms and conditions and coverage and also get the aggregation right. So we're well along the path there, and we think it will continue to be an opportunity as it grows as a market. Operator: We will move next with Meyer Shields with KBW. Meyer Shields: So I'm inferring from the high 90s expected combined ratio in Casualty & Specialty that you're not anticipating much of a change in reserve philosophy for Casualty lines. And I'm wondering if you look at the older accident years that are close to being settled, I was hoping you could talk about how reserves for those accident years have played out where conservative reserving is just less relevant? Kevin O'Donnell: Yes. I think overall, I think we're trying to be as transparent as we can on kind of the Casualty & Specialty segment and specifically GL. The book -- the Casualty & Specialty looks great. We've had favorable development last year. But the overall reserve pool for Casualty & Specialty, I think of it as the old story of a duck. It's relatively stable on top, but there's a lot of pieces moving around down below. It's moving by year and it's moving by line of business. And we continue to be extremely cautious in thinking about how to reflect and particularly in GL, the increased pricing that's coming through where pricing actuaries are putting it through on the pricing. But from a reserving perspective, we're being cautious and continuing to not reflect that at this point. So from the overall portfolio, it's behaving well with regard to the years. Most of the years that are older seem to be settling down. And much of those older years still have the protections with regard to the protections that were part of the acquisitions of both Validus and Platinum. So they're less relevant for us than they are for some others. Meyer Shields: Okay. That makes perfect sense. And so going in a slightly different direction. One of the, I guess, chatter points for the 1/1 renewals was the increased inclusion of riot and civil commotion coverage. I was hoping you could talk about whether your exposure to that specific risk is materially different than in 2025? David Marra: Meyer, this is David. There's no real change in our exposure there. It's apparel, which was -- is covered in a very specific way with tight terms and conditions. So while the risk is in there at the levels we attach at, the retentions keep us insulated from a lot of attritional loss, and there's really no change into 2026. Operator: We will move next with Mike Zaremski with BMO. Michael Zaremski: Bob, back to the tax credits and all the tax legislation. I think clear about '26 the expense ratio net of the credits. I guess we'll just have to see how the tax credits go up in '27. So I guess we'll have to decide if we want to also kind of re-spend some of that -- the credits as an investment unless you want to comment. And the DTA, is there clarity on how that's going to play out? Or is there going to be a write-down? I know it was a benefit this quarter. Robert Qutub: That's a good question. I'll tackle them both. The DTA, I'll start with that one. That's a legislation here by Bermuda. So it's a matter of law, we used it this year to defer our tax liability, and we fully intend to use it in 2026 to defer the liability. The only way that changes is if the law changes, and I don't control that. I haven't been any conversation about it. So we're still moving forward on it. With respect to the credit, I kind of led in my prepared comments that it was 60 basis points on the annualized operating expense. It goes up to 75% next quarter. So it means it goes up to around 90, all things constant as my economics feature used to say, and then it goes to the full impact of 2027. We don't intend to spend that specifically as a part that comes in on the back of our spend. It does reduce our net spend. But I stick by what I was talking about with Elyse was the -- we're investing in our infrastructure, technology to be able to operate at scale. Michael Zaremski: Okay. Great. And maybe pivoting back to the Casualty & Specialty segment and specifically on Casualty, I know you've given us some good commentary so far. But if we -- let's say, if we use the Marsh pricing gauge, excess Casualty rates, which Bermuda writes a lot of, you're seeing pricing kind of accelerate up into the close to 20% range. I know Ren is taking -- you guys have taken a lot of positive reserving actions to put in conservatism. But curious, is there something brewing for the industry that is causing rate to accelerate so much in excess Casualty? David Marra: This is David. So you're right to point out that the excess Casualty, the high layers that are written by the Bermuda insurance market, some of which are our clients, although we service the global casualty portfolio, that is accelerating more than the lower layers. And that's just the effect of what the market has been doing for the last 18 months or so, where Casualty rates for all excess Casualty has accelerated as a response to accelerating loss trend. At the higher layers, it's -- the market is taking more rate than at the lower and the mid-layers. But that's what's going on there. There's nothing unique about those layers. What we're seeing overall is it's not just the rate acceleration, but it's also the investment in the claims handling. That helps all open claims, not just the new underwriting years. So really encouraged by the signs, but it's going to take time for that to come through the numbers. Operator: Our next question comes from Ryan Tunis with Cantor Fitzgerald. Ryan Tunis: First question, just looking at the trajectory of fee income, in particular, management fee income, I would think that, that would move with the growth in the partner capital, but that was down in 2025. And it sounds like Bob's guidance was for that to kind of be flat in '26. Could you just kind of walk us through, I guess, why we're not seeing growth on that line? Robert Qutub: Ryan, specifically, my guidance was in the first quarter. It was at 59% based on what we had. Ryan Tunis: First quarter? Robert Qutub: Right. Yes. Ryan Tunis: That was down from the fourth quarter... Robert Qutub: It's around the same. There was some -- a lot of noise in 2025. But the guidance what I was trying to give you was it 59% in the first quarter. And you're right, if we grow the asset significantly, the fees will follow. Performance fees are a different measure based on the volatility that can happen in the earnings stream in each of the JVs. Kevin O'Donnell: If it's helpful, the joint ventures are all -- none of them are smaller going into '26 than where they were in '25, and we haven't changed the fee structure on our -- on any of the vehicles that we're managing. So just as a starting point, there will be ups and downs as new capital comes on Board or there will be changes in the existing capital, but it's relatively stable from last year to this year. Ryan Tunis: Helpful. And a follow-up probably for David and Bob, but on the other property side, curious at 1/1, what you're seeing from a demand perspective? Clearly, a lot of cedings have had really strong accident years in '24, '25. Are you seeing them buy down? Or what are the trends there? And then I guess, separately, just given the competitive environment in Property, I was a little bit surprised that the other property margin guidance is still for mid-50s. I guess just walk me through your confidence in that. David Marra: Ryan, this is David. I'll start with your question on retentions in terms of conditions. So terms and conditions across other Property and CAT remain strong and a big piece of that is retention. So the other Property CAT exposed structures or risks have had a step change after 2022. Those remain at strong levels. There's competition on price, and we're able to move around that portfolio to make sure that we're getting the best return on the risk that we put out. But we're really comfortable with the way the terms and conditions have held strong there. And on the CAT side also, clients elected generally not to buy down their retentions as they save money on their CAT towers, they didn't spend it on cover below. Robert Qutub: Ryan, on the mid-50s, that was our guidance for the other property book. And that's kind of a mix issue that you have between the attritional versus the CAT exposed, non-CAT exposed. But we view that as a strong current accident year loss ratio. It's a little elevated this year, obviously, because of the events that came through, but that's what we're steering is the mid-50s. Operator: We will move next with Matthew Heimermann with Citi. Matthew Heimermann: I guess just a couple -- one, Kevin, following up on your comment on Casualty with technical ratios eventually decreasing. I'm curious if you think that will have more to do with a change in loss trend turning out to be better than you think or rates going up? Kevin O'Donnell: Yes. I think right now, our pricing actuaries are reflecting the benefit of the price change. So if all works out well, I would hope our reserving will ratios trend to the pricing ratios. So I would say it's more of a reflection of the benefit of price having persistence and us increasing our confidence in that. I would love to say that I see the trend decreasing over time. I think if we'll certainly monitor that. Any change in trend will reflect over time, whether it's going up or going down. But I would say more likely price. Matthew Heimermann: And I guess I was curious, I mean, happy to listen if there are more details you want to share on some of the investments you're making around the platform and embedding that in underwriting systems. But I also am curious whether or not from a talent perspective, being in Bermuda, there's any limitations in terms of the speed or with which you can execute your technology road map? Kevin O'Donnell: Yes. So with regard to our thinking about how to manage our risk, this isn't the first time we've used the capital markets to think about hedging risk in our underwriting portfolio or in our investment portfolio, obviously. With regard to talent, we have a global platform. Our investment team is split between New York, Bermuda and Dublin. So we've got kind of good coverage there, good access to talent. And almost all of the groups that we have within the company are split across multiple platforms. So I don't see any constraint with our ability to access talent. And with the technology that we have for collaboration, we can easily link teams in any location. So we have access to the best talent, I believe, anywhere in the world. Matthew Heimermann: And just any color on the types of add-ons that you're -- or enhancements you're making to the underwriting side. And I wasn't sure if you meant REMS specifically or other platforms. Kevin O'Donnell: Yes. We are enhancing our REMS program, which is the underwriting platform. We're probably 1 year, 1.5 years into the actual technology rebuild. And that really is a shift in a couple of kind of material ways. As we've diversified, we want to make sure that our system is not as much of a deal system, but more of a client system. So it's easier for us to look at profitability per client and understand how to engage with the client to best bring our capacity to their problems. And then secondly, we're updating our architecture so that as AI becomes more meaningful in either automation or augmentation of our processes, we will have the infrastructure to plug it in much seamlessly than what we currently have. So we think these investments put us in a very strong competitive position to continue to adopt the best technology as it becomes proven. Operator: Our next question comes from Dean Criscitiello with Wolfe Research. Dean Criscitiello: I was hoping if you could talk about how ceding commissions in your Casualty book trended during January 1 renewals. Robert Qutub: Yes, absolutely. So ceding commissions and Casualty were pretty flat overall. Most of the improvements that are coming in the market are on the insurance side with insurance rate going up and insurers investing in claims handling to better be able to fight the plaintiffs bar. But the transfer to reinsurance and the reinsurance supply/demand was pretty stable. The best accounts might have gotten the tick up. The worst accounts got a tick down, but that's pretty much the case across Casualty and professional lines. Dean Criscitiello: Got it. And then within the Casualty & Specialty segment, you guys have been growing a lot within like the credit line. So I was wondering what kind of impact that would have on like the underlying losses and maybe the expense ratio going forward? Kevin O'Donnell: Yes, we did see some good opportunities in credit. Credit is one of the 3 main pillars of the book. We have Casualty, Specialty and Credit with Casualty being split into the general liability and professional liability. Credit has been a really profitable class. The pillars of the credit book are the mortgage business and the standard credit bond and political risk and then some structured credit business. All of those are performing well. What we found in the last quarter and the last year was we found opportunities in the structured credit business and in the mortgage business. Both of those are high profit margin and good opportunities for us to add to the portfolio. Operator: We will move next with Peter Knudsen with Evercore. Peter Knudsen: In the prepared remarks, you noted prioritizing Casualty cedents who focus on claims handling practices. I think going back to 2024, you had made a couple of comments around making a larger effort to work more closely with Casualty cedents to sort of ramp up information flow at renewals. So now at 1/1/26, can you maybe talk a little bit about how this renewal period was different and how it's evolved in that regard, if at all? Would you say there's a material difference in what's being collected now versus 1/1/23 before you guys were calling that out, for example? Kevin O'Donnell: Yes. It's been 2 strong renewals since we started that, and we're working collaboratively with clients. We get materially better information than we got previously. And that information is not only geared towards understanding claims trends, but also geared towards how do we then understand our overall business approach and has led a lot into claims conversations. So where we can then use that in our underwriting to make sure we're picking the best risks and avoiding those that are worse. It's been a very positive process and collaborative with the clients. One of the things on the -- that we've noticed overall on the claims side is there is -- the trend is not -- the plaintiff's bar has not let up in how they're approaching trying to get big settlements. But the insurance carriers have gotten much more proactive from the top down. There's a lot of awareness of how they can invest, how they can use data, how they can collaborate across the tower -- and so it's not always the quantitative things we get from that process, but it's those qualitative things, which we're confident will have a strong impact over time. Peter Knudsen: Okay. Great. And then just a quick one for me on the Casualty favorable ex the GAAP adjustment. I know it was minor, but I was just wondering if -- and maybe I missed it, I'm sorry, but if you could talk about the drivers, the puts and takes on that? Robert Qutub: On the Casualty, I talked about the favorable -- favorable development on a cash basis. The purchase accounting layers in around -- somewhere around $8 million on top of it. So that kind of pushes it around. That's what I was trying to point out that we have been favorable at the top of the house for that segment this year. Operator: We will move next with Rob Cox with Goldman Sachs. Robert Cox: I just wanted to follow up on the artificial intelligence technology discussion from earlier. I think a lot of the programs that we hear in insurance, there's an automation efficiency component that often results in lower employee costs. And the reinsurance businesses tend to have lower employee costs and noncompensation operating costs relative to other insurance businesses. So I'm just hoping for some color on how that dynamic informs your plans to use AI and how we should be thinking about potential benefits. Kevin O'Donnell: Yes. I think it's -- your observation is consistent with ours. I'd say from the top of the house, many companies are looking at trying to measure ROI, the way to measure that is with automation and efficiency. And then I think a lot of the improvements, certainly what we're seeing in how we're thinking about our processes and our analysis augmentation coming from the bottom up. So our focus really is becoming a stronger, better underwriter if we become -- and those 2 co-mingle at a point where if we -- like one example with -- we have some work that we've done with AI in some of our investment analysis where we're taking what -- I'll make the numbers up 10 hours of analysis and doing it in 1. Well, that allows for better judgment to be applied to stronger data. So one could argue that, yes, we've increased efficiency, but it really is to augment our decision-making process. So I would say I don't anticipate that AI is going to materially improve us as a company through efficiency and automation as much as it will over time through augmentation of our judgment. Robert Cox: Okay. That's very helpful. And I just wanted to follow up on Property CAT pricing. You guys laid out the supply-demand dynamic that's out there right now. I'm curious if we model forward sort of a normal year of weather Catastrophe losses in 2026, how would you expect Property CAT pricing to change next year in 1/1 renewals in 2027? I realize that's pretty far out there, but curious your thoughts. Kevin O'Donnell: Yes. I would -- markets tend to move in curves. So if it's going one direction, I think our planning will be that the direction will continue, but it's way too early for us to think about building our '27 pro forma. Our portfolios have been constructed with our best judgment and reflect where we think we'll be on October 1, so sort of the heat of wind season. Where it goes from there, I think there's a lot of things that can shift. Interest rates can change, geopolitical situations can change materially and then certainly, losses can change. So I think of it as in curve. So it's going a direction. I generally think it will continue, but it's not something that we have a strong view on at this point. Operator: I will now turn the floor back over to Kevin O'Donnell for any additional or closing remarks. Kevin O'Donnell: So we're proud of the performance we achieved in '25 and eagerly working to build the best portfolio and maximize returns in 2026. I want to thank you for your attention and your questions today. Operator: Thank you. This concludes the RenaissanceRe Fourth Quarter and Full Year-end 2025 Earnings Call and Webcast. Please disconnect your line at this time, and have a wonderful day.
Operator: Good morning and good afternoon, and welcome to the Novartis Q4 Full Year 2025 Results Release Conference Call and Live Webcast. [Operator Instructions] The conference is being recorded. A recording of the conference call, including the Q&A session, will be available on our website shortly after the call ends. With that, I would like to hand over to Ms. Sloan Simpson, Head of Investor Relations. Please go ahead, madam. Sloan Simpson: Thank you, Sarah. Good morning and good afternoon, everyone, and welcome to our Q4 2025 Earnings Call. The information presented today contains forward-looking statements that involve known and unknown risks, uncertainties and other factors. These may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. Please refer to the company's Form 20-F on file with the U.S. Securities and Exchange Commission for a description of some of these factors. The discussion today is not a solicitation of a proxy nor an offer of any kind with respect to the securities of Avidity Biosciences or SpinCo. The parties have filed relevant documents with the U.S. SEC, including a proxy statement for the transactions and a registration statement for the spinoff. We urge you to read these materials that contain important information when they become available. Before we get started, I also want to remind our analysts to please limit yourselves to one question at a time, and we'll cycle through the queue as needed. And with that, I will hand over to Vas. Vasant Narasimhan: Terrific. Thank you, Sloan, and great to be with everyone today. With me in the room are Harry Kirsch, our Chief Financial Officer; and Mukul Mehta, our Chief Financial Officer, Designate, who will be taking over for Harry in mid-March. So let's dive into the results. And when we start on Slide 5, Novartis delivered high single-digit growth, as you saw earlier this morning. And importantly, we achieved our 40% core margin goal 2 years ahead of plan. And I think that demonstrates the strong operational performance of the company. On the full year, our sales were up 8%. Core OpInc was up 14%, as I mentioned, the 40.1% core margin, $21.9 billion now on Core OpInc. I think significant growth over the years. On quarter 4, sales did decline impacted by both the gross to net, which we'll talk about a bit more as well as the Entresto LOE and Core OpInc is up 1%. We did have some important pipeline highlights, which we'll cover over the course of the call, but I think a few I wanted to highlight upfront. First, remibrutinib, we achieved the submission in the most common type of CIndU that was based on positive Phase III results as well as interactions with the FDA. And we'll have the remaining readouts for the 2 other subtypes of chronic inducible urticaria over the first half of this year. And with pelabresib, we now have a path forward for both the EU and the U.S. I'll go through that data and the path forward on a future slide. So overall, we met our upgraded full year 2025 guidance. We expect to grow in 2026 through the largest patent expiry in Novartis' history, which I think demonstrates the strong performance we have on our key growth brands as well as our pipeline replacement power. Now moving to Slide 6. The growth drivers in the quarter continued their strong trajectory as well as on the full year. Here, you see the full year numbers. You can see Kisqali was up 57% on the full year. Kesimpta was up 36%. Scemblix up 85%; Pluvicto on the PSMAfore launch, having dynamic growth as well. We'll talk about each of these brands in turn. Overall, a 35% growth in this portfolio, and this is a portfolio that will carry us through the end of the decade as well with many of these brands taking us into the mid-2030s. Now moving to Slide 7. On Kisqali, we grew 57% in the quarter -- on the year to $4.8 billion, outpacing the market for CDK4/6. Now when you look at the chart on the lower left, our growth was 44% in Q4. When you remove the U.S. RD adjustments, our global sales grew at 54% and our U.S. sales growth was at 62%. So in our view versus the consensus, the entire miss really came from these onetime RD adjustments. We remain fully confident on the $10 billion peak sales outlook for the brand. And what's underpinning that confidence is the very strong volume growth we're seeing across geographies. When you look at the middle panel, U.S. eBC NBRx is now above 60% and holding steady. I think that really demonstrates the strong preference providers have for Kisqali, particularly in settings where we are uniquely positioned. And in Germany, we have over 80% NBRx share in the early breast cancer setting, which I think shows again this early strong performance for the launch in Germany, which we hope to carry over now to other ex U.S. markets. So going to the last panel, I already went through many of the key elements, but I think I wanted to also note that eBC NBRx share is leading in both the overlapping and the exclusive population. Outside of the U.S., we have important launches in Italy and Spain coming up in 2026. And finally, we continue to bolster the data profile for Kisqali, both with data that we recently presented at San Antonio and ESMO. We'll continue to follow up these patients over the long run, and that should allow us to continue to have mature OS data over time, which we think will continue to bolster the portfolio. So very excited. Kisqali continues to be -- have the outlook to be the largest brand in Novartis' history. Now moving to Slide 8. Kesimpta grew 36% to $4.4 billion on the year. You can see the continued steady performance of this brand, driven by the continued expansion of the B-cell class within MS. In the U.S., we had 27% growth in quarter 4. Importantly, we see increasing adoption in naive patients, which are now 50% of our NBRx is now in first line. Outside of the U.S., we are leading now with NBRx share in 9 out of the 10 of the major markets that we track. And the core opportunity we see ex U.S. going forward is to continue to expand B-cell therapies in the 67% of patients who are not on B-cell therapies and receiving disease-modifying therapies in MS. So we continue to generate additional value for Kesimpta. We continue to progress also our every 2-month formulation for Kesimpta. So I think we're on a solid track with this brand to fully achieve our peak sales guidance of $6 billion plus. Now moving to the next slide. Pluvicto now really showing dynamic performance with the PSMAfore launch, 42% constant currency growth. We reached $2 billion in sales now overall globally. And that strong performance was driven primarily in the U.S., where we continue to see strong uptake in the pre-taxane setting. Sales grew 75%. We saw a 4x increase in our PSMA share since approval, now reaching 16% in that setting. We also see continued growth on provider set, across provider settings, including the highest growth in community, where we now have over 790 treatment sites. Outside of the U.S., importantly, we've secured approvals in Japan and China, which also allowed us to continue to drive that ex U.S. strong growth. And we expect that growth to accelerate now with the Japan and China launches upcoming. Now the next phase for Pluvicto as we expect to kind of get to the peak of the PSMAfore population over the course of this year will be the launch in the hormone-sensitive setting, which adds about 75% additional patients to the patients we already have from the VISION and PSMAfore population. That sNDA has been submitted to the FDA as well as the NMPA in China and PMDA in Japan. We have the right foundation for that launch to be, we think, a rapid uptake with 2/3 of eligible hormone-sensitive patients already with existing treaters or providers. So the capacity is well established. I did want to flag as well that we have new manufacturing sites that are coming online in California, in Florida as well as in Japan and China. We have over 440 treatment sites now outside of the U.S. as well. So we've really taken this to scale, which positions us well for the Pluvicto launches, ongoing Lutathera business as well as our future RLT portfolio. Now moving to Slide 10. Leqvio reached blockbuster status in the quarter, an important milestone for this brand as we continue that steady trajectory that we often see for cardiovascular launches, 57% growth on the full year, 46% on the quarter. In the U.S., we continue to outpace the overall advanced lipid lowering market. And our real focus is increasing depth in the health systems we prioritize where there's strong capabilities within the buy-and-bill setting, strong interest in getting patients to goal, also focusing more on specialty areas as we've guided in the past. We saw a 33% growth in the setting versus the prior year. Now a key milestone for us outside of the U.S. will be the NRDL listing, which we achieved in China and is now already now started in the first part of January. As you have heard on previous calls, we have had very strong uptake in China in the private setting. And now with the NRDL listing, the early signals are very strong for a rapid uptake in the China market for Leqvio. So we're quite excited about that, and it's a key focus area for us in 2026. We continue to build the evidence base for Leqvio, important publications in various journals, mostly focused on adherence rates as well as our ability to drive LDL-C down to goal regardless of which background therapy patients are on. Now moving to Slide 11. Scemblix had another strong quarter. We've reached again blockbuster status with this brand, and we have NBRx leadership in the U.S. and Japan. 87% growth in Q4. Now if I could focus your attention on the middle panel in the U.S., we've reached 41% NBRx share now across all lines of therapy, and we plan to continue to grow that. But the most important thing for us now is to drive the growth in the first-line setting where we're trending ahead of our plan. We're already now in the mid-20% range in the frontline setting. We want to drive that up. And I think as we get -- as we've now secured broad access, we have the opportunity now to continue to make Scemblix the medicine of choice on the front line for patients with TML. And now outside of the U.S., we also continue to have our leadership in the third-line setting with 72% share across the major markets that we track. The early line indication is now approved in 60 countries, and we've already just launched in Germany, and we expect to get other EU markets online in the front line with launches expected in 2027. I think one ex U.S. market to note, which I think shows the ability we have to drive Scemblix outside of the U.S. is in Japan, where we already have 45% frontline market share -- NBRx share and 74% second-line NBRx share. So really strong outlook, confident in the $4 billion-plus outlook for this medicine. Now moving to Slide 12. Cosentyx grew 8% overall in the year, getting to $6.7 billion on the steady march up to our $8 billion peak sales guidance. You can see the 11% growth on the quarter. In the U.S., we had 9% growth. That was driven by higher demand we saw both in hidradenitis and in IV. Right now, we're the #1 prescribed IL-17 across indications, and that's really because of the strong access that we have frontline access. In HS now, we are the NBRx leader in naive patients with 51% share and 47% overall. And the naive market is 2.5x the switch market. Certainly, we've seen our competitor get traction in the switch market, but we're very much focused on that naive market where we have a really strong position. And the IV is also steadily advancing 8% a steady growth, 200 new accounts, and we expect that to continue over the coming years. Outside of the U.S., no major changes, continued very strong growth, leading originator biologics in the EU and China. And overall, we would forecast Cosentyx to have, on average, mid-single-digit growth over the coming years as we get to that $8 billion peak sales potential. I did want to also flag that we have completed the submission with the U.S. FDA for polymyalgia rheumatica. And so we're excited about that as an additional launch now for Cosentyx. And we've also are on track. We're also on track to file in the EU and Japan in the first half. So moving to Slide 13. Our renal portfolio has continued its rollout, I think, with steady progress. And separate from that, we also have amended our zigakibart Phase III protocol, which I wanted to talk about in a bit more detail. Starting with our renal portfolio, our IgAN portfolio contributed 50% of the NBRx market growth versus prior year, driven equally by Vanrafia and Fabhalta. So I think we see steady uptake across these 2 brands. Also in C3G, also continued steady adoption across the top accounts. So we hope to see that accelerate now over the course of 2026. And outside of the U.S., Fabhalta is now approved in C3G in 45 countries. Vanrafia had its EU submission. So I think across these 3 brands, we have the opportunity to continue to build out a strong position. We do expect to be able to provide the full data set on the Fabhalta eGFR readout in IgAN soon and also move forward with the filing for a full approval in IgAN for Fabhalta. Now on -- and we also expect, I should also note the Vanrafia full eGFR data set in the first half. On zigakibart, we have made the decision in order to optimize the overall label positioning and the competitive positioning to align our UPCR readout with the interim eGFR readout, which we expect in the first half of 2027. And we expect that to support our BLA for a full approval. This was a decision based on our analysis of the Phase I and II data. We think we have the opportunity to be second to market with both proteinuria and the eGFR benefit. And so that, I think, is going to hopefully position us well to have a fourth renal agent in our portfolio. We also have combination trials underway because we certainly see the opportunity in having a hemodynamic agent, having a Fabhalta and having zigakibart, the opportunity to use combination to optimize care for these patients. Now moving to Slide 14. Rhapsido's U.S. launch, which is obviously something we're very closely tracking is delivering encouraging results. We are optimistic with already what we're seeing in the early days for this launch. We see strong demand with an encouraging mix of patients, both patients who are post antihistamines as well as post a biologic failure. We have a strong and positive response from allergists and dermatologists. The sampling and bridge program has over 2,000 HCP starts. And I think that when we benchmark that versus other highly successful dermatology launches, it's right in line with some of the most successful dermatology launches. We're also seeing early access wins. I think access will be now the gating factor. Every few months, we expect to bring on additional access on board. That will allow a steady pickup in sales over the course of the year with more of a steady pickup in the second half of the year. And I think for that second half, I would encourage everyone to watch as we get that access together. And as a reminder, I think you all know well, clean safety, no box warnings, no contraindication, no required routine lab monitoring, no liver safety issues in the label, fast relief across a broad population as fast as 2 weeks. Anecdotally, we hear reports as fast as a day or 2 days, patients are starting to see benefit. And it's the only oral therapy approved by FDA who remain symptomatic despite antihistamine therapy. Now moving to Slide 15. Now Rhapsido is one of these brands that we hope over time could become one of the largest brands in Novartis' history. This is an opportunity over multiple indications. I mentioned CSU launch, the CIndU now positive data that we have in hand for type, 2 more types coming, an HS readout in 2028. We have positive food allergy data, which we'll be presenting in Q1 of this year, and that's leading us to now initiate a broad Phase III program in food allergy. We are on track for the RMS readout second half of this year, but really mid of this year is the opportunity that we have to read out the RMS -- 2 RMS studies, SPMS and myasthenia gravis ongoing. So when you take that together, you clearly have an opportunity with a medicine with a clean safety profile. and strong efficacy with an oral -- as an oral option to have a significant long-term sales potential. Now moving to Slide 16. Now Itvisma, which we haven't had as much attention, but it's something we continue to believe has a significant overall sales potential, total potential for this brand across the IV and IT of $3 billion plus. This is a U.S. approval that brings the onetime gene therapy in children 2 years and older. It's a broad label across patients who are non-sitters, sitters and walkers, no AAV9 antibody titer limit for this treatment. There's a strong value proposition, single administration, durable efficacy, solid safety profile. So we see a multi-blockbuster opportunity for this brand. 7,500 children, teens and adults have not been treated yet with Zolgensma IV. We also have an extensive experience in the U.S. and ex U.S. with this medicine. Outside of the U.S., we've already been approved in the UAE 1 day after the FDA approval and Europe and Japan submissions are completed. And as a reminder, for Zolgensma, actually, our sales are larger outside of the U.S. than in the U.S. So there's certainly a significant opportunity ex U.S. for Itvisma. Now moving to Slide 17. As I mentioned on the first slide, for pelabresib, we read out in the quarter 4, the 96-week data from the Phase III MANIFEST program, which both on safety and efficacy has now given us a path forward to, we believe, get this medicine registered, assuming successful regulatory and clinical trial Phase III trials. In that study, we showed deep and durable responses and a comparable safety profile to ruxolitinib in myelofibrosis. You can see the data here on the left in terms of the spleen response. When you look at the data that we presented, we had a deep and durable spleen volume reduction for the spleen volume, 35% reduction landmark, 91.5% versus 57.6%. We also saw sustained improvements in symptom scores and anemia. We had 2x as many patients reaching goal with the spleen volume reduction and the TSS50. So we believe this medicine has disease-modifying potential. We saw improvements in bone marrow pathology on the anemia. There was importantly now from a mortality standpoint, fewer deaths and progressions observed with pelabresib and ruxolitinib versus ruxolitinib alone. And the overall safety now has proven comparable with ruxolitinib, including comparable leukemic transformation rates, which was one of the topics that was holding this program back. So with this data set, we have now an agreement with the EU to file in 2026 based on this data. And in the U.S., China and Japan, we'll be starting a new Phase III study focused on patients who have high TSS50 at baseline, where we believe we have the data set now to show we can achieve the regulatory milestone to ultimately get approval. Now moving to Slide 18. I did want to also take a moment to mention our impact on global health. As I think many of you know, Novartis has been in global health for nearly 100 years, working on malaria and other neglected tropical diseases. With our Coartem medicine 25 years ago, we started a real sea change in the treatment of malaria, reaching now well over 1 billion patients with Coartem. And now with the recent data we presented in November, we have the opportunity to bring the first new malaria medicine, novel medicines so in 25 years. This is KLU156, ganaplacide plus lumefantrine. It disrupts the parasites internal protein system, very positive data here. You see on the adjusted basis, 99.2% cure rates versus 96.4% versus a 5-day course, a 3-day course, opportunity to block transmission, very solid safety profile. So we're quite excited to bring this forward as part of our mission in global health. So moving to Slide 19. Now taken together, a very good year for us from a pipeline standpoint in 2025. You can see we met the vast majority of our milestones and trial starts. And I think that really shows the strong execution machinery we have now in R&D at the company, very aligned across research and development and strong execution across our global development organization. And turning to Slide 20. For 2026, we're on track for 7 pivotal readouts with the potential to strengthen the midterm outlook that we're guiding to, including the mid-single-digit sales growth we expect in the 2030s. A few particular readouts, which I haven't mentioned, which I'll call out. And on the left side, you can see pelacarsen for CVRR. We do expect to read out middle of this year. It will be second half, but it will be middle of this year, which, if positive, would allow us for a U.S. submission this year. We also are on track for our submissions for Ianalumab in Sjogren's disease. and as well as the Del-zota DMD U.S. submission, which assuming the closure of the Avidity deal would also happen in the first half of this year. Number of pivotal readouts. I mentioned pelacarsen. There will be the Ianalumab readouts in hematology, which could have significant potential to drive that brand to very large long-term potential. Of course, remibrutinib as well as the Del-desiran DM1 Phase III readout, again, assuming the closure of the Avidity. We also have the additional readout of the DUX4 interim data readout as well, which could support accelerated launch in FSHD. However, that we would characterize as an upside case. And then a number of key study initiations you can see on the right-hand side of the chart. So another exciting pipeline year to continue to bolster our long-term growth profile. Now moving to Slide 21. I will hand it over now to Harry. Harry Kirsch: Yes. Thank you, Vas. Good morning, good afternoon, everybody. I now walk you through our financial results for the fourth quarter and the full year of 2025, which, as Vas mentioned, was very strong despite midyear significant U.S. generic entries. And as always, my comments refer to growth rates in constant currencies, unless otherwise noted. So on Slide 22, 2025 marked another year of excellent execution. So over the last 5 years, as you can see here, we delivered an 8% sales average growth rate and a 15% core operating income average growth rate, driven by strong commercial execution, a great late-stage readout and disciplined productivity programs. This translated on the right side into more than 1,000 basis points of core margin expansion in constant currencies. And as you can see, in reported currencies, allowed us to reach our midterm core margin target of 40% 2 years earlier than planned. As you may recall, we initially planned for 2027. Now we have achieved it in 2025. With these results, I hope you agree, but I believe we have really elevated the company to a new level of sales performance, margin profile and as I'll discuss later, free cash flow generation. On Slide 23, just a quick summary. You see that we have delivered our full year guidance in 2025 after upgrading twice throughout the year, and we guided to high single-digit sales growth, and we delivered 8%. For core operating income, we guided to low teens. and achieved 14%. And this is a strong result in the year, as I mentioned, where U.S. generic entries for Entresto, Promacta and Tasigna happened, and it speaks really for the momentum of our priority brands, as Vas already laid out, as well as disciplined cost management. Turning to Slide 24. So here, a few more details. For the full year, we delivered the described solid top and bottom line growth, record core margin and record free cash flow, almost $18 billion. The core margin in the year improved by 210 basis points to 40.1% and core EPS rose 17% to $8.98. Free cash flow grew 8% to $17.6 billion. Now for the quarter, on the right side here, as expected, the U.S. generics had an impact, which we see in quarter 4, and then Mukul will lay it out first half of next year or 2026, but then again, back to growth. Anyway, sales declined 1%, whilst core operating income increased by 1%. And the results were a little bit noisy due to some U.S. R&D adjustments, a positive impact in quarter 4 of 2024, so last year financially and a negative impact this year in quarter 4, 2025, mostly on generic -- so excluding this adjustment, underlying quarter 4 sales growth would have been positive 3%. As said, the vast majority of the gross net adjustments were Entresto and other generic brands like Promacta and U.S. Core EPS in the quarter, $2.03, up 2%. Now on Slide 25, you can see our continued progress on free cash flow generation, which reached $17.6 billion, all-time high for the company in 2025. I think it shows you also besides the financial, the power of being a pure-play pharma company. As you know, many years back with even 6 businesses or even before the Alcon and Sandoz spin, these numbers were usually in the $10 billion to $12 billion range. And now this is the earnings power of a focused and very successful pharma business. We remain, of course, focused on ensuring that the growth in core operating income translates into high-quality earnings and strong cash flow generation. This robust cash flow allows us to reinvest in the business, pursue bolt-on acquisitions and continue to return attractive capital to the shareholders through growing dividend and share buybacks. On 2026 -- on Page 26, a quick reminder on our unchanged capital allocation strategy. And as you see, we continue to execute our balanced shareholder-friendly capital allocation in 2025. We invested more than $10 billion in R&D, an 8% increase versus prior year, announced 4 acquisitions, 10 licensing deals, strengthening our key platforms and pipeline across all of our 4 therapeutic areas. On returning capital to our shareholders, we completed our $15 billion share buyback program in early July, and we launched a new up to $10 billion program targeted to be completed by the end of 2027. Approximately $7.7 billion of that remains to be executed. In addition, we distributed $7.8 billion in dividends during the first half of 2025. Now speaking of dividends. Turning to Slide 27. We are proposing a dividend of CHF 3.70 per share, a 6% increase in Swiss francs and even double digit in dollars. And it's our 29th consecutive dividend increase in Swiss francs since company creation '96 and including years following the Sandoz and Alcon spins when we did not rebase the dividend at all. This reflects our long-term and long-standing commitment to a growing dividend in Swiss francs per share. That concludes my remarks. Before handing over, I'd like to briefly acknowledge that this will be my final earnings call as CFO of Novartis. It has been a privilege to serve in this role in the last 13 years and to work alongside Vas and so many other great colleagues to help guide the company through a period of significant transformation and performance improvement. I'm very pleased to hand over to Mukul, a long-time colleague. In fact, we both started maybe at different stages of our career in 2003 at Novartis and very intensively worked together, especially in the last 10 years. So with that, I turn it over to Mukul to take you through 2026 guidance. Mukul Mehta: Yes. A big thank you to you, Harry, for everything. It's been -- it is an honor to step into the role that you're leaving me with, and I look forward to getting to know everybody on the line in the months to come. So if you can go on Slide #29, please. For 2026, we expect sales to grow low single digit and core operating income to decline low single digits. And this reflects the 1 to 2 percent points of core margin dilution related to the Avidity deal that we had previously indicated. Importantly, in 2026, we will be growing top line through a period of highest GX impact in our company's history. At the same time, we will make sure that we continue to invest in R&D. We fund our launches appropriately while driving forward with the productivity improvement plans that the company has. As previously noted, we expect to close the Avidity deal in the first half of 2026. Looking ahead, we remain very confident in our 5% to 6% sales CAGR in the '25, '30 period, and we expect to return to 40% plus core margin in 2029 as laid out in our Capital Markets Day. For 2026, we expect core net financial income expenses to be around $1.7 billion. This is higher than the '25 levels, and this is largely due to the anticipated funding costs related to the Avidity deal, which we have previously indicated is primarily going to be debt funded. We also expect core tax rate to remain around 16.5%. Moving to Slide 30, please. As we have previously indicated as well, 2026 is going to be a year of 2 halves. We expect -- we continue to expect strong volume growth from our priority brands throughout 2026. But we have to understand that for the first half of the year, we will have a tough prior year base with Entresto, Promacta and Tasigna generics having entered the U.S. market mid-2025. With that, we expect the first half of the year sales to decline low single digit and core operating income to decline low double digit. Additionally, Q1 will be impacted by the 2% positive gross to net impact that we had in the base Q1 '25, which will weigh on the quarter-on-quarter growth rate in Q1. That said, in the second half of the year, we expect a clear improvement with sales growing mid-single digit and core operating income growing mid- to high single digit. This takes us to our full year guidance of low single digit on top line. So moving to Slide 31, please. If exchange rates remain as at their late January levels, we expect a positive 2 to 3 percentage point impact on our full year sales and a positive 1% point impact on core operating income. And as a reminder, which Harry has conveyed previously, we published updated FX estimates monthly on our website. So that concludes my remarks, and I hand it over back to Vas. Vasant Narasimhan: Yes. Thank you, Mukul. I want to take a moment as well to acknowledge Harry Kirsch's incredible contributions to Novartis over 23 years. Over my tenure as CEO, now entering my ninth year, Harry has been by my side as we've transformed the company into a pure play and I think unlocked really outstanding shareholder returns, outstanding financial performance. But probably less visible is the strength of the finance organization Harry has built as well as the culture he's created in the company around productivity, financial discipline and operational excellence. He'll surely be missed, but will continue his legacy in the years to come. And a big welcome to Mukul, who I've known for many, many years. It will be a great addition to the team and continue the strong track record of Novartis finance and delivering strong operational execution. Now moving to the next slide. I do want to take a moment to build on Mukul's comments on our confidence in the -- our 5% to 6% sales CAGR to 25% to 30%. That includes the impact of Entresto in 2026 as well as the U.S. MFN agreement impact. You can see in the chart, we do expect some generic impact. So a lot of that is front-loaded in the first -- early part of the 5-year trajectory here. A number of brands where we believe we can drive dynamic growth in the middle column. And then lastly, a strong set of assets that we probabilized in our pipeline. This ranges from lanalumab, our various Pluvicto and actinium PSMA, pelacarsen as well as the Avidity assets, amongst others, that give us the opportunity to not only hopefully deliver the 5% to 6%, but if we're successful on those pipeline assets, we could even drive higher growth in the period. So moving to Slide 34. and in closing, strong performance in 2025. We delivered the guidance that we outlooked and got to our 40% core margin early. Our priority brands continue to outperform, and that's what's going to drive our growth through the second half of '26 and then through the 5 years to come. We're advancing the pipeline meaningfully in 2020 -- we advanced meaningfully in 2025 with 7 pivotal readouts this year. And we're confident in that mid- to long-term growth guidance. So move -- so with that, we can close this section and move to questions. So operator, we could open the line. Thank you. Operator: [Operator Instructions] We'll start with our first question, and this is from Sachin Jain from Bank of America. Sachin Jain: Perhaps I'll just kick off with thanking Harry for support and insight over the years. The question, I guess, for that on remi. You talked about avoiding liver monitoring in MS given no high law. Competition recently has been vocal avoiding monitoring in the label when monitoring has been involved in the studies could be difficult. So I wonder if you could just give us any color on FDA conversations around this topic and whether monitoring in the studies picked up events that required dose changes? And then a quick follow-on on efficacy. Any color on what you're targeting on relapse or progression given we have no Phase II to go here. Vasant Narasimhan: Yes. Thanks, Sachin. So I think first on liver, I think we should first take a step back and note that we already have an approval and an approved label without any liver safety discussion in the label, which just points to the fact that remibrutinib structurally does not have the off-target toxicities we believe that the structures of some of the other molecules do. And so that we didn't have any of that in the existing TSU label. I think I have an abundance of caution given the findings of the other competitors, FDA asked us for a limited liver monitoring to our understanding that's more limited than the liver monitoring that our competitors have had to add to their programs. And our full plan is assuming that we -- and as we've seen to date, no liver signals in our study, we fully plan to advocate to FDA that we should stick to the current label in the absence of any information to really -- any data to really change the current label with respect to that. I'd also note that for -- in general, for competitors, when there is a Hy's law case, at least to our understanding, whether it's 1, 2, 3 cases, that generally leads to REMS programs, leads to monitoring, does lead to warnings and precautions, just given the safety risk that these -- that creates for patients who have alternative therapies. And in RRMS, there's numerous alternative therapies. So safety is absolutely paramount. So I think that's our overall perspective on the safety. We're very confident in overall remi's safety and assuming 2 positive Phase III trials this summer, the potential for this to be a very significant medicine. Now with respect to efficacy, I think it's very fair to point out, we don't have Phase II data. We went to Phase III based on the findings that we saw from competitors. So -- but I think given that we know that we hit the target very well at 25 milligrams BID and we move up to 100 milligrams BID in the study, we think we'll definitely have strong target saturation. We think the molecule is very well designed when we look at the PK and the PD of the molecule. So that gives us confidence that assuming the class is effective against RRMS, we will have a compelling profile from an efficacy standpoint and with the safety profile and with the fact that we're established now in the market having already launched should give us a strong value proposition. Operator: We'll take our next question today, and this is from Simon Baker, Rothschild & Co Redburn. Simon Baker: Two, if I may, please. Firstly, on -- just continuing on remibrutinib. -- going on from Sachin's question. I just wonder if you could give us your updated thoughts on the commercial opportunities here in MS because it kind of feels like that your enthusiasm for remi in MS has increased over time. A couple of years ago, there was talk of almost MS being playing second fiddle to CSU. So just updated perspectives on your thoughts on the commercial opportunity. And then moving on to pelacarsen. You've now guided to a 2H '26 readout. Given this is an event-based study, could you just give us any thoughts on potential risks and risk mitigation for this what appears to be significantly lower event rate, does this run the risk of creating additional noise in the study? Or is that more than offset by the powering assumptions and the design that you've built in there? Any thoughts on that would be very helpful. Vasant Narasimhan: Yes. Thanks, Simon. So first on the commercial opportunity, I think it's really going to be data-driven. I think our base case assumption is that an oral drug will struggle to have the same level of efficacy as monoclonal antibodies in hitting the B-cell pathways in MS. And because of that, that still B-cell monoclonal antibodies will be the dominant class, but there will be a number -- large number of patients that would want an oral option and who don't want to go through injectable therapy. I mean, as I noted in my slide, still 25% of patients in the U.S. and 65% outside of the U.S. are on DMTs and are not on B-cell injectable B-cell therapy. So there's a large market there on its own. And then I think it will depend if the efficacy and safety profile overall, particularly the efficacy profile in the case of remi in our hand is compelling enough to have a broader market. So I think we'll certainly see based on the data. But even if we take it as a given that there is a large B-cell monoclonal class out there, there is a large market opportunity beyond that, which we think is important. And then, of course, the question is with the brain penetrant properties of our molecule, does that lead to other opportunities either in SPMS or in the control of RRMS that provides another dimension, and that will all be data driven as well. So in this case, I'll exceptionally take the second question, but if everyone could limit themselves to one question. Pelacarsen, so we expect a midyear readout. The study is going to completion in terms of the number of events that we had originally outlined. We had powered up the study, you'll recall, during the process of the Phase III. So we feel like we're adequately powered to demonstrate both at the 70-milligram per DL cutoff and the 90-milligram per DL cutoff, the CVRR that we're targeting. And so I don't think there's necessarily any risk associated with going in full. I think what it does indicate is that the event rates are lower than what we had modeled from the published literature. And I think that's just something that is just the reality now that we found. We suspect it has to do with the fact that we've really optimally managed these patients for all other risk factors, particularly LDL lowering. And I think that, of course, has an impact on event rates as well. So we'll see, and we're excited to see this data and hopefully creating an entire new class of medicines that can help a whole group of patients that have no other option. And so I think with a positive study, we have the opportunity to give these patients a hopeful solution against sudden cardiac death and some of the other things that can happen for patients with elevated Lp(a). Operator: And the next question today is from Matthew Weston, UBS. Matthew Weston: Can I also add my thanks to Harry for all his support and best of luck for the future, Harry. Vas, Kisqali is building into a fantastic and highly profitable medicine for Novartis. And I guess the only challenge is it has an LOE just after your 2030 time window. What are the options in-house to extend the franchise further in breast cancer? And given the SERD data that we've seen from a competitor, what other options are there from BD that could potentially -- or is oncology, I should say, a category where BD looks like somewhere you should supplement the Novartis pipeline? Vasant Narasimhan: Yes. So I think there's actually 2 questions in there, but I'll also take both of these, Matthew, because it's you, Matthew. With respect to Kisqali, I think right now, we guide to a mid-2031 with the pediatric exclusivity that we would expect for this brand in the U.S. I think it's longer outside of the U.S. depending on the market. Our core goal at the moment is our CDK2, CDK2/4 and CDK4 programs, all of which now are in the clinic, and we're advancing as fast as we can to see which of these medicines can provide either additional benefit in the post- Kisqali setting or either in combination and we'll see what we ultimately learn. Of course, we also are advancing our radioligand therapy portfolio. We have HER2 RLTs now in the clinic. Those will be important to watch as well as the [ neobombesin ] RLT as well in breast cancer. So a number of shots on goal. And I think those will all be very important for us to continue to life cycle manage Kisqali, as you rightfully point out, beyond the mid-2030s. I always think about it as a full year 2032 effect for this brand. Now I think with respect to BD and M&A, I think absolutely, I mean, we see amongst our therapeutic areas, clearly, oncology is one we'll have to focus on. So we'll continue to focus there as we have. I would say we've had just more opportunities and traction in the last years in cardiovascular, immunology and neuroscience. You've seen us do a large number of deals in those spaces. We'll continue to see, and of course, it's a high priority to continue to build oncology now that we have the scale we're building from Scemblix, Pluvicto, Kisqali. And so if we find good opportunities, good assets, we'll certainly go after them. Operator: Next question is from Peter Verdult, BNP Paribas. Peter Verdult: Peter, BNP Paribas. Just on Rhapsido and ianalumab. Given we're now in an MFM world, how should we be thinking about ex U.S. launch plans for what are clearly mostly significant assets. I'm basically just pushing my life to see how specifically you're comfortable being about changing in rest of world launch strategies for important assets like ianalumab. Vasant Narasimhan: Yes. So I think this is high in our minds. We're working through strategies here on Rhapsido, given that it's already launched, of course, we would be exposed on the first pillar of the MFN approach, which is on the Medicaid rebate it's more limited. And I think there we can manage. We think we have good options to manage the ability to launch Rhapsido globally. Of course, we'll have tighter pricing corridors, but that's something we think we can manage. Ianalumab is more complex as we get to launches in 2027 in the G7 countries. There, of course, it's on the entire market of U.S. net price, not just Medicaid. And so we're working through strategies. Absolutely, it's our aspiration to get these medicines launched in all of these markets given the patients that need them. But we certainly can't adversely affect the U.S. market. And so we're just going to have to be thoughtful about looking at where are there opportunities to price appropriately for the value that ianalumab brings. Given the PPP adjustments and some of the other elements of how pricing is looked at, are there things we can do to manage this. It's all in the works. I think we'll have a better sense over the course of this year on ianalumab. But on Rhapsido, we feel confident we have a way forward to get a global launch moving ahead. Operator: Next question is from Steve Scala from TD Cowen. Steve Scala: On pelacarsen, Novartis has said previously, that a delay in the HORIZON trial readout would stem either from overestimating the baseline risk or underestimating the treatment effect. Do you have a sense of what is at work here I would think the baseline risk, if it were overestimated would question the value of lowering LPA in the first place. And I would think that Novartis should have a better handle on treatment effect based on early studies. So any color of Novartis' view at this point would be helpful. Vasant Narasimhan: I wish we knew, Steve. Honestly, obviously, I can only give you an opinion. I can't actually give you a fact because we're completely blinded, and we have no database insights. We believe that we have appropriately estimated the baseline risk. And that's not so many rounds of looking at it. So it might be that baseline risk is more prominent at higher Lp(a) threshold. I think in my mind, it really comes on to what Lp(a) threshold that we appropriately thinking about the baseline risk and how -- and this is, again, I think not in our -- no way to know if this is correct, but my assumption is that at lower Lp(a) levels, there could be more interactions with LDL and other risk factors. And that Lp(a) becomes more dominant as you get to higher Lp(a) levels and because the risk goes up almost linearly at a higher Lp(a), that becomes the dominant risk factor. And so the studies obviously have some portion of patients at the 70 to 90 to 100. We've, I think, announced in our papers that overall, our median is 108. So that's kind of our best guess in terms of the risk profile and how we've estimated. Obviously, we would love for this to be that our treatment effect is larger than we expect, and that would be the reason for this, but there's just no way to know that at this time. Operator: Next question comes from Richard Vosser, JPMorgan. Richard Vosser: Just a question on Itvisma. Just how should we think about the ramp of that product in the U.S. and ex U.S. could imagine that there are some patients that are potentially waiting for the therapy. So have you seen warehouse patients? And how should we think about the launch? Vasant Narasimhan: Yes. Thanks, Richard. In general, for gene therapies, we see often a pretty fast ramp as we get through the kind of prevalent pool of patients. And then it kind of comes down to a more steady state. And I think over the next 2 to 3 years, we would expect really Itvisma to penetrate the majority of the kind of relevant patient pool that it has. And then come back down as we saw with Zolgensma more to a steady state because of the nature of the onetime therapy. So I think relative to other brands, the ramp will be on the faster side. It won't be in 6 months, but I think over the first few years, will get to peak relatively quickly and then come down from there. And we do have, I think, warehouse patients, we do have patients that we really understand. We also have strong access, we think, in many markets. And as we build that access forward, I think that will really allow us to maximize the medicine. Operator: Next question is from Graham Parry from Citi. Graham Glyn Parry: So I reiterate the best wishes for Harry, of course. And then a question on Kisqali and the outlook for the year. So how much of the gross to net impact that was impacting fourth quarter carries through into the next year because of a different channel mix versus how much is one-off? And so to what extent does that give you an easy base for comparison in 2025 into 2026? And then any thoughts you have on the risk that oral SERDs might pose to encroaching on CDK4/6 combinations in the adjuvant setting? Vasant Narasimhan: Thanks, Graham, and great to have you back. On Kisqali, I think the higher gross to net, we believe, is a onetime effect where we saw higher Medicare utilization than we had forecast in 2025. We do expect as the early breast cancer launch continues to accelerate and our mix shift to younger and younger patients that this will net out back towards where we had historically expected. And I think we should be fine from that point forward. And Harry wants to add something. Harry Kirsch: Yes, Graham, thank you very much. And by the way, everybody, for your nice words. So on Kisqali, I mean, one thing to note is that actually in quarter 1 of '25, with a positive gross to net as Mukul pointed out. So in quarter 1, that's a higher base due to one-timers. As Vas mentioned, the quarter 4, what we have noted here out-of-period adjustments. So if you take that out, it's really the true quarter 4 performance. And then quarter 4 of '26, there should be a bit of a lower base because of this negative this year. But overall, the -- basically, these gross to net adjustments are all out of period, so one-timers and the underlying is what you see. Vasant Narasimhan: And then with respect to the oral SERDs, we've had a lot of discussion, and we feel confident that when we look at the profile of Kisqali and what we hear from physicians that physicians want a CDK4/6 inhibitor for patients who can benefit. And they, of course, need to look for an endocrine therapy option. Certainly, the oral SERDs now have the opportunity over time to become the standard of care endocrine therapy option. We already know that roughly half of patients in the early breast cancer setting in the U.S. are already now on a CDK4/6, and as we continue to penetrate that base of patients, we think that the opportunity will be CDK4/6 plus the choice of historical endocrine therapy or the oral SERDs, and that's how this market will play out. At the margin, could there be some physicians who choose an older endocrine therapy plus a CDK4/6 or an oral SERD and not a CDK4/6. Certainly, that dynamic will happen, but we don't expect that to be the predominant approach in the U.S. or in any of the other core markets. That's what gives us confidence in the $10 billion-plus guidance that we have and are sticking to. Operator: Next question today is from Seamus Fernandez of Guggenheim Securities. Seamus Fernandez: And just would echo, Harry, we'll miss you, for sure. Vas, hoping you could maybe give us your thoughts on the overall food allergy opportunity within your overall portfolio, obviously, Xolair has done extraordinarily well in this space with excellent growth opportunity. Just hoping to get your perspective on that as well as the opportunity that you see potentially within your broader portfolio, not just for the BTK, but beyond. Vasant Narasimhan: Yes. Thanks, Seamus. We've had a long history looking at food allergy. It goes back to medicine. Some of you will remember called QGE031, which was a high affinity IgE. There was supposed to be a follow-on for Xolair. In the end, we weren't able to show a stronger effect than Xolair has ultimately shown in food allergy. So we know the space well. once we saw the Phase II data for remibrutinib and food allergy, I think it changed our perspective to really think now how could we build this out to be a significant market opportunity. So we'll be sharing that data, as I mentioned, in the coming month or two. And with that data set and now the agreement with FDA on how to advance into Phase III studies, we see the option for a safe oral medicine to be able to hopefully be given broadly to patients. And you know that a lot of the patients in food allergy that are most interested or at risk to be treated are children. And so versus ongoing injections, having an oral high efficacy safe option, we think would be pretty compelling. So I think overall, we see food allergy is a multibillion-dollar opportunity. I certainly with the potential to make something major out of this. We're going to obviously run through the phase Phase III program. We're excited to share the Phase II data as well. And then beyond that, now we are evaluating are there other opportunities within the pipeline earlier at Novartis. And, of course, externally as always, to see can we further bolster our food allergy portfolio. So I think it's definitely a shift, but something we're getting quite excited about. Operator: Next question is from James Gordon at Barclays. James Gordon: The question was on pelacarsen and what a win now looks like. So you talked about a potentially lower event rate. Where is the latest magnitude of efficacy? I think the original design was a 20% benefit in the broader population, a 25% benefit in a narrow population with a longer study and maybe some other tweaks. Is that sort of the minimum? Is there a possibility that you could actually have a benefit for either of those groups that were statistically significant, but didn't quite hit the her? And if so, would that still be a product with strong commercial prospects? Vasant Narasimhan: Yes. Thanks, James. So you are correct. It is a 20% powered for 20% in the 70 mg per DL group and 25% for the 90 mg per DL group. We can win on the study with a relative reduction that's lower than that. And so certainly, there is the opportunity to win with CVRR in the mid-teens. I think we have to evaluate, I think, for patients who have no other option. And if we were to win at that lower level, what would be the right approach to bring it to market. And that's something we'll have to see based on the data. But that's certainly something we'd have to look at. Of course, we hope for a much higher CVRR impact either at the lower cutoff or the higher cutoff, but we're going to ultimately have this to be data driven. There have been no other changes, though, from a protocol standpoint, from a study design standpoint, everything is as it was when we originally started the study with respect to powering, et cetera. Operator: Next question is from Michael Leuchten from Jefferies. Michael Leuchten: A question for Harry, please, given it's your last time with us. Harry, the SG&A expenses in the fourth quarter were extremely tight. Very good performance there, helped you to gear the margin in underlying terms. As I think about the margin for 2026, obviously, you do have the Avidity dilution. But if that SG&A control continues, I struggle to see how you're going to get as much dilution, especially if avidity doesn't quite close as quickly as maybe it could. So can you just talk about the repeatability of that SG&A performance in the fourth quarter into 2026? Harry Kirsch: Yes. Thank you, Michael. Actually, any 2026 question is kind of for Mukul, so I will hand over in a second. But Historically, we always had quite an increase in quarter 4. So we took this year to say, look, this is inefficient to have such a peak in a quarter where you have 1 to 2 weeks of Christmas and you have also the U.S. Thanksgiving and so on. It shouldn't be actually a big peak here. So we took that in order to even a bit out. And overall, we will continue and Mukul, of course, will drive productivity programs, right? But Avidity, just one thing. I mean, when we -- a day before quarter 3 earnings, when we took you all through the Avidity deal, we said it would be a 1% to 2% margin point dilution effect given the unusual high development cost burden in the next 2 to 3 years of a late-stage development product with a very expensive medicine from a COGS, especially when it is under contract manufacturing. So not everybody has figured this into the consensus. It's okay when people don't follow everything we say, but we have mentioned it to you. And 1 to 2 points, if you take 1.5, it's pretty much what you get when you have a low single-digit increase on sales and a low single-digit decrease in core operating income. So we feel we have implemented exactly that without Avidity would have been unchanged margin basically. But Mukul, what do you think? Mukul Mehta: Harry said it all. I think it's -- the short answer -- the short add-ons to the answer that Harry gave was, the SG&A cost control, productivity plans within the organization is something that we, as a company, feel very proud of on what has been achieved in the last 4, 5 years. And as we go into our next 5-year journey, this will absolutely continue going forward. There is a certain bit of margin dilution that we had predicted. And if we -- and that's the reason that we gave clarity on H1, H2 because if you look at how once the GX for this year are going to come off the base, we actually see core operating income starting to grow. And that kind of sets the base or sets the expectations for what to expect of our P&L in the next 4 years to come. Operator: We'll take the next question, and this is from Thibault Boutherin from Morgan Stanley. Thibault Boutherin: Just a question on Cosentyx and the dynamic in the HS market. It looks like shares have been stabilizing for some time between Cosentyx and the main competitor in terms of NBRx and total script. So from here, is it fair to assume that both drugs should grow in line with the market. And I think the last is to say the HS market should expect a growth around 15%. So I just want to know if it's the type of growth that just you're seeing today? Vasant Narasimhan: Yes. Thanks for the question, Thibault. So you rightfully point out, we've seen stabilization in the overall NBRx share in the market. As I noted, we're kind of in this 48% to 50% range. And then we see the two other medicines splitting the remainder. We're doing very well in the naive population. And then in the switch segment, we see our competitor performing very well. So I think that's kind of the dynamic. We've seen that dynamic kind of stabilize now. So we would expect that dynamic to continue going forward. So I think both -- all brands will grow based on the market. Now clearly, the market potential here is quite large. It's just a matter of how effective we are at getting patients to come in to get to get treatment. So we continue to see this kind of $3 billion to $5 billion market opportunity, but could it be larger if we were able to mobilize with two competitors and potentially more future competitors coming in, the market growing faster certainly. And we, of course, want to capitalize on that. And that's part of the reason why we studied Rhapsido in HS because we see the opportunity here to build this market hopefully, with a high efficacy safe oral to then go make the market even larger. So something we'll continue to work to build and hopefully get more of these patients are kind of lost to treatment, probably we're on a TNF ultimately not successful get those patients back into the medical home and backlog therapy. Operator: [Operator Instructions] We will now take the next question, this is from James Quigley from Goldman Sachs. James Quigley: My thanks and congrats to Harry as well for the next chapter. My question is on the Lp(a) portfolio. So as you showed in the slide, you started a new trial Phase II trial for DII235. Firstly, what are the dosing intervals by testing for that drug? And secondly, at the media management event, as you were saying that if HORIZON were positive, that could then lead a decision to move some of the longer-acting Lp(a) straight into Phase III. So are there other assets in the portfolio that you're holding back, waiting for HORIZON to move into Phase III. Is this Phase II a function of a pushout in HORIZON? Or is it just you want to see more data beforehand before making a final decision here on which assets to take forward? Vasant Narasimhan: Yes. Thanks, James. So for DII235, our partner, Argo Biosensors, I think, publicly released that this is has had already strong data in the early Phase II study and has a potential for an annual dosing interval. And we are prepared to move that study -- that program directly into Phase III based on the HORIZON data set. So there's no change in our plan. I don't know if there might be different things happening between the studies and their studies and et cetera. But our strategy very much is based on the HORIZON readout, to then based on the data we've seen with DII235 on an annual dosing interval to move that forward then into late-stage studies. We do have, of course, a range of other programs earlier stage as well on the range of cardiovascular assets. We've talked about that in the past. HMG coA Reductase, annual PCSK9, of course, the angiotensin 2 siRNA and then combination programs as well that we're working on, both at the 6-month interval and at the 1-year interval. And so both because we life cycle manage Leqvio but also be prepared that pelacarsen is positive. So the HORIZON is positive to seem to be ready to come with what we think will be the preferred market option we want to be ready for all these eventualities. Operator: And the next question is from Peter Verdult, BNP Paribas. Peter Verdult: Just a follow-up for you, Vas, on the pipeline. Just on this basket of cell therapy programs in autoimmune, I think some of them do read out next year. Just wondered if you've got it in the top of your head in terms of which ones and which indications and perhaps a general temperature check on your behalf in terms of your level of enthusiasm for these programs. Vasant Narasimhan: Yes. Thanks, Peter. We remain enthusiastic. We have a huge effort internally on YTB as a first instance, currently in pivotal studies, aligned with FDA over 4 indications and then with follow-on programs that are now in proof-of-concept studies in 3 -- 4 additional indications as well. and then additional exploratory work that's ongoing. And then behind that, trispecific and bispecific monoclonals also to explore can there be alternative options for certain patient groups in the immune reset. I think the first readouts we'll have will be in SLE lupus nephritis. That's building off of the data we presented last year on 20, 23 or 24 patients where we showed, I think, pretty spectacular results for those patients in terms of winding the progress of their disease other than the permanent damage that has happened to the kidneys. And so quite exciting data. That's allowed us, I think, to move forward on that study quite quickly. But we also are advancing all the other programs. And some of them, if we're fortunate, might even be able also to read out next year depending on enrollment patterns and enrollment time lines. So we're advancing these as fast as possible. Depending on the program, many of them have alignment with FDA that we can file off of a single arm and then continue on to provide data on randomized data sets. Others need the randomized upfront. So that all varies based on indication. But I think a lot of the enthusiasm and focus inside the company. Operator: Now take the next question, and this is from Michael Leuchten from Jefferies. Michael Leuchten: Vas, just on Scemblix, you helpfully provide the share data across lines of therapy for the product. It looks like it's plateauing in first line in the U.S. a little bit over the last few quarters. What's stopping the momentum to continue? Vasant Narasimhan: Yes. Thanks, Michael. So we have looked into that. One thing to note is that data is very noisy because with CML, it's a rare disease, most physicians only see 1 or 2 patients. And so the data here always is getting restated. Overall, our view based on our internal assessments is we continue to see steady share growth on the frontline setting. Actually, I would say our frontline share growth is ahead of our plan and our original planning assumptions. And so we see the opportunity here to really continue to grow. We have really strong broad access. One of the biggest things we're trying to overcome is the perception that we don't have strong access to get that access perception to where we want it to be. And then, of course, as we've outlined in the past, you do have Gleevec loyalists out there who want to stay with a product that they've used for a long period of time. That will be more of a refractory group. But to get from the mid-20s up to the 40% to 50% share range is absolutely what our ambition is, and we see a path to get there. Next question I think this might be the last question, operator. Operator: So the last question today is from James Quigley from Goldman Sachs. James Quigley: I've got one quick one on Zigakibart. The data has been pushed out a little bit in order to have the eGFR data on the label at launch. But as you think about sort of the strategy here with your other assets, whether you had the UPCR data first and then adding the eGFR data. Is this a case that the data were quite close together so it is worth having a delay, just trying to understand the rationale here versus the mechanism? Or is there something around the Zigakibart mechanism that could lead to a stronger benefit on eGFR relative to UPCR. Vasant Narasimhan: It's a great question, James. I think when we looked at the number of competitors entering in the [ anti-APRIL ] space. We asked ourselves, given we already have a strong portfolio in the nephrologist office, what would give us the most compelling data package to kind of cut through all of the various launches that are ongoing. And we felt coming right away with hopefully the second medicine with a full approval, clear proneuria reduction and eGFR benefit would give us a very compelling proposition. I mean theoretically, assuming everything goes as we hope, we would have three medicines in IgAN with eGFR outcomes benefit across Fabhalta, Vanrafia, Zigakibart, and that will give us a very compelling proposition. So we thought that was prudent given that the time that passes here is three quarters, it's not the end of the world, and then we would have a much more compelling data set to provide to FDA. All right. Well, thank you all very much for joining the conference call. We look forward to keeping you up to speed, and we wish you all a great 2026. Thank you. Operator: Thank you. This concludes today's conference call. Thank you for participating, and you may...
Operator: Good day, everyone, and welcome to the Matthews International First Quarter Fiscal 2026 Financial Results. [Operator Instructions] Please note this call may be recorded. [Operator Instructions] It is now my pleasure to turn the conference over to Dan Stopar. Please go ahead. Daniel Stopar: Good morning. I'm Dan Stopar, Chief Financial Officer of Matthews. And with me today is Joe Bartolacci, our company's President and Chief Executive Officer. Before we start, I would like to remind you that our earnings release was posted on the Investors section of the company's website, www.matw.com last night. The presentation for our call can also be accessed in the Investors section of the website under Presentations. Any forward-looking statements in connection with this discussion are being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Factors that could cause the company's results to differ from those discussed today are set forth in the company's annual report on Form 10-K and other public filings with the SEC. In addition, we will be discussing non-GAAP financial metrics. I encourage you to read our disclosures and reconciliation tables carefully as you consider those metrics. In connection with any forward-looking statements and non-GAAP financial information, please read the disclaimer included in today's presentation materials located on our website. Now I will turn the call over to Joe. Joseph Bartolacci: Thank you, Dan. Good morning. Thanks for joining us today to discuss the financial results for Matthews fiscal 2026 first quarter. Today, we aren't just reporting on a quarter. We are reporting on the successful execution of a strategic pivot. Over the last 12 months, we set a target to bring our leverage ratio below 3x. I am pleased to announce that following a series of actions, we've achieved our goal. During our first quarter, we closed on the sale of our warehouse automation business for $225 million, representing a very accretive 15x adjusted EBITDA and a very accretive after-tax multiple of 11x for an asset that was highly underappreciated by the market. In addition, we recently closed on the sale of Saueressig, our European Packaging and Surfaces business for a total consideration of $41 million, including cash, the assumption of pension and other liabilities and promissory notes. Selling the Saueressig assets enabled us to avoid significant restructuring costs and shed pension liabilities from our books. Saueressig represented the remaining assets of the packaging business that was not sold or transferred in our transaction with SGS. Saueressig was held back from the SGS transaction because we would not have received much value for the business. Instead, we converted the business to a highly favorable transaction for the company. Since last year, Saueressig EBITDA was only $1.5 million. Also, as a result of the Saueressig transaction and actions taken over the past few years, our remaining pension liabilities stand well below $10 million from well over $300 million just a few years ago, of which $125 million was unfunded. As a result of these transactions, our net debt is down to roughly $500 million. We now sit below 3x, a balance sheet-driven target that we had set for ourselves 12 months ago. Beyond just reducing the debt balance, we have fundamentally improved our balance sheet and our cash flow profile. In January, we executed the early redemption of our -- of all $300 million of our 8.625% senior secured notes. By replacing high-cost debt with lower cost capital, we expect to increase our annual cash flow and reduce our annual interest expense by $12 million. This move reclaims capital can now be deployed toward our dividend, internal innovation and high-margin opportunities in memorialization. A key pillar of our future cash realization is our 40% interest in Propelis. The merger of SGK and SGS is already outperforming expectations. Propelis is now operating at an EBITDA run rate significantly higher than the $100 million that was assumed at the time the deal was closed. In a move that should further enhance inbound cash flow, the Propelis team is currently migrating onto their own version of SAP. This move alone will activate $20 million in potential synergies, part of a total synergy target that exceeds $60 million, much of which is yet to be achieved. We expect to reap the full benefit of this investment when we exit the business, which we anticipate in an 18- to 24-month window. However, assuming a successful conversion to the new operating system in the coming months, we hope to begin to receive some repayment of our preferred equity possibly as soon as our third quarter. Between the rising equity value and our $50 million preferred, including PIK interest of 10%, we view Propelis as a significant cash and waiting event. Given all that transpired in fiscal '25, we're happy with our first quarter results for fiscal '26. Total revenues were down on a year-over-year basis to $284 million, primarily reflecting the divestiture of our interest in SGK. Additionally, after adjusting for the 3-month lag in reporting and including our 40% interest in Propelis, adjusted EBITDA for the 2026 first quarter was $35 million compared to $40 million in the prior year's first quarter, which included 100% of SGK, a pretty compelling indication of how well we performed in the quarter. Turning to our businesses. Memorialization continues to serve as the engine that drives our asset portfolio. Our Cornerstone segment had a solid quarter, buoyed by inflationary pricing and higher casket volumes driven by an active flu season and a strong performance in several other product lines. The segment reported a 7% year-over-year increase in sales, thanks to a positive contribution from the Dodge acquisition. Our team has done an exemplary job integrating Dodge, and they are capturing cost synergies ahead of plan. We've also taken significant steps to reduce the initial outlay to acquire Dodge, including expected asset sales and working capital reductions. The outcome of these transactions will bring the adjusted purchase price of Dodge closer to $50 million with anticipated EBITDA contributions of over $12 million, another highly accretive acquisition. We believe there are more M&A opportunities like Dodge available to us, though it is difficult to ascertain when business owners might be ready to contemplate a sale. However, our deep relationships in this space should enable us to be ahead of the market when the time is right. We're also seeing strong demand for Mausoleum Construction, which bodes well for our Gibraltar Construction business. Mausoleum projects provide good margins and more importantly, pull through additional opportunities for other products such as bronze lettering and vases. Moving on to Industrial Technologies. Revenues were down 14% year-over-year in the first quarter, primarily reflecting lower sales by our Energy Solutions business and the impact of the Saueressig Surfaces divestiture. Let's first focus on our Product Identification business, where sales grew modestly during the first quarter, driven by favorable currency shifts and tariff impact. Axian, our new printhead chip product, made its public debut at a PACK EXPO, where the market response was exceptionally strong. We were not surprised by the high interest, which resulted in a strong list of customers entering into our early pipeline directly from meetings at that event. Since the PACK EXPO event, global interest in Axian has continued to build. Our distributors in the EMEA region are showing strong pull, and we're now engaging targeted customers across the region, broadening visibility and accelerating early adoption. We're also seeing Axian being a clear entry point into the CPG space, where we have expanded what we believe to be our total available market to over $3 billion. Through our introduction and initial discussion with customers, we are seeing interest not only from continuous inkjet users, which is still the largest part of the market, but also from thermal inkjet customers seeking high-quality print at substantially lower cost than thermal inkjet. This new interest further validates the high value of our intellectual property. We have been running our Axian systems in real-world production environments and delivering stable uptime, consistent print quality, reduced cost of ownership and ease of use, essentially all of our value propositions. One final note on Axian. Based on customer feedback, we recently made a deliberate decision to pause shipments and incorporate a small set of production refinements to the equipment. Specifically, we added more electronic shielding to the product to protect it from electrical noise, nothing of significance in a normal part of initial product launches as we can never fully evaluate all of the operating environments in which the equipment is used. That work is now complete, and we are positioned to place production units this quarter with these additional improvements. Overall, the strong market reception, the larger TAM, expanding global pipeline and a solid beta performance gives us confidence as we move towards volume production. As mentioned in previous quarters, we are seeking partnerships in this business to accelerate the adoption of this technology and offset some of the costs associated with further development. We hope to have further news on this initiative as the product gains market acceptance and we are able to ramp up our production. Moving on to our Energy Solutions business unit. It was a challenging quarter as we expected. But while the European market and U.S. battery space face near-term headwinds, our IP remains a global benchmark. We firmly believe in the value of our IP, while interest in our solution remains strong and steady as reflected in over $100 million in our lead pipeline. Included in the pipeline are several opportunities on the calendaring side where we expect decisions to be made in the second half of this fiscal year. We're also discussing opportunities on the ultracapacitor front and hope to have some clarity on order decisions later this fiscal year. Additionally, as we discussed last quarter, we are awaiting a decision from a domestic energy solutions provider for a $50 million U.S.-based opportunity for a battery separator line. The technical team for the client has approved our equipment's efficacy and the significant value that it provides. We expect this opportunity will convert to an order later this fiscal year as the customer works towards securing supply agreements. Our near-term expectations for the dry battery electrode market has decreased. However, DBE is still viewed by market participants as highly valuable and an enabler of next generation of chemistries, including solid state. We continue to see industry announcements on R&D and patents around the dry process. For example, LG recently stated its intent to actively pursue strategic patents relating to DBE as they view it as a critical for large-scale production. The company also confirmed its goal to begin full-scale commercial production by 2028. Samsung recently identified the 2026, 2027 time frame as a pivotal period. Their CEO also spoke of a battery super cycle where a period of demand growth will enable their next-generation technology platform, including solid-state batteries to reach full-scale mass production. Samsung's mention of a super cycle also augurs well for the energy storage systems market, which is expected to double globally by 2030. Analysts expect this market's growth to be driven by several factors, including U.S. tariffs on Chinese-made batteries, enabling Korean manufacturers to expand the North American market share and Korean firms converting their underutilized EV battery lines to energy storage production. These activities speak of a market that is pivoting towards the type of battery chemistries and regional supply chains where DVE technology provides the greatest competitive advantage. To protect cash, while we wait for the battery super cycle, we are exploring strategic partnerships and direct investment to expand adoption without heavy capital expenditure. This continues to be an area of focus for our bankers supporting our strategic alternatives efforts. With regard to our outlook for 2026, we believe a full year contribution from the Dodge acquisition will enable memorialization to grow in fiscal 2026. Additional cost reduction actions at the engineering business are planned for later this fiscal year to mitigate any further declines in the business as we work towards converting several opportunities into orders. Based on these factors and inclusive of our 40% interest in Propelis, we expect our adjusted EBITDA guidance to be at least $180 million for fiscal 2026. Please note that several events may have impact on our full year results. First, we have been accruing the PIK interest related to the preferred that we received from the SGK transaction. That interest is reflected as a reduction in our corporate and other operating costs. Obviously, to the extent that we receive principal as a reduction of our preferred, PIK interest will decline, but then we will have also received cash, which will further reduce our debt. Second, the timing of orders in our energy business is somewhat out of our control. Although we are confident in the value that we have demonstrated to our customers, demand in North America and Europe for additional battery capacity has slowed. We believe that we have anticipated this in our guidance, but we remain cautious on our timing. While our current transition services agreements from recent sales temporarily limit our ability to slash overhead, these agreements have expiration dates. Once they have rolled off, we expect to focus on our corporate cost structure, which we expect will be materially lower. We have demonstrated that we know the true value of our assets, and we will be patient in taking actions that do not reflect the best interest of our shareholders. We have fixed our balance sheet, and we are now focused on accelerating the returns to our shareholders. Finally, our evaluation of strategic alternatives is continuing. As discussed above, we are principally focused on finding partnerships, which will benefit our shareholders by capturing the full value of our intellectual property. However, we will be prudent, like we have demonstrated by the sale of our warehouse automation business and the merger of SGK, we know what the true values of our businesses are, and we'll be patient in our process. Now I'll turn it over to Dan for a deeper dive into our financial performance. Daniel Stopar: Thank you, Joe. Before starting the financial review, I want to give a reminder on the financial reporting with respect to the SGK business. As you are aware, the divestiture of this business closed on May 1, 2025. As part of the transaction, the company received a 40% ownership interest in the newly formed entity, the Propelis Group. Please note that as a result of the integration process of Propelis Group and the transition to its own stand-alone reporting systems, our 40% portion of the financial results of Propelis will be reported on a 1-quarter lag. As a result, the consolidated financial information for the fiscal first quarter of 2026 discussed today includes our 40% interest in the financial results of Propelis for the months of July through September of 2025. In contrast, the prior year first quarter consolidated financial information reflects the complete financial results of the SGK business. Our financial statements will be included in the quarterly report on Form 10-Q and will also reflect our portion of the results of Propelis for July through September 2025. Now let's begin the financial review with Slide 7. For the fiscal 2026 first quarter, the company reported net income of $43.6 million or $1.39 per share compared to a net loss of $3.5 million or $0.11 a share a year ago. The change primarily reflected a significant gain recorded this year on the divestiture of the warehouse automation business, partially offset by losses recorded on the divestitures of the European packaging and tooling businesses, higher litigation and other strategic initiative costs and lower operating performance in the Industrial Technologies segment for the current quarter. Consolidated sales for fiscal 2026 first quarter were $285 million, compared to $402 million a year ago. The decrease primarily reflected the divestitures of the SGK business on May 1, 2025, and the European packaging and tooling businesses on December 1, 2025. The consolidated sales impact of these divestitures was approximately $120 million for the current quarter. Sales for the Industrial Technologies segment were lower for the quarter, offset partially by higher sales for the Memorialization segment. Consolidated adjusted EBITDA for the fiscal 2026 first quarter was $35.2 million compared to $40 million a year ago. The decline primarily reflected lower operating performance by the engineering business. The Memorialization segment reported higher adjusted EBITDA for the quarter, while corporate and other nonoperating costs were higher in the current year. On a non-GAAP adjusted basis, net loss attributable to the company for the current quarter was $6 million or $0.19 per share compared to net income of $4.3 million or $0.14 per share last year. The decline primarily reflected the impact of lower operating profits and the unfavorable impact of losses in foreign jurisdictions for which we were unable to record tax benefits. Please see the reconciliations of adjusted EBITDA and non-GAAP adjusted earnings per share provided in our earnings release. Please move to Slide 8 to review our segment results. Sales for the Memorialization segment for the first quarter of fiscal 2026 were $204.2 million compared to $190.5 million for the same quarter a year ago. The Dodge acquisition contributed sales of approximately $10.4 million to the current quarter. Higher sales volumes for caskets, bronze and granite cemetery memorials, combined with inflationary price increases also contributed to the improvement in the segment's results. Mausoleum sales declined, primarily resulting from timing of construction projects and cremation equipment and related sales were also lower than a year ago. Memorialization segment adjusted EBITDA for the current quarter was $38.9 million compared to $36.6 million for the same quarter last year. The increase primarily resulted from the benefits of higher sales volume, inflationary price realization and cost savings initiatives, partially offset by the impact of higher labor and material costs. The Dodge acquisition and the disposition of the unprofitable European cremation equipment business also contributed to the increase in the segment's adjusted EBITDA. Please move to Slide 9. Sales for the Industrial Technologies segment for the first quarter of fiscal 2026 were $69 million compared to $80.5 million a year ago. The decline mainly resulted from lower sales for the segment's engineering business and the divestiture of the segment's tooling business on December 1, 2025. The decline was offset partially by higher sales for the warehouse automation business. Changes in foreign currency rates also had a favorable impact of $2.9 million on the segment's current quarter sales compared to a year ago. Adjusted EBITDA for the Industrial Technologies segment for the current quarter was a loss of $4.5 million compared to a profit of $1.8 million for the same quarter a year ago. The decrease primarily resulted from the impact of lower engineering sales, offset partially by the segment's cost reduction actions in its engineering business and the impact of lower compensation expense. Please move to Slide 10. Sales for the Brand Solutions segment were $11.6 million for the quarter ended December 31, 2025, compared to $130.8 million a year ago. Sales for the current quarter were comprised of the months of October and November for the segment's European packaging operations, which were divested on December 1, 2025. The impact of this divestiture was a decrease of $3 million compared to the same quarter in the prior year. The remaining decrease resulted from the divestiture of the SGK business on May 1, 2025, which had an impact of approximately $115 million for the quarter. Adjusted EBITDA for the Brand Solutions segment was $12.7 million for the current quarter compared to $12.3 million a year ago. The current quarter mainly reflects the company's 40% interest in Propelis as our European packaging business reported relatively breakeven results, and this was generally consistent with the same quarter a year ago. To reiterate the earlier comments about Propelis, our 40% portion of the financial results of Propelis is reported on a 1-quarter lag. And as a result, the consolidated financial information discussed today includes our 40% interest in the results of Propelis for the months of July through September. Please move to Slide 11. Cash flow used in operating activities for the fiscal 2026 first quarter was $52 million compared to $25 million a year ago. The first fiscal quarter is typically our slowest, generally reflecting a net operating cash outflow, and this is due primarily to seasonally lower earnings and the payment of year-end accruals, taxes, insurance and other annual payments. The quarter also reflected payments in connection with divestitures, litigation and other strategic initiatives. Outstanding debt at December 31, 2025, was $537 million and net debt, which represents debt less cash, was $506 million. Net debt declined by $173 million in the first quarter of fiscal 2026, driven by receipt of $240 million of cash proceeds from the divestitures of the warehouse automation business and the European packaging and tooling businesses. Total cash proceeds from the warehouse automation sale, including $40 million of estimated future income tax payments in addition to other costs are projected to be $170 million. This business has a relatively low tax basis and is predominantly a U.S.-based business. Net proceeds from the sale of the European packaging and tooling businesses are approximately $30 million, including $14 million received at closing, $8 million to be received within 90 days of closing and the balance in the form of interest-bearing seller notes due in future years. The buyers also assumed pension and certain obligations with the transaction. For the first quarter of fiscal 2026, the company purchased 206,123 shares under its stock repurchase program at an average cost of $25.04 per share. These repurchases were solely related to withholding tax obligations for vested equity compensation. And finally, the Board declared last week a quarterly dividend of $0.255 per share on the company's common stock. The dividend is payable February 23, 2026, to stockholders of record February 9, 2026. This concludes the financial review, and we will now open the call for questions. Operator: [Operator Instructions] We'll take our first question from Colin Rusch with Oppenheimer. Colin Rusch: Guys, as you look at the landscape around ultracapacitors, batteries and a pretty significant investment in domestic manufacturing that's in the planning stages right now. Can you talk about the breadth and depth of potential customers that you're looking at here domestically? And then would also love to hear about something similar in Asia outside of China in terms of how much of those conversations are at this point? I know you gave a little bit of color, but would love some additional detail. Joseph Bartolacci: Yes, I mean, with respect to the North American markets and the European markets, the customers, all those players that you might expect it to be, whether it be OEMs or whether it be battery manufacturers, we're having conversations with all of them. As you said, it's still in the planning stages, but more and more you're hearing about the desire to move towards DBE, and that's coming from the battery manufacturers. The OEMs are kind of now awakening to the idea that this is where they need to go. And the idea that tariffs on Chinese products could continue for a long time to come, only makes it more important that we are a Western world. So we think we're well positioned to continue to deliver into the future. We're just having a difficult time right now as we go through this cycle. Colin Rusch: Excellent. And then as you look at the ecosystem of technologies that could augment the DBE, is there anything of interest or bubbling up that we could think about you guys pursuing as a tuck-in acquisition? Obviously, you don't want to signal too hard, but just curious about the pipeline of potential M&A opportunities for you guys. Joseph Bartolacci: When we speak of energy, it's less about acquisition capacity than it is joint development opportunities with different players, whether it be the mixing side, on the material handling side or on the chemistry side, it's the joint development between partnerships that allow us to bring to fruition the opportunities. I don't need to acquire them. Oftentimes, they're much bigger companies than we are. There may be possibility for them to invest in us or for them to carry the weight of the capital investments that we expect will be necessary for this. So I don't see significant opportunities for acquisition right now. It doesn't mean that something couldn't arise. We own everything we need for the pieces of the equipment that we produce. Colin Rusch: Excellent. And then just a final one on the balance sheet. Obviously, you guys have optimized the business, streamlined it and now are sitting in a much different position from a debt-to-EBITDA ratio perspective. Are there other things that the company is contemplating now to optimize the capital structure? Or should we think about the current capitalization as the path forward and just generating cash from operations here on an ongoing basis? Joseph Bartolacci: As a practical matter, you heard me mention what we call the cash and waiting event that comes from Propelis. Two elements of that, whether it be the repayment of the preferred, which is more likely to occur before the exit from the equity. But those 2 events themselves, you can put your own multiple on those numbers. I mean, with a business that's running well over $100 million worth of EBITDA already and relatively low debt in that business, we think debt equity is pretty valuable, whatever multiple you put on that EBITDA. As we start approaching that time when that becomes realization, there'll be more discussions about what we do from a capital structure standpoint. Operator: Our next question comes from Daniel Moore with CJS Securities. Dan Moore: Start with memorialization. Solid quarter, obviously. How do we think about just what are your expectations for the market looking at, obviously, caskets, memorials, cremation? When I kind of think about calendar year '26 versus '25, what are the puts and takes there? And then in the very short term, some extreme weather here that can sometimes cause delays in that business. Just wondering what you're seeing early in fiscal Q2. Joseph Bartolacci: Dan, I'll let Dan Stopar give you the numbers, but let me give you a little bit of color on what the current environment is happening to us. As you've been around for this business for quite a while, you understand the month of January was a difficult month for us. Hopefully, that's just a time step as people still need to be buried, still need to be celebrated and so forth. So we expect that to pick up here in February and March and maybe come back to even a greater number than we had expected. But -- so I would expect we are firing pretty well on a number of cylinders in that business right now. We've just begun the integration from a commercial standpoint of the opportunities on the Dodge side. We think that there's an opportunity to expand both market shares on both sides of the equation, whether it be on the Dodge product side or whether it be on our memorial side. And that team is excited about that opportunity. Those efforts are just beginning as we speak. When we look at the balance of the year, I'll let Dan speak to you about the numbers. He'll give you a better perspective. He's got it in front of him. Go ahead, Dan. Daniel Stopar: Yes. Dan, I think Joe kind of gave you the overview of the market expectations. Obviously, we're going to continue to add in our year-on-year comps as we pick up more of the Dodge business. And we have synergies that will layer on throughout the year going into the following year, 1.5 years after that. So we continue to follow the same expectation around death rates in the 1.5% to 2% cremation rates that will continue to grow, but at a declining rate. And then obviously, we are taking advantage of our ability to grow in the market and build market share. But also top line will continue to grow as we increase our prices to offset inflationary costs. Dan Moore: Very helpful. And as you touched on, obviously, synergized down the Dodge acquisitions looking maybe 4x-ish on a kind of adjusted multiple, so certainly very attractive. Talk about just the opportunity set there from an inorganic perspective. Is it that specific end market where you see room for additional opportunity? Or is it more sort of ancillary products around the memorialization business? Joseph Bartolacci: I think it's both, Dan. At the end of the day, I mean, whether we look to find opportunities to sell our caskets to customers of Dodge that are overseas or in other parts of the North American market where we don't serve today or whether it is to introduce a new product into a market that we currently don't serve. I think that when we look at acquisitions, we think we have a pretty good structure to be able to run through every door in the United States when it comes to sales. So if I can add a product line that we currently don't have and expand it over 100 and some odd salespeople across the United States that currently just put that into their portfolio and begin to sell, we'll add that. And then when we look at our structure, and be able to take the kind of synergies that we took out of the Dodge acquisition in a relatively short period of time, we think we can make some highly accretive transactions. Now to be fair, there's nothing on the horizon right now. I do not want to walk away from this and say we're on a tirade to ramp up our debt levels and continue to go through the acquisition trail. What I am conveying is that there's a significant opportunity across the United States and elsewhere in the world to continue to add pieces to the puzzle to this portfolio that we currently don't have. Dan Moore: Really helpful. Again, back to energy storage, just pulling on the string a little bit. It sounds like your expectation is that the cadence of orders is likely to pick up in H2 at least based on your current conversations. So we think about more of a kind of a fiscal '27 ramp in revenue? And any kind of sense for the range or scope or size of these opportunities? I know you mentioned one was a $50 million potential revenue opportunity. What are we looking at here just in terms of how we think about the backlog and order book could grow as we look out a couple of quarters? Joseph Bartolacci: Yes. I mean the interesting thing that comes, you should take from my comments is now the large Korean manufacturers whose names we gave to you earlier, battery manufacturers and others, by the way, are speaking very freely about dry battery electrode. That it is in their development plan, and they expect to be in market with the dates they've kind of committed publicly. I don't expect them to be coming in and launching with $0.5 billion worth of orders. It is a ramp process for them. We have some equipment that we're working on as we speak. Our new production piece of equipment, they -- our people are beginning to schedule time on here to be able to run their samples on our equipment, and that should facilitate the acceleration of the production process for them. As they see a -- rather than going -- as we've said before, rather than going from a lab machine and scaling up to a pilot machine, selling up, scaling up to a production machine, we have a production level piece of equipment that we manufactured that's sitting in our facility in Vreden right now, where we're going to begin selling time to some of our battery manufacturers and OEMs to be able to run their chemistries through to see how it handles it. So we'll be able to speak more to that probably second half, but I do not want to create an expectation of significant orders. We've kind of given you the $50 million order, which we expect. It has passed technical efficacy tests. We have several other smaller orders that make up the other $50 million in our pipeline. Hopefully, those come to fruition over the second half of the year. Then the ramp thereafter is going to be dependent on when they begin to scale out their gigafactories. We don't control that. We're a critical piece of those gigafactories, but we are not the major spend. Dan Moore: Understood. Really helpful. And just a reminder what is in the -- from a revenue perspective and the projections for fiscal '26, just for energy storage in ballpark terms? Daniel Stopar: $30 million to $35 million, Dan. Dan Moore: Perfect. Okay. Last one, obviously, great to see the leverage back down. Congrats on execution of those transactions. Expectations, Dan, for sort of CapEx and free cash flow in fiscal '26, just thinking about the organic delevering capability, whether that's going to be closer to breakeven or if we can kind of start to tick that even lower on an organic basis here in the near term? Daniel Stopar: Yes. Dan, CapEx should be around $25 million for the year. From this point forward, this is Q1, we typically build working capital. And from this point forward, for the rest of the year, we should get some small benefits, $5 million to $10 million on working capital. So with an EBITDA -- cash EBITDA that should be when you start with our $180 million and you back off the Propelis piece that may or may not monetize this year, you're going to be left with about $130 million of cash EBITDA. We should be in pretty good shape after interest expense and dividends, treasury stock to generate some cash for the last 3 quarters. Dan Moore: Really helpful. I’'ll circle back with any follow-ups. Joseph Bartolacci: Dan, I'd be remiss if I didn't at least highlight the commentary with respect to the pension. I remember conversations with this group a few years back when we were $125 million underfunded, and we're now down to virtually 0 underfunded. We think that we're pretty proud of what we've had to get done there. And some of that sat in that -- we had to put into our revolver and help the, what created some of the debt situation we were in. Operator: Our next question comes from Liam Burke with B. Riley Securities. Liam Burke: Joe, you quantified a few quarters back the quote activity that you've been having as the Tesla overhang has been eased. Off that number, and I'm not asking for a number, but directionally, is that quote activity increasing? And is it concentrated on larger systems? Joseph Bartolacci: I would not say it's concentrated on the larger systems. It's concentrated on customers that can order larger systems, I would say. The $50 million item is the big ticket item in that portfolio. The rest of them are made up of multiple customers that have the potential to place large orders thereafter. Liam Burke: Okay. Dan, copper pricing has been increasing. Obviously, that affects bronze pricing. Have you been able to get the increases passed through? Daniel Stopar: Yes. So far, Liam, I think you know we buy out for about 6 months. So that's -- we're working through that now. But certainly, we've been buying at higher rates all along. We've passed through price increases that should help us offset that to a large degree. Joseph Bartolacci: Unfortunately, Liam, it's moving faster than our price increases sometimes. So it's a moving target lately. Daniel Stopar: And our buying is opportunistic, right, to try to time the market when the prices do dip down. Liam Burke: Great. And just a little color on cremation. There wasn't any mention in the prepared comments. I presume it's just moving along just fine. Joseph Bartolacci: Yes. After some restructuring, we shut down a facility on the West Coast, concentrated that back into our Florida facility. We're expecting a strong year from them after -- if you recall, last year, we divested of our European operations. That was a comparable that's going to have a year-over-year full year impact on us, but should trail off. I think it's this quarter, right, Dan. So we lose it this quarter, and we're expecting a pretty strong year for them going forward. We're seeing great interest in a couple of new products, in particular, in new services. We've invested pretty significantly in our service portfolio. And that is really what is bringing more and more opportunities for us as our competitors just don't have that scale. Operator: Our next question comes from Justin Bergner with Gabelli Funds. Justin Bergner: I have a handful of questions. Most are kind of just clarifying in nature. Maybe to start, the Propelis EBITDA, I think in prior quarters, you provided an estimate for the EBITDA in the quarter, even though the adjusted EBITDA number was speaking to the contribution from the prior quarter. Are you able to do that this quarter as well? Daniel Stopar: Yes. Justin, we -- last quarter, we were able to provide that because that was year-end. It was much later in the quarter. As we mentioned, they're delayed in developing their financial statements. What I can tell you is this is seasonally their lightest quarter. So we would not expect the profit that we pick up next quarter to be as high as what it was this quarter. Justin Bergner: Got you. Second, the tax liability on the warehouse automation sale, has that been paid yet or mostly been paid yet? Or is that yet to come out of your cash balance effectively? Daniel Stopar: No, that will be paid for our normal quarterly payments over the remainder of the year. Justin Bergner: So it's essentially all remaining the tax liability? Daniel Stopar: That's correct. Justin Bergner: Okay. And then just trying to clarify the sale of European packaging and industrial tooling. I think you mentioned December 1, but then I saw the January 7 press release. So how much in sales is coming out of Industrial Technologies for the tooling business? And what closed in December versus in January? Daniel Stopar: Yes, it all closed in December. And Packaging was about $60 million that came out of SGK, the Brand Solutions segment and $40 million came out of Industrial Technologies. Justin Bergner: Okay. Got you. That's helpful. So then the portion out of Industrial -- okay, so you said there was a few million, I guess, for the quarter that wasn't in there for SGK and a few million that wasn't in there because of Industrial Technologies because of the December 1 close. Daniel Stopar: Yes, that's right. It was about $3 million, I believe, on the SGK side and yes, a couple. Joseph Bartolacci: Yes, on the industrial side. Daniel Stopar: On the Industrial side. Justin Bergner: Okay. Got you. And then maybe bigger picture, what remains active in the electric vehicle kind of pipeline as it relates to your energy storage business? I mean it seems like most of what you're talking about is outside of EVs now, but where do you continue to engage on the EV side? Joseph Bartolacci: No, no. In fact, actively, all of them are on the EV side, whether it be the battery separator line, whether it be the calendar lines that we've quoted, the $100 million is pretty much all located in the EV sector. They also could be for energy storage, which would be more for freestanding facilities. But I mean it's all related to that. Justin Bergner: Okay. Got you. And then the chip had delay because of some of the customer requests on electrical security, how many months did that back the program? Joseph Bartolacci: 30 days. 30, 45 days, Dan. Excuse me, Justin. It was a minor tweak basically. Operator: It appears we have no further questions. I'll turn the program back to the speakers for any additional or closing remarks. Joseph Bartolacci: We have no further comments. We appreciate your time today, and we look forward to speaking to you in several months.
Operator: Good morning, and welcome to the Jack Henry Second Quarter Fiscal 2026 Earnings Conference Call [Operator Instructions] Please note that today's event is being recorded. At this time, I would like to turn the conference over to Vance Sherard, Vice President, Investor Relations. Please go ahead, sir. Vance Sherard: Thank you, Chris. Good morning, and thank you for joining the Jack Henry Second Quarter Fiscal 2026 Earnings Call. Joining me today are Greg Adelson, President and CEO; and Mimi Carsley, CFO and Treasurer. Following my opening remarks, Greg will provide an overview of our quarterly results and key performance metrics, along with updates on our strategic initiatives. Mimi will then discuss the financial results and updated fiscal 2026 guidance provided in yesterday's press release, which is available in the Investor Relations section of the Jack Henry website. Afterwards, we will open the lines for a Q&A session. Please note that this call includes forward-looking statements, which involve risks and uncertainties that could cause actual results to differ materially from our expectations. The company is not obligated to update or revise these statements. For a summary of risk factors and additional information that could cause actual results to differ materially from such forward-looking statements, refer to yesterday's press release and the risk factors and forward-looking statements sections in our 10-K. During this call, we will discuss non-GAAP financial measures such as non-GAAP revenue and non-GAAP operating income. Reconciliations for these measures are included in yesterday's press release. Now I will hand the call over to Greg. Gregory Adelson: Thank you, Vance. Good morning, and I appreciate each of you joining today's call. As always, I'd like to begin by thanking our associates for their hard work and commitment to our success by doing whatever it takes and doing the right thing for each other and our clients. Our focus on people-first culture, service excellence, technology innovation and well-defined strategy supported by consistent execution continues to set us apart in the market and is reflected throughout my remarks. I will share 3 key takeaways from the quarter, then provide additional detail about our overall business. First, our financial performance. We produced record second quarter results with non-GAAP revenue of $611 million, up 6.7% over last year's second quarter. Our non-GAAP operating margin was 25.1%, representing a robust 355 basis points of margin expansion over last year's Q2. Second, our sales performance. Our core sales team delivered an outstanding quarter with 22 competitive core wins. Of the 22 wins, 4 were financial institutions with over $1 billion in assets and 15 included core digital banking and card solutions. We have continued to see an increase in trifecta wins over the past 12 months. 68% of new core wins this quarter included digital and card processing as compared to 45% in Q2 fiscal year '25. The recent announcement of core consolidation by one of our competitors has positively impacted our core payment and complementary solutions sales pipelines. We expect our historical success rates within this base of clients to continue and most likely accelerate based on what we know today. It's worth noting that given the timing of their core consolidation announcement, our sales success in Q2 was minimally impacted by the news. It had much more to do with our ability to continue demonstrating innovation and service differentiation in the market, not just relative to that competitor, but across the competitive landscape. Third, we continue to win in a consolidating market. We have outpaced our competitors for many years in core market share growth even as the overall number of financial institutions has declined. Over the past 8 years, our core market share among banks has increased by 17%, while our credit union market share has expanded by 40%. And among institutions with more than $1 billion in assets, our market share has risen by 32% for banks and 12% for credit unions over that same time period. This growth occurred despite an average overall market contraction of 3% for both banks and credit unions over the past 8 years. Our market share and asset size growth can be attributed in part to our bank and credit union clients continuing -- continued growth through M&A, acquiring both Jack Henry and non-Jack Henry institutions as well as our success in the past few years in winning mergers, winning the core merger business when a Jack Henry institution is acquired. Additionally, we have relationships with more than 80% of the financial institutions in the U.S. across our core complementary and payment segments. So in most consolidation events, we are already doing business with the acquiring institution, giving us a strong advantage in increasing the likelihood that the combined entity remains on some or most Jack Henry technology. Now for more detail on the overall business, starting with some recognition for the team. We are very proud -- I'm sorry. We placed -- the Jack Henry was recently named one of America's Most Loved Workplaces, ranking 12 out of 100 companies. We also earned spots on the Forbes list of Best Companies in America, Computer World's ranking of Best Places to Work in IT and Newsweek's list of most Responsible Companies. These honors reaffirm our unwavering people-first commitment to our associates. Turning to the significant progress we are making on key innovative solutions. We are extremely pleased with the strong reaction to our new cloud-native Tap2Local merchant acquiring solution. Tap2Local is offered exclusively through banks and credit unions, giving the FI a powerful way to win back deposits from small- and medium-sized businesses that have shifted their card acceptance activities to other providers. Built in partnership with Moov, Tap2Local delivers differentiated capabilities for SMBs, including easy enrollment, tap to pay on both iOS and Android devices without additional hardware and continuous account reconciliation to the accounting platform of their choice. We are currently rolling the solution out in waves to all of our Banno clients. We took 300 clients live in November and December and just rolled out another 100 clients last week. We will continue to add 100 to 150 per month and expect to have some nice data points to share on the May earnings call. We're also seeing strong early success with Jack Henry Rapid Transfers, which allows both SMBs and consumers to quickly move funds between external accounts, eligible cards and digital wallets to manage day-to-day transactions and personal finances. We are the first provider to bring this unique capability to community banks and credit unions. This offering will help our clients grow deposits and attract younger digital native generations like Gen Z. Rapid Transfers is now live with 75 clients with another 180 in various stages of onboarding. We will also share more data on Rapid Transfers on the May earnings call. We are very excited about the development and execution of our stablecoin strategy. As I mentioned on our last earnings call, we leveraged the Jack Henry platform to complete our proof of concept in 2 weeks. We are now in beta testing with multiple financial institutions to send and receive USDC. In addition, we are evaluating over 20 stablecoin infrastructure, compliance and payment fintechs to ensure we have best-of-breed partners for this critical initiative. Another important strategy I want to highlight is our focus on embedded payments and Banking-as-a-Service capabilities. Our integration of Victor Technologies, which we acquired on September 30, is progressing extremely well. As a reminder, Victor's modern innovative platform with direct-to-core connectivity enables financial institutions to embed payment capabilities into third-party nonbank brands such as fintechs and commercial customers. Victor was already integrated with our SilverLake core banking system and Jack Henry PayCenter prior to the acquisition. We are now extending its capabilities to serve our Symitar credit union clients and integrate directly with the Jack Henry platform. We also plan to leverage Victor's modern APIs to complement our treasury management offering. Many corporations are seeking no-touch processing and virtual accounts to streamline accounting and reconciliation. This creates an opportunity for financial institutions to deliver in embedded payments to their corporate customers, giving them more options for seamlessly integrating payments into their business processes. We already had a sales team in place focused on selling embedded payments to financial institutions. To build upon that momentum, we have added a team that will work directly with fintechs to bring new opportunities to our clients. This expansion supports our broader strategy to help financial institutions compete and grow revenue. All of these innovative solutions are made possible by our technology modernization strategy and public cloud-native API-first Jack Henry platform. We have developed 22 components on the platform and we'll have multiple clients testing our new cloud-native deposit-only core functionality in the second quarter of this calendar year. I will now provide a few updates on specific products. In our core segment, I talked earlier about our 22 competitive wins in Q2. We also secured 10 on-premise to private cloud contracts and 5 of those were with institutions that had more than $1 billion in assets. In the first 6 months of this fiscal year, 7 of our private cloud contracts were with clients holding over $1 billion in assets compared with just 2 at this time last year. This is important because we earn an average of approximately 2x more revenue from clients in the private cloud than those operating on-premise. Today, 78% of our core clients are operating in the private cloud. In our Payments segment, we continue to experience outstanding growth in our faster payment solutions. Over the past year, the number of financial institutions using Zelle has grown by 22%, The Clearing House's RTP network by 26% and FedNow by 32%. In Q2, payment transaction volume through these channels increased by 49% over the prior year same quarter. In our Complementary segment, we signed a total of 48 new Financial Crimes Defender and Faster Payment module contracts in the quarter. As of December 31, we had 164 financial crimes installations completed and another 64 in various stages of implementation. We also have 141 faster payment modules installed and 227 in various stages of implementation. We had a very strong sales quarter with our Banno digital platform. For the quarter, we signed 84 clients to our Banno platform with several large competitive takeaways. We currently have 1,037 Banno retail clients and 435 live with Banno Business. We now serve 15.2 million registered users on the Banno platform, up 15% from a year ago. A couple of additional items before I wrap up. Some of you may have seen Cornerstone's annual survey of bank and credit union executives published last week. According to the study, 84% of banks and 83% of credit unions expect to increase their technology spending in 2026. That's up from 73% of banks and 79% of credit unions a year ago. We are currently conducting our annual Jack Henry strategy benchmark study with our clients, and we'll share those results on our May earnings call. We were honored to celebrate the 40th anniversary of our IPO by ringing the NASDAQ opening bell on November 21. To put that milestone into perspective, Jack Henry is one of approximately 200 companies out of the 3,400 on NASDAQ that has remained public for 4 decades. This long-standing stability is the perfect lead into another major milestone this year as we celebrate the 50th anniversary of Jack Henry's founding with associates, clients and investors. In closing, we are extremely pleased with our first half performance and remain very optimistic about the rest of our fiscal year based on the strong demand environment, our robust sales pipeline and our exceptional competitive win rate. We will continue to focus on our key differentiators of success, culture, service, innovation, strategy and execution. All of these position us extremely well for the future. With that, I'll turn it over to Mimi for more detail on our financials. Mimi Carsley: Thank you, Greg, and good morning, everyone. I would like to begin by thanking our associates who remain focused on serving our financial institution clients. The result is another quarter of solid revenue and earnings growth and continued momentum for a healthy fiscal year. I'll begin with our robust second quarter results, then conclude with our updated fiscal '26 guidance. Second quarter and fiscal year-to-date GAAP revenue increased 8%. Non-GAAP revenue increased 7% for the quarter and 8% for the year, a continuation of consistently solid performance. Quarterly non-GAAP revenue growth was negatively impacted by the shift of our Connect client conference into Q1 from Q2. Without this timing shift, quarterly non-GAAP revenue growth would have been a more pronounced 8%. Second quarter deconversion revenue of approximately $6 million, which we previously announced, was up approximately $6 million for the quarter, reflecting a steady pace of M&A activity among financial institutions. It should be noted that the dollar amount of deconversion revenue has little correlation with the number of transactions or annual revenue impact. We continue to see industry consolidation as largely neutral to slightly positive for our business. Now let's look more closely at the details. GAAP services and support revenue increased 7% for the quarter, while non-GAAP increased 6%. Services and support growth during the quarter was primarily driven by strength in data processing and hosting revenue for both private and public cloud. Private and public cloud offerings continue to drive strong growth. Cloud revenue increased 8% in the quarter. This reoccurring revenue contributor is 33% of our total revenue. Shifting to processing revenue, which is 44% of total revenue and another strategic component of our long-term growth model. We saw robust performance with 9% GAAP and 8% non-GAAP growth for the quarter. Consistent with recent results, quarterly drivers include increased digital, card and faster payment processing revenue. Completing commentary on revenue, I would highlight total reoccurring revenue exceeded 92%. Next, moving to expenses, beginning with cost of revenue, which increased a modest 5% on a GAAP and non-GAAP basis for the quarter. Drivers for the quarter included higher direct costs consistent with growth in lines of revenue, higher personnel costs, partly offset by lower benefits costs and increased amortization of intangible assets, which have been consistent throughout the first half of the year. For modeling purposes, amortization of acquisition-related intangibles was $6 million for the quarter. Next, R&D expense increased 3% on a GAAP and 2% on a non-GAAP basis for the quarter. The quarter of minimal increase was primarily due to tempered net personnel costs, which has also been consistent year-to-date. Ending with SG&A expense for the quarter on a GAAP basis, it decreased 13% and a decrease of 10% on a non-GAAP basis. Results reflect the timing of our client conference moving into Q1 in conjunction with our continued focus on managing costs. Aided by our consistent revenue growth, we remain focused on generating annual compounding margin expansion. Q2 delivered 355 basis point increase in non-GAAP margin to 25%. This contributed to year-to-date non-GAAP margin improvement of 291 basis points and a non-GAAP margin of 26%. Non-GAAP margin benefited in the quarter and year-to-date from inherent leverage in our business model, strategic cost management and leveraging existing workforce as we continue to focus on enterprise process improvement and AI utilization and further aided by lower self-insured medical costs, which we anticipate to be nonsustainable. We are focusing on a normalized benefit growth trajectory in the second half of the year, which is expected to noticeably impact results. These strong quarterly results produced a fully diluted GAAP earnings per share of $1.72, up 29%. For the first half of the fiscal year, GAAP earnings per share was $3.70, an increase of 24%. Reviewing the 3 operating segments, we see positive performance across the board. Core segment non-GAAP revenue increased 7% for the quarter with operating margin increasing 5 basis points. Payments segment quarterly non-GAAP revenue increased 6%. The segment again had outstanding non-GAAP operating margin growth with quarterly results of 200 basis points. Revenue growth was due to the resilience in our card-related services, consistent growth in the EPS business and continuing a large percent growth from faster payments, albeit on a smaller dollar base. Finally, Complementary segment quarterly non-GAAP revenue growth increased an impressive 9% with healthy 58 basis points of non-GAAP margin expansion. Quarterly revenue growth continued to reflect digital solution demand and beneficial product mix and sales sourced from both new core wins, existing core customers and noncore financial institutions. Now a review of cash flow and capital allocation. Q2 operating cash flow was $153 million, a $63 million increase over the prior fiscal year Q2. Quarterly free cash flow of $103 million delivered a $74 million increase over the prior fiscal year second quarter. Our consistent dedication to value creation resulted in a trailing 12-month non-GAAP return on invested capital of 23% compared to 19% in the second quarter of prior year. We're very proud of the durability of this metric and how it reflects our high-quality allocation of capital for our shareholders. Additionally, I would highlight the following significant capital decision, $125 million in share repurchases, $84 million in dividends paid through the end of the calendar year 2025 plus the asset acquisition of Victor's Technology. The average purchase price of shares repurchased was $157. We ended the quarter with minimal amount of debt, consistent with our normal course revolver line usage, but expect to exit the year debt-free, barring acquisitions or other opportunities. I will now discuss our second consecutive increase to full year guidance. As you're aware, yesterday's press release included updated increases to fiscal 2026 full year GAAP guidance. Deconversion guidance will continue to follow the conservative methodology introduced in fiscal '24. Fiscal '26 deconversion revenue guidance has been increased to $28 million. Aligned with our guidance methodology, we will update the outlook as we confirm more activity throughout the year. Full year GAAP revenue growth guidance increased to a range of 5.6% to 6.3%. For emphasis, GAAP revenue remains understated due to the conservative deconversion revenue guidance. Based on our strong year-to-date results, we have increased and tightened the range of non-GAAP annual revenue growth guidance, resulting in a new outlook of 6.4% to 7.1%. The second half of the fiscal year will see relatively lower non-GAAP revenue growth compared to the first half. Drivers include projected cloud revenue showing continued strength, offset by anticipated slower momentum in onetime revenue and card. Expenses during the second half are expected to reflect the relatively higher pressure from medical cost benefits returning to historical levels, cloud migration infrastructure expense and commissions. Our expectations on the second half revenue are consistent with our current analyst consensus. As a reminder, fiscal '26 and the first quarter of fiscal '27, Victor acquisition-related financial impacts will be excluded as part of non-GAAP reporting. Based on the above revenue growth and our resilient financial model, we expect to gain -- again, generate sustainable accretive sources of margin. We're increasing full year guidance for non-GAAP margin expansion to a range of 50 to 75 basis points. Margins are projected to contract in the back half of the year due to the benefits cost returning to normalized levels and the timing of workforce expense increases. As a reminder, we see fluctuations in quarterly results relating to software usage license components along with the timing of implementation. Therefore, the correct performance indicator of our business is consistently strong fiscal year financial results. All of the presented results and guidance metrics are indicative that our business operations remains healthy and sound with near-term growth [ process ] opportunities across all 3 operating segments. The full year GAAP tax rate estimate for fiscal '26 is 23.25%. The above increased guidance metrics results in a stronger full year outlook for GAAP EPS of $6.61 to $6.72 per share, growth of 6% to 8%. As a reminder, even updated conservative deconversion revenue guidance likely understates GAAP EPS growth. Full year free cash flow conversion outlook is for 90% to 100% for fiscal '26, matching our expected range target, but with a bias to the higher end of the range. Concluding, Q2 results reflect another outstanding performance from our associates, leading to increased guidance. We're pleased by the continued performance momentum and remain positive on the financial year outlook. Demand for our solutions aligned with continued technology spend by our clients and prospects will drive superior shareholder value. We appreciate the contributions of our dedicated associates that have produced these superior results and our investors for their ongoing confidence. Chris, will you please open the line for questions? Operator: [Operator Instructions] And today's first question comes from Rayna Kumar with Oppenheimer. Rayna Kumar: Good results here. It sounds like the second quarter sales results were very strong. And I'm just wondering, based off of what you're seeing, do you expect 3Q sales results to come in better? And are you starting to see the impact from the core consolidation news from one of your competitors at this point? Gregory Adelson: Yes, Rayna, thanks for the comments. Yes, a couple of things. So I can't comment on whether Q3 will be better. Q3 is starting off very well. I don't know where we're going to end up at this point in time. As I mentioned, the Q2 results, which were significant, really had very little impact on the announcement just because all those deals were kind of in the timing of expectation to be done and we're already in motion. As you know, a lot of these core deals can take up to a year or longer to actually secure. I will tell you the pipeline is growing, not just in core opportunities, but across all of our complementary and payment products as well. So we're continuing to see some nice uptick there. And so I'll be able to report more definitively, obviously, at the end of the quarter, but we are seeing some nice uptick in the pipelines and in the opportunities with some larger opportunities as well. Rayna Kumar: That's helpful. And just staying on the competitive environment, can you talk a little bit about what you're seeing out there in terms of pricing for core systems and ancillary services? Any changes you're seeing in pricing? Gregory Adelson: No, not really. I think it's been very consistent to what it's been over the last couple of years. So I wouldn't say anything has been significantly changed as a byproduct of the announcement or what we have been seeing within the rest of the competition over the last couple of years, pretty consistent. And the fact that we won 22 of them in the quarter is a pretty good indication because we're never the lowest cost provider. So I think that's a pretty strong statement as well. Operator: And the next question is from Vasu Govil with KBW. Vasundhara Govil: Congratulations on a really solid print here. Greg, maybe just the first one. There's been a lot of investor focus on how AI could reshape software economics across industries. And we've seen that concern reflected in pretty meaningful stock moves in the last few days and weeks. So maybe you could talk about how you think about AI's impact on your business model over the long term and where you see it as an opportunity versus a risk. Gregory Adelson: Yes. I'm really glad you asked that question because of what happened yesterday. So yes, so a couple of things. One, from a standpoint of affecting companies, not just Jack Henry, but others in our space, I think it's really a misinformation because when you think about what AI does in the development of technology and the development of building whether that be a core system or other very complex solutions that we support in this industry, it's not just as simple as doing things faster. It's way more complicated than that. It creates some concerns for maybe some of the other areas where people are doing seat licenses and other stuff, so some of the other larger enterprise-wide solution sets. But as you know, we don't do seat licenses here, so we don't have that challenge. Building the technology and restructuring technology is use cases that we can, whether that's taking code and moving it or things along that line. But it's not as straightforward as it might be in some other industries. The other component that I'll say is that we at Jack Henry have been spending a lot of time in using AI, both in the back office and in our product set, all of our new platform products do contain some form of AI. And then a lot of the things that we're doing to control our headcount costs to do improvements and things along that line are all byproducts of AI. So from our standpoint, and I think, honestly, from an industry standpoint, it's a much different perspective than what I believe that is being kind of played out there in the space, specifically with some other enterprise-wide solution sets. Vasundhara Govil: Great. And then I know you touched on this a little bit before, but just bank M&A, that's continuing at an accelerated pace, including some deal announcements involving some of your larger clients recently. So just curious if you're still feeling good that bank M&A will still be a net neutral to maybe even a positive as we move forward from here? And that -- the convert/merger activity will sort of increase and will offset any deconversion revenue. Just curious on your latest thoughts there. Gregory Adelson: Yes, absolutely. I mean we've already seen it. So as I kind of mentioned a little bit in my opening remarks, I mean, not only have we seen significant market share growth during this last 8 years where there's been 3% decline overall. We're seeing it across opportunities today, even in one very large one that was announced a year ago or close to a year ago, then we're having opportunities for other products within that set. And in some cases, these other products can be even more valuable than the core itself. So we are very bullish on what we're doing, how we're doing it and the opportunities that continue to come our way even when an acquisition of one of our accounts has taken place. We're right in there, in some cases, winning the overall core deal prior to the conversion, in other cases, having conversations post as we talk about complementary payment and potentially our digital core products as part of their long-term strategy. Operator: The next question is from Jason Kupferberg with Wells Fargo. Jason Kupferberg: I wanted to start on the revenue side. I was curious which segments exceeded expectations perhaps in the quarter, I mean, versus our model, there was some nice upside on the complementary side. So would love to hear about product drivers there. And then if you can just comment on how we should think about second half growth rates by segment and maybe hone in on the payments piece a little bit. I think that's maybe tracking a little bit below the medium-term guide halfway through the year. So should we expect any acceleration there? Mimi Carsley: Jason, I would say, first off, we continue to be pleased by across-the-board performance across all 3 segments, both quarter and year-to-date. Let's roll through each one of them. I would say most of the performance that we've seen above and beyond our expectations in the first half, you saw a decent card performance relative to the more modest expectations we had going into the year. We do think that the back half will be a little bit more challenging relative to the first half in payments. So even though that is a touch below historical, our growth algorithm expectations, that segment is doing really well. And we have some strong resuscitation of like our bill payments business. We've talked about the contribution from our faster payments even on a smaller dollar revenue, but great growth rates and healthiness in card. But we do expect that to slow a little bit in the back half just as a bit of -- you have both weather at the beginning of the calendar year, but then just it's the natural seasonality of as you climb into the back half, it's just getting a little bit higher and you have some comps from a grow-over perspective. Complementary is doing great. We continue to see success in the newer products, things like Financial Crimes Defender, our treasury management products, our digital products, all being continued strong drivers, and we would expect that to continue. And then in core, core has been great the last couple of years, in fact, even stronger growing than the growth algorithm. Part of that is based on the success that Greg talked about, the multiyear success from new core wins and the organic growth of our clients and just that continued shift from on-premise to private cloud. This quarter, we also saw a little bit of the convert merge benefit and other onetime that I would say drove up some of the core revenue that we don't necessarily to expect in the same pace in the back half. Jason Kupferberg: Okay. That's all good color. And maybe I just want to ask a follow-up on margins. I know you guys called out the lower medical insurance claims costs. Can you just quantify that piece? I mean the margin beat was huge, for lack of a better word, versus consensus. I know you guys don't guide it for the quarter, but just trying to get a sense of how big that benefit was? And is that something that reverses out in the second half? Or is that a full year -- how much of a full year tailwind is that? Mimi Carsley: Well, Jason, I appreciate you acknowledging the importance of full year versus quarterly guide. I continue to encourage everyone to look at our performance on the consistent annual basis, not the quarterly. Sometimes you just have kind of quarters that either from a year-over-year perspective or a cohort perspective or conference timing perspective just may create a picture that is less than consistent with kind of the full year. But if we look at margins on the full year, increasing our full year guide from the 30% to 50% to now the 50% to 70% is indicative of our belief of just delivering in totality. It was very front-end heavy. Part of that is some cost savings. Part of that is some cost timing. So some of the lower-than-expected benefits costs related to our self-insured medical plan is a savings, but the savings that we don't necessarily expect to continue in the second half. Other things, we just naturally, as part of our plan, we expect higher to be in the second half than the first half. So if I think about just the pace of some of the commissions, as I think about some of the infrastructure costs as we move more migration loads and planning for our data center longer-term initiatives, some of that spend is higher in the second half than the first half. So yes, we're pleased by the incredible performance and margin in the first half. But more so, we're really proud of the 3-year compounding margins that we've been able to deliver and our ability to increase the guide for the full year. Operator: Our next question is from Will Nance with Goldman Sachs. William Nance: Nice results. I wanted to circle back to the question on AI. And I was wondering if you could put more of a positive spin on the AI theme for this space. I think the core processing space is kind of known for having fairly outdated code bases, a lot of COBOL around, not a lot of programmers who can actually maintain it. And AI is one of those things that could actually accelerate the modernization of the code bases, which has been a process that you guys have been on for a long time now. So maybe can you talk about that in the context of your next-gen platform and the journey that you've been on for the last couple of years? And how do you see AI as an accelerant to that strategy and something that could perhaps even improve the competitive positioning of what historically has been thought of as a good industry with low switching costs, but a lot of software that may be in need of modernization. Gregory Adelson: Yes. So good question. I appreciate the follow-up. So I mean, obviously, Will, we've been involved with AI for many years as part of this, not only what we're building with our new platform, but what we've been doing on the back end to move some of our foundational cores and foundational code over to other ways of doing things. And we've been able to do it faster, but also with less people. When you look at the number of initiatives that we have going on with some significant technology innovation and still look at our headcount growing at less than 1% over the last several years during that time frame, that's all apparent because it's being done with -- with utilization of AI and other tools. So that's been a big part of our strategy for a long time and continues to be. We have some of the top-notch talent in this industry that we brought in that are helping push that across the entire organization, not just in certain aspects of our business. The other thing is what I was referring to earlier from the question from -- I believe it was either Rayna or Vasu, but around the complexity of building out cores, it's not just the ability to move foundational core stuff to something else. And by the way, it's taken us almost 5 years to get where we are. So if you haven't started, you're a little behind. But from where we are today and the work that we've done, when you look at a lot of the international cores that have tried to come into the United States and haven't been very successful, it's because of the level of complexity that you need to build and not just the core itself because, again, you can build some core -- headless core that has components on it, but it's the full integration and it's a full suite of connections to the payment networks and everything else that goes with that, that really makes it complex. And that isn't just done with AI. Some of that's done with a lot of hard work and people. And like our team likes to say, it's dirt digging. And so that stuff is where the complexity really makes it more difficult. So I think what we have done, where we have gone and been able to utilize AI as part of our overall strategy is what differentiates us not just from innovation, but from speed of innovation. Mimi Carsley: And if I could add on to that, Greg, I would say that because of the investment we've made and started making over 5 years ago of moving our infrastructure to the public cloud allows us to take advantage of the DevOps environment. So if we think about something like Banno and the number of new feature releases we're able to do on that and now similarly, with the Jack Henry platform being API-first digital cloud native, we'll be able to increase that velocity of solution enhancements for our clients that others cannot because they're still on that journey to public cloud. Gregory Adelson: Yes. And just one other point just because I know this is a big topic for probably everybody is that, as they say, no data, no AI, right? So the things that we have been doing and focused on, so not just what Mimi is referring to with various product sets, but what we've been focused on with our data has allowed us to take more advantage of AI as well. And again, in our industry, there's a lot of complexity and a lot of differentiation on how pricing and everything else is orchestrated versus what I think is being thrown in to these other enterprise providers where they're selling seat licenses, and we're pricing by transaction or active user or asset size or whatever it is. It's a whole different model. William Nance: That's great. I appreciate the really thorough answer. And just if I could switch gears and ask about the payment side. I was wondering if you could talk around competitive dynamics on payments and card. There's just been, I think, a resurgence in chatter on new entrants in that space and the community bank space maybe evaluating beyond the kind of traditional competitive set. Just wondering if you could talk about anything that you've seen recently. Gregory Adelson: Yes. I don't -- I know -- I mean, I mean, there's a couple of them. I'll call out -- there's a couple of names that have presented themselves in the space, but they're really -- they're more, I would say, compartmentalized offerings. They're not full suite debit and credit offers, most of the ones that I think you're referring to are more on the commercial card side and I think have limited availability on the debit side as of today. And so as you know, that is the stronger part of our particular card processing today, even though we've had a lot more success on credit deals lately than in years past because of some changes we've made. But I will tell you that one of the reasons why I wanted to call out the number of what we call trifecta wins around here is because we are seeing more and more opportunities in this space for -- because of the solution set that we've built to allow us to sell digital and card as part of a core deal or sell digital and card individually outside of a core deal. And that's been a big part of our strategy and will continue to be. But I haven't seen anybody that's come into the market that I would say has disrupted the market. There's a lot of names that are saying they're doing things, but the level of success into our space, we just haven't seen it yet. Operator: The next question is from Darrin Peller with Wolfe Research. Darrin Peller: Nice quarter. I just wanted to touch again on the core wins. You highlighted another strong quarter at 22. I know you had about 11, I think it was this time last year's quarter. So just that includes some of the larger institutions. Maybe just help us understand how we should think about the near-term versus long-term revenue cadence around some of those. And I know it takes time to really come into the run rate. But just as importantly, I mean, what are you seeing that's giving you the right to win in these banks maybe in a slightly accelerated rate as well as the larger as you move upmarket and you've been having more and more success. So maybe just help us understand what's going well there. And if this is a better run rate that we can see in terms of cores, maybe given industry dynamics? Gregory Adelson: Yes. Thanks for the comments. Yes, I mean, you were right. We did 11 last second quarter. As we like to say, same thing with everything else, it's fiscal year results, right? So some quarters are bigger than normal. Q2 and Q4 are typically our largest quarters, our fiscal quarters. That's just the end of the year for the customer, the end of the year for us, just tends to have a lot more activity even though we try to spread it more evenly than that. As I mentioned before, the pipelines are growing fast with a lot of the news that's happened in the space, not just core, but across all of our channels. We're pretty excited about some things that we can't announce yet just because of the timing. But the reality is we're continuing to move the needle in all of those products at a pretty fast pace. What I would say from a core standpoint, though, to answer your question, we're winning really -- and even on some of these deals that were referenced earlier that our customer was purchased, we're in there already talking to them about a variety of products. We're hearing some really positive news on what we are doing differently than our competition. And it really starts with our ability to what I say all the time on these calls. Our culture comes through on those meetings very fast and people that are -- there's a lot of people that want a partner that has a similar culture. I just met with a bank this week that, that was their comment. They said, the first thing we noticed was your culture and alignment in culture. Obviously, our service reputation is 50 years of doing the right thing and doing whatever it takes. The level of innovation that we've built over the last 5 years is not matched by anybody in the industry, and we've said that multiple times. And when people are able to see what we are able to already compete and do with a lot of these innovative things, not just tap to local and rapid transfers, but stablecoin, things that we've done with the platform, things along that line, it just shows that level if you want to grow your institution and you want to make sure that you've got deposits and lending capabilities or building efficiency, which are the 3 most talked about things that they want to do. Jack Henry has been the provider and is the provider that can make that happen. And then we don't change our strategy. We've been very focused on our strategy, and our execution is second to none. So when you take those 5 words that I say all the time, honestly, those are the reasons why we win, and it comes through with the products and the level of innovation we've shown. Darrin Peller: That's helpful. And then I just want to follow up one more time on the way we think about guidance for this year and even an early thought in terms of what's trending for next year, this fiscal year, just given you've been inching up your guide now. You're obviously having success with the SMB initiatives that's starting to early, but show now, show results in numbers. And I think that's a key factor to getting back to that 7% to 8% range. So I mean, is your confidence growing into fiscal '27 even that we can get back to that 7% to 8% again based on everything you're seeing in the run rate and some of your results from investments? Mimi Carsley: Darrin, I love your long-term view there. Just a little too premature from our perspective. We are heads down focused on executing in '26. We're starting to have budgetary conversations and strategy conversations about '27. But I think it's sticking to the fundamentals, really. It's about the execution. It's about every day coming in and hitting the singles and just continuing to execute. So yes, we're super excited about the onboarding progress from our SMB offerings. We're super excited about the feedback we're getting from customers that are validating the direction that we've talked about. But I would say for this year, it's about continuing to drive on the implementations from the sales pipeline of closures, and it's about card and payments and it's about continuing traction on the complementary side on some of our newer products. As we look into '27, I think certainly, we will be past some of those potholes that we've talked about previously that the deconversion created and our growth rate on some of these new wins of sizable institutions that Greg mentioned will be coming into the fold from an implementation perspective, and that is super exciting. Gregory Adelson: One other point. We -- I mentioned earlier on that we had made a lot of strides in changing how we go about our renewal processes and things along that line. And that -- those changes are starting to pay significant dividends for us. And so it's been a big part of the strategy and focal point, but also another reason why we're very bullish on where we're going. Operator: Our next question is from Madison Suhr with Raymond James. Madison Suhr: I also wanted to start on the SMB strategy with Rapid Transfer and Tap2Local. I guess more broadly, what are you seeing in terms of adoption for those products? What's the longer-term opportunity look like? And maybe any color on how the competitive set may differ from a traditional Jack Henry competitor? Gregory Adelson: Yes, Madison, thanks for the question. I have some data, but I would -- as I said, I'd prefer to really talk more about it in May when I have more data months because it's still very early. As I said, we rolled out 300 customers in 2 months, and we just rolled out another 100. So as people are starting to ramp up. I'll give you one anecdote, though, there was a -- we had a client that wasn't sure they wanted to keep it on, and they called us as soon as it was turned on. And 2 hours later, they asked us to turn it off. And we said, did you know that you already had 30 people sign up for it? And they said, no. And they said, okay, keep it on. So my point is, is that there's that type of opportunity that's forming. And we're just now really working with them on the marketing. So there's a whole aspect of this that we think will have a lot better data points. To answer your question on the level of differentiation, though, it's significant to what a Stripe or Square is doing in the space, and I'll make it very short. First of all, Stripe and Square are taking deposits away from our institutions, and they're not getting them back because then they're lending to them or they're doing other things. And so once those deposits go, they're gone. The other part is that the level of sophistication that we're able to give these sole proprietors or very small SMBs with not only instant account approval where we're approving about 75% of everybody instantaneously in the market. That's a 2- to 3-day process, if not longer. And then we're able to do both iOS and Android devices for Tap2Pay. Very few people in the United States are doing that today. Stripe and Square are, but very few others. And then -- but the biggest one is our patent pending account reconciliation component where the actual SMB can upload all their transactions onto their device and hit a button and upload it into QuickBooks or Xero or any of their accounting package choices instantaneously. Those are all things that can happen today in the market. Mimi Carsley: I would add on to that, the knowledge we have from the core systems really enable us to have a frictionless experience from the get-go of sign-on all the way to the account reconciliation that Greg mentioned. So we really believe in this case, it's a fragmented industry, and we believe that small businesses should be multi-acquirer the same way a sophisticated treasury customer has more than one bank account. It's just smart business. We think that small and sole entrepreneurs will be multi-acquiring. Madison Suhr: Okay, that's very helpful... Gregory Adelson: Yes, Madison, one other point, we have a very long road map for SMB. This is not just a one-hit wonder with Tap2Local and Rapid Transfers. We have a lot of things we're going to be rolling out over the next 18 months, and some of them are already done. We're just waiting to put them into play. Madison Suhr: Certainly. It seems like an interesting opportunity for you guys. Just a brief follow-up here on capital allocation. I mean maybe just talk to the priorities right now, appetite for buybacks and just anything to call out in terms of M&A pipeline. Mimi Carsley: Of course. First and foremost, we're super excited to get back to the very strong free cash flow and a very high free cash flow conversion of 90% to 100% to be on the other side of the tax legislation and have certainty and to have a year where a pretty significant contribution of roughly, call it, $100 million from clearing up that tax uncertainty and kind of clarifying from a go-forward perspective. From a capital allocation, our priorities remain consistent. We have a long-standing dividend policy that we are committed to. We are always looking at M&A prospects and opportunities, although we have less gaps strategically, we're always looking for things that may be an accelerant or enhancement to solutions and our ways of meeting customer needs. We continue to invest significantly in internal development and moving our strategies and innovations forward. And then share repurchases. We were excited by the $125 million of shares we purchased thus far year-to-date. And we said previously, we feel comfortable if that went to [ $200 million ] or more this year. So it sort of depends on purchase price and what M&A opportunities come into the marketplace, but we will be dynamic capital allocators, but continue with our conservative balance sheet. Operator: And the next question today comes from Kartik Mehta with Northcoast Research. Kartik Mehta: Greg, one of the strategies you implemented was going about pricing renewals differently. And I'm wondering if that's gained traction? And are you seeing it manifest in the financial results yet? Or will that take a little bit more time? Gregory Adelson: Yes. Great question. I appreciate you bringing that up. Yes, we are starting to see it in our financial results and on our approach for the percentages of new versus renewals in our wins and our overall numbers for the team. So congrats to the entire sales team for embracing what we've put in place because it was a change, and it's working very well. So we are really -- the percentage of new versus renewals is significant as compared to last year, which is obviously great for a lot of reasons. But the other part is that it's allowing us to hold much more steady in the market. One of the questions early on was pricing pressures. And we've been negotiating more at a position of strength than I think we have in years past. Kartik Mehta: And then just a follow-up, Greg. Early on, you talked about bank spending and maybe a couple of the reports that have come out that say bank spending should continue or is expected to continue in 2026. Is there a difference, at least as you're talking to clients from an asset size and what they want to spend? And the reason I'm asking is there's so much talk about consolidation and maybe consolidation happening with smaller banks, smaller asset size banks. So I'm wondering if there's any hesitation for those banks to spend money or if you're seeing any kind of bifurcation? Gregory Adelson: Yes. Just to be candid, you do see it sometimes, but I think you can also probably see them on the market the next week or the next quarter or whatever because you really can, Kartik, determine when technology isn't being bought, [ Dave ] coined this line a long time ago, and we like to use it, which is everything that needs to happen in this space, if you want to grow, technology can do for you. And so from our standpoint, we are very focused on making sure that's why the level of innovation. And so the short answer is yes. There are some institutions that are going to spend way more than the 10% or 6% to 10% that's been forecasted based on whatever their needs are or their desires. And there's others that don't. And sometimes they'll take a better financial deal and less impressive technology, and you tend to see those are the ones that are on the market down the road. Operator: The next question is from Cris Kennedy with William Blair. Cristopher Kennedy: Greg, just wanted to follow up on the trifecta wins that you talked about. What's driving that? Are financial institutions consolidating vendors? Is it from changes in your go-to-market strategy? Are you moving upmarket? Any more color would be great. Gregory Adelson: Yes, it's a great question. It's a combination of a few things. One is, as we've been mentioning, we have done a much better job of building out the Banno solution set to be much more competitive on the business side. We've always had what we think is the best retail application, but the team has done a great job of building that out. So as that has gotten more sophisticated and improved, it's allowed us to not only win more deals, but win larger deals, as you referenced and it has happened as well. Same thing on the card side. We've really improved the commercial aspects of our card platform with some other things that we're working on. And so those 2 things combined have allowed us to get involved in each of those deals. And as I mentioned, 15 of the 22 deals included all 3. But it is by design, and it will continue to be by design as we continue to not only go upmarket, but also as we go after some of these new opportunities in the consolidating base. Cristopher Kennedy: Great. And then just as a follow-up separately, I think you launched a new enterprise account opening platform. Can you just talk about the opportunity with that new solution? Gregory Adelson: Yes, Cris, I will say that we're still in what I would call closed beta or what we call closed beta, still pretty early. There are some feature gaps that I want to get closed before I want to release it out into what we would call generally available. I'll talk more about that in coming months as it becomes more relevant. But it will be a very unique platform where you'll have a single platform for both consumer and commercial with account opening embedded. So it will be something that's very unique in the market, but it still needs a few more things completed before we're ready to talk too broadly about it. Operator: Our next question comes from Dave Koning with Baird. David Koning: Great job. And I guess my question is really on complementary. You've done a really good job. And I think Greg called out that some of the platform consolidation in the space is creating more wins in complementary. And we often think of it driving core. But if it's driving complementary, too, is that faster? Those are a little smaller products. Are those faster to implement? And then secondly, you've had really good growth. You hit a tougher comp. Is that new kind of win rate or the additional complementary work going to allow you to keep growing as fast even though you hit a tougher comp? Gregory Adelson: Well, yes, it's a good insight. I think it depends on a couple of things, Dave. I mean if -- some of these are sold with core deals, some of these are tied to the timing there. There are -- actually, we had several nice independent wins outside of core in digital and financial crimes for this particular quarter. So those typically are 6 to 9 months, maybe less, depending on their sense of urgency and timing in their contracts. But they're definitely sooner than what would be tied to a core deal. One of the things that we are doing and it's starting to be, I won't say, successful, but being interesting to some folks is we're really going to them and talking to them about integrating the digital offering even before the core. And this could also be part of -- or is part of our outside the base strategy to drive some opportunities sooner than waiting on core. So we're working through some of the logistical parts of that. But as that starts to take hold, I think that will create even more of an opportunity for us to do what we've really envisioned even on our core platform, right, doing things in a more modular componentized approach and doing it incrementally than doing it all at once. And so we'll kind of give you more context on that as it happens. But absolutely by design, absolutely by continued improvements in those products. Operator: The next question is from James Faucette with Morgan Stanley. James Faucette: A couple of questions for me. First, obviously, I think everybody understands and very excited about the tailwinds your business is likely to see from some competitors' core platform consolidation. How do you think about like what your execution requirements are? Kind of what keeps you up at night in terms of things that could trip you up, whether it be timing or magnitude? Or I'm just trying to get from you the checklist of things you need to do to potentially take advantage of the opportunity. Gregory Adelson: Yes. So James, I mean, it's candidly #1 priority here right now based on kind of, I won't say once in a lifetime, but a very few times in a lifetime opportunity where you see this. And so between the sales team, the operations teams, the finance teams, the marketing teams, they're all very much aligned, working regularly in conjunction with our go-to-market stuff that we've done. I don't want to share openly the opportunities that we have in front of us at this point. But as I mentioned, there are significant numbers that are already in the pipeline, not just ones that are "out there," but already in our current pipeline for all products, not just core. And then there's, again, work that we've done on the operational side to ensure that we're ready. As you can imagine, I mean, especially on a core deal, even if we sell the core deal like we did this quarter, it's still going to be another 15, 18 months. So our ability to get ready on the operational side is honestly the easier part. It's more about what we needed to do to gear up on the marketing, sales and finance side. And the teams have done a great job of that. We are humming right now. It's absolutely an awful gear. And so I'm very proud of the team on how fast they reacted in what they did. James Faucette: That's great color there, Greg. And then I wanted to ask about the attach rate and bundling strategy. As you win more competitive core deals, how are complementary attach rates trending at signing and maybe at 12 months post conversion? Just looking for any quantified examples of bundles you're seeing more frequently. Gregory Adelson: Well, the most frequent one is what I called out, which was, again, to us, is the trifecta of card and digital. So that is as frequent. There's always some products that get thrown in that some variation of account opening or the lending platform or whatever. But those 3 in particular, we're still averaging about what we have been. And again, remembering that we're doing some small levels of end of lifing or product rationalization as part of our initiatives. But we're still seeing anywhere from 35 to 50 products typically in a deal as we have in years past. The key is that the more lucrative ones, candidly, are card, digital, financial crimes, things along that line. Operator: The next question comes from Charles Nabhan with Stephens. Charles Nabhan: I noticed that you tightened the outlook for free cash flow conversion from 90% to 100% from 85% to 100%. And I know your bias was towards the higher end of that range last quarter, but curious what led to that increased visibility? And as a follow-up to that, it sounds like there's no shortage of opportunity that you're investing in to pursue. Love any comments on capital expenditure and the level of investment level necessary to pursue that opportunity that you're seeing across your markets. Mimi Carsley: All good questions, Chuck. So yes, we continue to see positive progress on the free cash flow and free cash flow conversion. I think now just having a crisper outlook of understanding all of the puts and takes of the legislative changes. We did have a number of just small asset sales as well, having clarity on those just makes us more confident on the projections for the full year and to have a bias towards the higher end of that range from a free cash flow. In terms of an allocation or an investment, we continue to be hovering around that 14% to 15% of R&D. As Greg mentioned earlier, we've -- in the last 5 years, ex M&A has kept headcount growth less than 1%. So we feel like we're able to make the strategic bets and solution progress while still maintaining a very tight workforce. So that's through our continuous improvement efforts. That's through the deployment of AI. That's through being very strategic on where those headcounts are going and are they fueling strategic initiatives. So we feel pretty good on our ability to continue to accelerate our growth, our progress against our strategic initiatives without needing to step up and increase our spending. Charles Nabhan: Got it. And as a follow-up, I wanted to get your specific comments on the credit union market. And if you're seeing anything different in terms of competitive dynamics, demand trends and just generally how you see that opportunity? Gregory Adelson: Yes. So we're getting a little bit of the -- still residual from the core consolidation from one of the competitors. We've done a lot to increase our solution set on our Symitar platform over the last couple of years. That's starting to pay some dividends. We're winning a good number of the mergers that are happening. So that continues to be a positive. And then the bigger thing that's happening is our ability to penetrate the complementary and payments market with our core solution set. So we are driving a higher penetration rate than we have in years past in the credit union business, both with existing clients and with wins, new competitive wins with, again, taking digital or payments as a -- for instance. Operator: The next question comes from Ken Suchoski with Autonomous Research. Kenneth Suchoski: I'll ask one since it's getting late. But Greg, you talked about not seeing a benefit on the core competitive takeaway side this quarter, but obviously, lots of work happening behind the scenes by Jack Henry. But you mentioned that service differentiation is really driving your success. And one of the competitors has talked about increasing its service levels and reinvesting on the support side. So I'm curious how you think about maintaining your differentiation relative to other providers when it comes to that support and service. Gregory Adelson: Yes. Thank you. I'll kind of say it this way. we have a 50-year head start on how we've been handling service at this company. And it's been in our DNA all the way back to Jack and Jerry and every other leader that's come before me. And I will tell you, we're actually at all-time highs right now as far as how our survey results are and things along that line. And I know there's a motion at really both of our 2 largest competitors to improve service. And I applaud them for that from a standpoint of the industry perspective, but it's hard to move a big ship when you don't have that mindset built in as we do at this company. And so could they have some improvements? Sure. I don't know what that will take. And is that bodies? It's not always bodies. It's usually a mindset. And so when you do whatever it takes and do the right thing like we do here, it just gets embodied into our everyday offering. So I just think it's going to be really difficult to "catch us" and we're sure not going to take off the gas here. So we'll continue to keep that as part of what we think is a huge differentiator and hear it from people that come over to us. Mimi Carsley: Yes. The only point I would add on that is, well, Greg aptly said, we have not seen a tremendous meaningful impact from the consolidation yet in the pipeline because deals take quite some time to walk through and to hammer out. But our track record over the last several years and our increase in market share and our gains against both competitors are indicative of that service that Greg just talked about and of our innovation. So we have a track record. So it's not -- we feel very strongly in this opportunity and our ability to continue to win. And that's backed up by the wins we've been doing from the last number of years. So it's not new that people have wanted to leave competitors, and it's not new that they're coming to Jack Henry. Gregory Adelson: Yes. And I think one just last point since you're on, Ken, is that the 50-plus wins that we've had for multiple years kind of emphasize what Mimi just said. The last part that I want to emphasize is, though it didn't have a significant impact in Q2, as I mentioned before, our pipelines are growing faster because of that news. And so I anticipate that not just this year, but over the next several years, which a lot of these contracts will have several years still remaining, but conversations could be taking place now, where you're going to see not only just the number of opportunities increase, the size of the opportunities increase much to what we've been focused on, as we said, of going upmarket. Operator: And this does conclude today's question-and-answer session. I would now like to turn the conference back over to Vance Sherard for any closing remarks. Vance Sherard: Thank you, Chris. Management will be participating in 8 investor events over the next 2 months, and we look forward to continuing our engagement with the investor community. We also extend our appreciation to all Jack Henry associates for their exceptional commitment and execution, which delivered a strong first half of fiscal 2026. Thank you for joining us today. Chris, please provide the replay number. Operator: Thank you. As a reminder, the replay number for today's call is (855) 669-9658. Again, that is (855) 669-9658 and the access code is 4206506. Today's conference has now concluded. I would like to thank everyone for attending today's presentation, and you may now disconnect your lines.
Gregory McNiff: Good afternoon, everyone, and welcome to the Clearfield Fiscal First Quarter 2026 Conference Call. A brief question and answer session will follow the formal presentation. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Gregory McNiff, Investor Relations. Please go ahead, sir. Thank you. Joining me on today's call are Cheryl P. Beranek, Clearfield's President and CEO, and Daniel R. Herzog, Clearfield's CFO. As a reminder, Clearfield publishes a quarterly shareholder letter which provides an overview of the company's financial results, operational highlights, and future outlook. You can find both the shareholder letter and the earnings release on Clearfield's Investor Relations website. After brief prepared remarks, we will open the floor for a question and answer session. Please note that during this call, management will be making remarks regarding future events and the future financial performance of the company. These remarks constitute forward-looking statements for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking. It is important to also note that the company undertakes no obligation to update such statements except as required by law. The company cautions you to consider risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release, shareholder letter, and on this conference call. The Risk Factors section in Clearfield's most recent Form 10-K filing with the Securities and Exchange Commission and its subsequent filings on Form 10-Q provide a description of these risks. Additionally, as announced on November 12, 2025, Clearfield sold its Nestor cables business. Following the divestiture of Nestor, we are reporting only on the Clearfield segment. Clearfield is reflected as continuing operations with Nestor classified as discontinued operations and assets and liabilities held for sale for 2026 and all prior periods on our financials. With that, I would like to turn the call over to Clearfield's President and CEO, Cheryl P. Beranek. Cheryl? Cheryl P. Beranek: Good afternoon, everyone. Thank you for joining us to discuss Clearfield's results for 2026. I'll begin with an overview of the quarter and our strategic priorities, and then I'll turn the call over to Daniel R. Herzog to review the financial details and outlook. During the quarter, we saw signs of stabilization and an early rebound in community broadband demand, reinforcing confidence in our long-term outlook. Clearfield continues to operate as the leading provider of fiber management solutions for the community broadband market, guided by a disciplined strategy anchored in our three-pillar framework to deliver better broadband and beyond. This framework remains focused on protecting and strengthening our core business, expanding market share, and selectively extending our technology into adjacent markets. Turning to results, first-quarter net sales from continuing operations were $34.3 million, exceeding our guidance range of $30 million to $33 million. That outperformance reflected a favorable seasonal product mix and solid demand across key customer segments. Net loss per share from continuing operations was 2¢. As a reminder, in November, we completed the sale of our Nestor cables business. With this transaction behind us, our focus and portfolio are now fully centered on the Clearfield business and the execution of our core strategy. Following the end of the quarter, we introduced the Nova platform, a modular, high-density fiber system designed to make building and expanding modern networks simpler. The Nova platform takes the cassette-based modular design approach that has long defined our success in broadband, and it extends it into new environments, including AI, data center, and edge compute networks in which we expect our broadband service provider customers to play a key role in future build-out. This product launch represents an important step in the evolution of our Better Broadband and Beyond strategy. As networks continue to grow in size and complexity, customers are looking for solutions that reduce installation time and cost, improve day-to-day operations, and scale efficiently as capacity needs increase. While we expect near-term revenue contribution from Nova to be modest, the platform is strategically important as we focus on early customer adoption and validation. Over time, we expect the Nova platform to support new applications and customer opportunities, particularly as demand for higher-density fiber solutions expands across regional data centers, edge facilities, and enterprise environments. Alongside this product momentum, execution across our core business, our core broadband markets remained steady. Community broadband remains a foundational element of our business, supported by long-standing customer relationships and a portfolio-based approach that emphasizes selling multiple Clearfield solutions for customer deployment. Large regional service providers and MSOs also remain important growth drivers and reflect the flexibility of our platform. In addition, recent acquisition approvals involving large regional customers create a favorable backdrop for continued opportunity. As broadband providers look ahead to their next phase of investment, the BEAD program remains a major area of focus across the industry. We are encouraged by the progress that the NTIA has made in advancing the BEAD program and are pleased with the level of planning and network design activity we are seeing from both current and prospective customers. While we continue to expect BEAD-related revenue contribution in fiscal 2026 to be modest, service providers are actively preparing for deployment. Customers are working through planning, network design, and vendor decisions, and Clearfield is staying closely engaged to ensure we are ready when funding is released. To support this effort, we are taking a structured and proactive approach with expected BEAD recipients, focusing on where customers are in their planning process and how we can best support them as these projects take shape. This allows us to allocate resources thoughtfully and to remain aligned with customers as programs move forward. We believe community broadband providers are likely to move more quickly than tier-one operators once funding approvals occur, which aligns well with Clearfield's focus and customer mix. However, supply chain constraints of US-made optical fiber that is required under the BABA, the Build America, Buy American Act, could restrain near-term deployment. We are working alongside others in the industry to address the issue. Beyond fiscal 2026, we expect BEAD to become a positive contributor, with timing dependent entirely on federal funding releases and supply chain constraints. And with that, I'll turn the call over to Daniel R. Herzog to review our financials and our outlook in more detail. Daniel R. Herzog: Thank you, Cheryl, and good afternoon, everyone. I will now review our first-quarter results beginning with sales. As noted earlier, all financial results for fiscal 2026 and prior periods are presented on a Clearfield continuing operations-only basis. First-quarter net sales from continuing operations were $34.3 million, exceeding our guidance range of $30 million to $33 million and up 16% from $29.7 million in the prior year period. Gross margin was 33.2%, compared to 29.2% in the prior year quarter, driven primarily by improved overhead absorption and better inventory utilization. Operating expenses from continuing operations increased to $13.2 million from $10.7 million year-over-year, reflecting continued investment in technology and customer expansion initiatives. We had an income tax benefit from continuing operations of $1,000 for 2026 compared to an income tax expense from continuing operations of $53,000 for the year-ago quarter. The income tax rate for 2026 was lower than the statutory rate due to the impact of discrete items and a lower level of pretax book loss. Net loss per share from continuing operations was $0.02 in 2026 compared to a loss of $0.02 per share in the comparable period last year. Net loss from discontinued operations for 2026 was $340,000 or $0.02 per basic and diluted share compared to a net loss from discontinued operations for 2025 of $1.6 million or $0.11 per basic and diluted share. We ended the quarter with approximately $157 million in cash, short-term and long-term investments, and no debt, reflecting continued balance sheet strength and disciplined capital management. During the quarter, the company invested $5.2 million to repurchase 179,000 shares. In November 2025, our board of directors increased our share repurchase authorization from $65 million to $85 million, leaving $23.1 million available for additional repurchases as of December 31, 2025. For 2026, we anticipate net sales from continuing operations to be in the range of $32 million to $35 million, operating expenses to be up slightly relative to the first quarter, and net loss per diluted share in the range of $0.02 to $0.10. The earnings per share ranges are based on the number of shares outstanding at the end of the first quarter and do not reflect potential additional share repurchases completed. For the full year fiscal 2026, we are reiterating our guidance for net sales from continuing operations in the range of $160 million to $170 million. We expect growth to be driven by steady demand for fiber connectivity across our community broadband, large regional, and MSO customers, with BEAD-related revenue contribution expected to remain modest during fiscal 2026. We expect operating expenses as a percentage of revenue to remain consistent with fiscal 2025 and earnings per share from continuing operations to be in the range of $0.48 to $0.62. And with that, we will open the call to your questions. Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question will come from Ryan Koontz with Needham and Company. Please go ahead. Matt Cavanagh: Hi, this is Matt Cavanagh on for Ryan Koontz. Thank you for the question. On the Nova product line, it would be great to better understand who the target customer type is for these products and maybe how you're thinking about the revenue opportunity from Nova over the medium to longer term? Thank you. Cheryl P. Beranek: Great. Yeah. Nice to talk to you, Matt. The initial target customer, I think, we'll see is existing community broadband customers who are opening data centers for their enhanced revenue base. So this would be customers like South Dakota Networks or CoLogic, who understand the requirements associated with high density, and they're looking at how they're going to be able to do that. Additionally, as we move into adjacent markets, the products are designed in a different way with the concept of modularity, being able to do the same type of thing that we do with today's cassettes so that every rack unit is optimized for the type of connector or service offering, single mode, multimode, whatever the high speed, ultra-small form factor connector might be. So I think we'll see customers there of a traditional database type environment, but not the big superscale hyperscale markets that will require innovation and an additional product offering that you'll see from us probably in about a year. From a revenue perspective, we don't see a significant revenue contribution in '26. So we do see the Nova platform becoming, over the next two to three years, really the kind of the dominant product offering of the company, and then a lot of what we're doing with Nova will be brought back into community broadband so that we'll have a single cassette and a single platform for optimization of all density requirements throughout our customer base. Matt Cavanagh: Great. Thank you. That sounds really exciting. Cheryl P. Beranek: It is. Thank you. Matt Cavanagh: As a follow-up, you had also mentioned earlier on BEAD, community broadband customers maybe being more likely to move quickly on their projects than their larger counterparts. Could you expand on why this might be the case and how it's affecting Clearfield's outlook for the program over the next several years? Cheryl P. Beranek: Alright. Let's see. We've seen over the years that community broadband, by definition of being smaller, are more nimble players, and they'll be able to optimize their deployments and can switch easier from one opportunity to the other or can pounce onto the money availability and move forward. The larger providers absolutely are going to deliver their BEAD initiatives, but they already have their build plans for the year, and we don't see them moving the application from one point to the next. So we're optimistic that even with some supply chain challenges, our small providers are going to be in a position to be able to get a little bit of a head start. We're tracking there are 319 different broadband service providers who are slated based upon the early tentative awards to be part of the BEAD program. And we are systematically tracking each of those customers based upon our penetration as a customer, where we are at in regard to the sales cycle, and really trying to apply the same type of high sales and customer support that we've done for the last fifteen years to now really put the sauce on thick within BEAD. So we're excited about it, more to come in coming quarters. Matt Cavanagh: Great. Thank you. And just one more, if I may. Is there any way, as you're talking about the potential fiber shortage, to maybe quantify the revenue impact and how that's affecting your fiscal 2026 outlook? Cheryl P. Beranek: Yeah. I think it could vary. It's really difficult to quantify specifically what's going to happen with fiber supply, especially as it relates from a BABA perspective. The current suppliers of BABA-compliant fiber, it's hard there with the bare extruded fiber. They are on lead times of over a year. And that is not consistent with being able to have a good aggressive BEAD program, and I'm sure it is not what the NTIA intended when they said there was enough fiber to go around under the BABA program. And so we, as an industry, are looking at ways by which we can offer waivers or alternative types of means to ensure that we can get a head start. And because of the uncertainty of all of that, it's one of the reasons why there is really no guidance in fiscal year 2026 associated with BEAD revenue. Matt Cavanagh: Great. Thank you, Cheryl. Cheryl P. Beranek: You're welcome. Operator: The next question will come from Timothy Paul Savageaux with Northland Capital Markets. Please go ahead. Timothy Paul Savageaux: Hey. Good afternoon. Got a couple of, I guess, merger-related questions, not so much you, but customers and competitors. So I'd be interested if you had any observations or thoughts on the early impact of both Verizon's combination with Frontier. Clearly, they're guiding CapEx way down as a combined entity, but seeming to keep the fiber build steady. It's not increasing. And, also, anything out of the CommScope, Amphenol merger that might be driving any opportunities for Clearfield? Cheryl P. Beranek: Well, yeah, we're looking at the Frontier merger as a significant opportunity for Clearfield. We have been a key supplier to Frontier. I've been pretty open about that over the years, and Frontier is, as you said, full speed ahead on their program for fiscal year 2026 and not looking to make any changes that are going to interfere with the build season. Verizon has been in strong support of being very visible in saying the reason they acquired Frontier is because of the strength of their fiber network. So as we move forward and have an opportunity to learn more about the procurement process inside of Verizon, which is one of our large tier-one customers, we're looking to just really be able to optimize that. So, we see it as an opportunity and have invested in a broader sales organization by which to support it. In addition to what we've done in the past to do traditional regional sales managers who live and work in the communities in which fiber is deployed, we've added not only a national sales team calling on corporate but a national turf team that calls on the field offices of those national offices to introduce their product line and to continue to help support it. For an existing customer in a new market or for new customers as they get introduced to the modularity of our platform. So if you look at our SG&A investment, and you see the $3 million investment for this quarter, higher than a year-ago quarter, that's where those dollars are going. We're not going to get that new business in our core business until in pillar one or in some of those adjacent without those investments and strategies, but it's really a replication of the strategy that has worked for the last fifteen years just for new customers. As it relates to CommScope and Amphenol, it's really too early. There's still a lot of people figuring out who's going to sign their check and is their job going to change, and who am I reporting to? So from that perspective, I think it's an opportunity for Clearfield as we continue to be full focused and in supporting our customer base. We also have seen CommScope continue to be open for all markets, of course, but they really have done a nice job in the hyperscale space, and we see them focusing on that under the Amphenol umbrella, which, again, I think could provide an opportunity for Clearfield. Timothy Paul Savageaux: Right. And less focused on carrier and perhaps even more so rural carrier markets. Cheryl P. Beranek: Correct. In terms of the results, you saw cable come down pretty sharply. I wondered whether what you expect throughout the balance of the year there maybe in Q2? Looks like you're looking at flattish overall revenue. Any notable trends in terms of the segments driving the Q2 outlook and what do you expect for cable beyond that? Cheryl P. Beranek: Alright. Yeah. Well, I mean, community broadband was significantly up, and it was the driver across the company. And I think everyone will find that to be very refreshing because we saw last year that community broadband was the one that's most severely affected by the delay in the BEAD deployments, not only for the dollars themselves but for the inability to fund and have the time by which to engineer other projects. So I think community broadband will continue to lead our growth into future quarters. Cable was really down from the fourth quarter but consistent with the first quarter of last year. And what we see in the MSO markets because those orders tend to be at a little bit larger scale, is a little bit of lumpiness on a quarter-to-quarter basis. So I'm comfortable that the regional MSO, as I've talked about before, the mid-continents and the Blue Ridges, the cable ones, are committed to their fiber builds, they're seeing that fiber does not have the risk that you're going to see from a DOCSIS standpoint. It's a better long-term play. And especially as the telcos get aggressive in the deployment of fiber, as Verizon and AT&T continue to build out, the MSO market, especially the regionals, is ready to respond. So I am confident that you're going to see growth in that space as well. Timothy Paul Savageaux: Great. Thanks very much. Cheryl P. Beranek: You're very welcome. Operator: This concludes our question and answer session. I would like to turn the conference back over to Cheryl P. Beranek for any closing remarks. Cheryl P. Beranek: Thank you all. I hope everyone that is listening stays warm and is finding ways to enjoy this winter weather. Clearfield has, of course, been a Minnesota company from the beginning, and it has been a struggle for our winter for a variety of different ways. But I want to commend everyone in the US who is working to be each other's neighbor and look out for each other. We are looking out for you and all of broadband. And, we do not take your support for granted and we'll continue to be able to earn it as we move forward. I look forward to seeing you next quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Crown Castle Inc. Quarter Four 2025 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Kris Hinson, Vice President of Corporate Finance and Treasurer. Please go ahead. Kris Hinson: Thank you, Bailey, and good afternoon, everyone. Thank you for joining us today as we discuss our fourth quarter 2025 results. With me on the call this afternoon are Chris Hillebrandt, Crown Castle's president and chief executive officer, and Sunit Patel, Crown Castle's chief financial officer. To aid the discussion, we have posted supplemental materials in the Investor section of our website at crowncastle.com that will be referenced throughout the call. This conference call will contain forward-looking statements, which are subject to certain risks, uncertainties, and assumptions, and actual results may vary materially from those expected. Information about potential factors which could affect our results is available in the press release and the Risk Factors section of the company's SEC filings. Our statements are made as of today, 02/04/2026, and we assume no obligation to update any forward-looking statements. In addition, today's call includes a discussion of certain non-GAAP financial measures. Tables reconciling these non-GAAP financial measures are available in the supplemental information package in the Investors section of the company's website at crowncastle.com. I would like to remind everyone that having an agreement to sell our fiber segment means that the fiber segment results are required to be reported within Crown Castle financial statements as discontinued operations. Consistent with last quarter, the company's full-year 2026 outlook and fourth quarter results do not include contributions from what we previously reported under the fiber segment except as otherwise noted. With that, let me turn the call over to Chris Hillebrandt. Chris Hillebrandt: Thank you, Kris, and good afternoon, everyone. We delivered the full year 2025 guidance exceeding the midpoint across all key metrics as we focused on operational execution across our portfolio. As we turn to 2026, we are in the middle of major changes across our business as we take several actions to position Crown Castle Inc. to maximize shareholder value. First, we remain on track to close the sale of our small cell and fiber businesses, which we anticipate will occur in 2026. We are completing the operational separation of our three businesses, and executing on our transition plans. Upon the close of our small cell and fiber businesses, approximately 60% of our consolidated workforce will move with the sale as we transition to a simpler US-only tower business. We have been notified that the Department of Justice has closed its Hart-Scott-Rodino review and is not requiring any action related to the transaction. We only have a handful of approvals remaining at the state and federal levels. Second, we continue to enforce our rights under the terms of our agreement with DISH. After DISH defaulted on its payment obligations back in January, Crown Castle exercised its right to terminate the agreement. As a result, we are seeking to recover in excess of $3.5 billion from DISH, in remaining payments owed under the agreement. Crown Castle is supportive of AT&T and SpaceX obtaining the announced 3.45 gigahertz, 600 megahertz, AWS-4, H block, and unpaired AWS-3 spectrum bands, which would put this valuable public resource into active use for the wireless industry and the American people. That said, we will continue to do everything possible to enforce our rights under our contract with DISH. Third, we are taking decisive action to maximize value for our shareholders in response to DISH's actions. Announcing a restructuring plan to enhance the efficiency and effectiveness of our standalone US tower business following the anticipated close of our small cell and fiber business sale. Due to DISH's contractual default, we have accelerated and expanded our restructuring plan to realign staffing levels consistent with the removal of all future DISH activity. In total, we are reducing our tower and corporate workforce and continuing operations by approximately 20%, ending at about 1,250 full-time employees. In combination with other cost reductions, we expect to deliver a $65 million reduction in annualized run rate operating costs. The majority of staffing reductions will take effect in the first quarter while the non-labor reductions will be phased in throughout the year following the anticipated close of the small cell and fiber business sale. Finally, I would like to reaffirm our capital allocation framework and update our expected use of proceeds from the small cell and fiber business sale. First, when we reset our dividend last year, we considered the composition and risk profile of our cash flows as a result, we expect to maintain our dividend per share at $4.25 on an annualized basis until reaching our targeted payout ratio of 75% to 80% of AFFO, excluding the impact of amortization of prepaid rent. Thereafter, we intend to grow the dividend in line with AFFO excluding the impact of amortization of prepaid rent. Second, we plan to invest between $150 million to $250 million of annual net capital expenditures to add and modify our towers, to purchase land under our towers, and to invest in technology to enhance and automate our systems and processes. Third, we plan to utilize the cash flow we generate to repurchase shares while maintaining our investment-grade credit rating. Fourth and finally, we plan to remain at a target leverage range between six and six and a half times using the proceeds from the small cell and fiber business sale. As a result, we plan to allocate approximately $1 billion to share repurchases and approximately $7 billion to repay debt. As I look forward to a full year 2026 and beyond, I am excited by Crown Castle Inc.'s opportunity as the only large publicly-traded tower operator with an exclusive focus on the US. The US tower model continues to benefit from attractive business characteristics including long-term revenues from investment-grade customers contracted escalators, and high incremental margins. I believe that these characteristics will be supported by continued mobile data demand growth and a significant volume of spectrum being made available to motivated mobile network operators. To maximize revenue growth and profitability, we are focusing on becoming the best operator of US towers with the following strategic priorities. One, we are empowering the Crown Castle Inc. team to make the best and timely business decisions by investing in our systems to improve the quality and accessibility of asset information. Improving customer experience on cycle time and their interactions with us. Two, we are strengthening our ability to meet the business's needs by streamlining and automating processes to enhance operational effectiveness, and three, we will continue to drive efficiencies across the business. We believe that these strategic priorities combined with our disciplined capital allocation framework and investment-grade balance sheet will drive attractive risk-adjusted returns. With that, I'll turn it over to Sunit to walk us through the details of the quarter and our full-year 2026 outlook. Sunit Patel: Thanks, Chris, and good afternoon, everyone. Our full-year 2025 results were highlighted by 4.9% organic growth, excluding the impact of Sprint churn, as our customers continue to augment their 5G networks. Due to our outperformance in organic growth, we ended the year near the high end of the guidance range for 2025 site rental revenues. Outperformance at revenues combined with higher than expected services contribution ongoing efficiency initiatives, and lower interest expense allowed us to exceed the high end of the guidance range for 2025 adjusted EBITDA and FFO. Turning to our 2026 outlook. At the midpoint, we are projecting site rental revenues adjusted EBITDA, and AFFO of $3.9 billion, $2.7 billion, and $1.9 billion which are meaningfully impacted by the following three items. First, due to the termination of our contract with Dish Wireless announced in January, our 2026 full-year guidance does not include any contribution from DISH, resulting in $220 million of churn in full-year 2026. Second, for the purposes of building our full-year 2026 outlook, we have assumed the small cell and fiber business sale transaction will close on June 30. Third, as Chris mentioned, we're reducing our run rate operating cost by $65 million on an annualized basis, resulting in a $55 million impact to full-year 2026 and a $10 million incremental impact to 2027 due to timing. Moving to Page 5, our full-year 2026 outlook includes organic growth at the midpoint of 3.3% or $130 million excluding the impact of Sprint cancellations and DISH terminations in 2026. Full-year 2026 organic growth is expected to be 3.5% at the midpoint if DISH revenues are excluded from prior-year site rental billings. This compares to 3.8% for full-year 2025, on a comparable basis excluding DISH revenues from the prior year. We expect our 2026 organic growth guide of 3.5% growth to mark the low point. This expected growth is more than offset at site rental revenues due to the $20 million impact of Sprint cancellations, $120 million of DISH churn, and a $90 million decrease in noncash straight-line revenues and amortization of prepaid rent. Turning to Slide 6, the expected $110 million decrease to site rental billings is more than offset by the following items resulting in an anticipated $15 million increase in 2026 AFFO compared to 2025. A $25 million reduction in expenses as the staffing and other cost reductions drive $50 million of expense savings in full-year 2026 partially offset by standard increases on the remaining cost base. A $5 million increase in service contribution as service activity levels similar to 2025 are complemented by $5 million of expense savings from the workforce reduction. A $120 million decrease in interest expense primarily from the repayment of approximately $7 billion of about 4% interest rate debt following the anticipated close of the small cell and fiber business sale partially offset by refinancing. A $25 million decrease in other items driven primarily by a decrease in amortization of prepaid rent. Turning to Page 7, we decreased our guidance for AFFO in the twelve months following close by $240 million to $2.1 billion at the midpoint. Our original guidance of $2.34 billion at the midpoint included a $280 million contribution from DISH, in 2026 and 2027 which we have removed. This is partially offset by a $40 million reduction in interest expense from increasing the assumed debt repayment following the anticipated close of the small cell and fiber business sale by approximately $1 billion to approximately $7 billion. Turning to Page 9, the revised guide for AFFO for the twelve months following the close of the small cell and fiber business, which includes a half year of growth compared to full-year 2026, is $180 million higher and consists of $120 million of interest expense savings related to the anticipated debt repayments made with the small cell and fiber business sale proceeds, $50 million of growth in the underlying business, and $10 million of cost savings related to the 2026 reduction in force. Turning to the balance sheet. We ended the quarter with significant liquidity and flexibility, positioning us to efficiently maintain and effectively maintain our investment-grade rating after the sale of the small cell and fiber business based on the target capital structure and capital allocation framework that Chris mentioned earlier. In conclusion, we're pleased with our full-year 2025 results and believe we are well-positioned to deliver our outlook for full-year 2026 and our updated range for estimated AFFO for the twelve months following the small cell and fiber business sale closing of $2.1 billion at the midpoint. Longer-term, we're excited by the opportunity for Crown Castle Inc., and we believe we are taking the necessary actions to become a best-in-class US tower operator. We believe our focus on operational execution combined with our capital allocation framework and investment-grade balance sheet will deliver attractive long-term risk-adjusted returns for shareholders. With that, operator, I'd like to open the line for questions. Operator: We will now begin the question and answer session. To ask a question, If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw the question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Ric Prentiss with Raymond James. Please go ahead. Ric Prentiss: Thanks. Good afternoon, everybody. Focus my questions wrapped around, obviously, DISH. But then also the fiber small cell sale. Couple of quick ones, maybe you can elaborate a little bit further on. Any update on the status of working with DISH? Why terminate the agreement and what do you get out of terminating the agreement? And I have a couple other quick ones. Sunit Patel: Yeah. I think simply spoken why do we terminate DISH stop performing under the contract. Our contract was very clear with DISH, and we're enforcing it to best protect the value of the contract. Ric Prentiss: And so, terminate, you feel it gets the best kind of protective value. Obviously, we appreciate knowing what the number was. Over $3.5 billion owed. Sunit Patel: Yeah. I mean, in the end of the day, Ric, you know, we had a contract with Dish. Dish has chosen not to honor it. With DISH in default, we exercise the termination rights for the agreement and can accelerate the entire obligations now. And this termination was because this is the remedy that was called for when a party defaults. And so in the end, we're vigorously enforcing our rights and trying to protect our shareholders for the terms of the agreement. Ric Prentiss: Okay. And, obviously, we had taken the DISH out of our model. Guidance looks pretty close to what we had laid out there. Appreciate all those details. One piece I'm wondering on is there any change to the purchase price of $8.5 billion for the fiber small cell transaction because you're noting approximately $7 billion of debt pay down, which makes sense given where you wanna keep leverage, cut interest costs. And then stock buyback at just a billion. So is there any change to the fiber small cell proceeds how you think about using what was originally $8.5 billion or might still be? Sunit Patel: Yeah. So, Ric, there's no change to the purchase price. Obviously, you have normal transaction costs and closing adjustments, those sorts of things. But so we just kept it at approximately $7 billion and $1 billion pending the close of the transaction. So no other reason other than that. There's no change to the $8.5 billion purchase price that we announced. Ric Prentiss: Okay. And then as far as the timing of the buyback, obviously, this deal to close fiber small cell has been going on a long time. You really couldn't say much until you got closer to the deal closing. We're into February. Half isn't that far away. Sounds like, quote, a handful of state and federal rules are left. How should we think about the execution then of a billion-dollar buyback? How fast could or should that be put to work? Sunit Patel: I think at this point, not knowing exactly when the transaction will close, we are thinking about that and we'll have more specifics to share about that, you know, as we get through closing. So not much detail at this point, but we're clearly committed to making that happen. Ric Prentiss: And last one for me, wrapping it all together. You mentioned a handful of state and federal level approvals left. Any lessons learned from, like, Frontier Verizon through California or other processes or where you think the long pull and the tent might be as far as getting those final handful over the finish line? Chris Hillebrandt: Yeah. So I think our team together with the teams at Zayo and EQT have made pretty solid progress. As you point out, California is always a sensitive one. I think we're adequately focused on all of those, but you know, pleased with the DOJ thing happening. But I think that we hope to get all of these worked through and still stick with the original timeline we have of closing in the first half. But in terms of lessons learned, I don't know of any specific lessons learned, but we do keep up with what's going on with the other transactions. Kris Hinson: I would just say more broadly, Ric, is, you know, I've been here four and a half months, and what I've seen is a steady pace of progress along that time period. Nothing has jumped out as unexpected. I think our teams working collectively are doing a great job of threading the needle and getting all the approvals in place. Ric Prentiss: Great. Thanks. Appreciate it, guys. Have a good day. Operator: Our next question comes from Michael Rollins with Citi. Please go ahead. Michael Rollins: I'm just curious if you could provide more characterization of the leasing environment and over the last few months, as carriers have been working their budgets, you know, some have access to more spectrum that's readily deployable in their networks. Have you seen a shift or change in how they're approaching whether it's densification and colo, whether it's the amendment strategy and activity, and can you maybe give a little bit more characterization of you mentioned that think in the prepared comments that 3.5% you're expecting to be kind of a low. Maybe a little bit more detail as to what can drive that higher over the next few years. Chris Hillebrandt: I'll start and maybe hand it over to Sunit. So thanks, Michael. I think if you think back at where we are at this point, there's a couple headwinds, if you will, around it's a cyclical 5G coverage in the deployment cycle of a say, ten-year decade-long deployment cycle and there's been great progress made by the operators in getting initial coverage out. You have a couple new CEOs and the MNOs in place. Which are obviously coming on strong, finding their ways, and talking about overall cost reductions and focus within their businesses. As they revise their strategy. I think that's counterweighed by tailwinds which were mentioned, which are all around the frequency bands that are becoming available both in the last year as well as the plan for the FCC to auction off at least another 800 megahertz of spectrum, beginning in 2027 and the nature of the spectrum, although we don't know the exact frequencies, we see them as higher band frequencies. Will naturally drive a higher densification of cell site deployment. And so we do expect that that becomes a tailwind both for the industry and for Crown as those plans come to fruition. So these are kind of the market dynamics that are shaping the industry right now. And Sunit, if you wanna talk specifically about 2026. Sunit Patel: Yeah. I think what I would say is just for the supporting work Chris said. I mean, we think the mobile data demand continues at pretty healthy growth rates as we talked about last quarter. All the three major MNOs acquired Spectrum in the last year. The FCC's auctioning 800 megahertz of Spectrum beginning next year. And then when we look at our leasing activity from a current leasing activity gives us you know, gives us some visibility into future activity. So when you put all that together, yeah, we think that the 3.5% is a low point for us, and we should do better. Michael Rollins: Thank you. Operator: Our next question comes from Jim Schneider with Goldman Sachs. Please go ahead. Joshua Matthew Frantz: Hi. This is Josh on for Jim. Thanks for taking the questions. Can you help us bridge the 2026 leasing outlook versus what you reported in 2025? We know DISH was zero revenue a few years ago and has stepped up what's the best way to think about how much they've been contributing on an annual basis so we can see what's happening kind underlying with the carriers? And then similar to that, if we look at 2019 and 2020 before 5G deployments and before Dish and before Sprint T-Mobile integration work, your activity your new leasing was about $100 to $125 million. Can you help us think about what's changed or or the moving parts to get from from then to now? Thanks. Sunit Patel: Yeah. Let me handle the DISH contribution. So, I mean, you can see last year, organic growth was 4.9% on a comparable growth excluding DISH in both periods is 3.8%. When you look at that difference, I think what it says is that DISH contributed about $50 million roughly to organic growth in 2025. And as we've said previously, this was all contractual, not really activity driven, including what was expected for this year. And then on your other comment, I mean, when you look back at the 5G cycle, I think that T-Mobile upon while they were concluding the Sprint T-Mobile merger, which was closed in April 2020, there was a pretty aggressive deployment of 5G. So when you look beyond that late in the cycle, you know, we always see people whether it's densification, amendments, that activity. Continues. So I don't have the exact numbers back then, but I think it's comparable to what we were seeing back then. Joshua Matthew Frantz: Understand. Thank you. Operator: Our next question comes from Michael Funk with Bank of America. Michael J. Funk: Thank you for taking the question. So you have a multi-pronged approach with DISH. Obviously, you've sued under your rights for the termination. Presumably lobbying the FCC and then also through the court. So you update us on the process and expected timing around the different approaches you're pursuing? Chris Hillebrandt: I mean, I don't think we wanna go into the specifics about our legal strategy and the timing of that. I think, you know, if we kind of take a step back and say, recap, we've taken steps. We've filed suit against DISH. We have as an industry under the auspice of WIA, gone in to meet with the FCC commissioner to kind of make our case of why we believe that DISH should be obligated to pay for its bills. And we continue to take a number of steps, which I won't list here in details, but include all manner of activities, as Crown specifically to be aggressive in defending our shareholder interests. You know, this unfortunately with the courts working its way through, you know, this could be anywhere from a year or longer until we start to see things back from the courts. And therefore, it won't be something that we'll be updating you in the short term. But we will continue to drive and defend our position against the actions that DISH has taken. Michael J. Funk: Great. Thank you for that. Operator: Our next question comes from Eric Luebchow with Wells Fargo. Please go ahead. Eric Luebchow: Great. I just wanted to follow-up on one of the questions earlier. I think, Sunit, you talked about how we're going to can it grow this year? You expect it to improve somewhat in '27 and beyond. And maybe you could just talk through what gives you confidence there, whether that's anything you're seeing from a densification standpoint on new billings, whether there's ways to drive steady-state churn down particularly now that you'll just have three, well-capitalized large carriers comprising the majority of revenue. Anything you could offer there would be helpful. Sunit Patel: Well, with respect to churn, I don't think we see much change in the churn outlook we've provided previously. But I think in terms of specific as we said earlier, we did have, we do have some visibility into leasing activity. So that's helpful as we look at next year. But I think if you look at comments made by our clients so far, I mean, they bought more spectrum. They got to deploy most. They want to deploy most spectrum. The data demand growth cycles continue. So, you know, we think we'll do better than where we are here. If you look at our performance last couple of years, it's been a little better on the margin. So why we think this is a low point for us. Chris Hillebrandt: And specifically, I think we have a good view into our contract and leasing activity from our MLAs. Gives us pretty good visibility into future activity levels, which is why we're able to say that. Eric Luebchow: Great. Appreciate that. And then just one follow-up. I know you talked about reducing, I believe, 20% of your operating expenses. Maybe you could just talk about the flow through between SG&A and gross margin kinda where we're gonna see the biggest impact there. And any kind of indication on, you know, where you can get cash SG&A down to the next couple years to go through this cost restructuring? Sunit Patel: Yeah. So, I mean, we talked about $65 million of run rate operating cost savings. So in year, we'll see $55 million. Most of that is through the SG&A line. So, you know, of that $55, about $45 million roughly will hit the SG&A line. And then $5 million will come in site rental cost of sales and about $5 million on the services side. And then from a run rate perspective, for those same items, which adds to $65 million, it's about $50 million from the SG&A side, $5 million from the site rental cost of sales, and $10 million from the services cost of sales. That's why I said it would be the $65 million, we'll see $55 million in year and then incremental $10 million next year. So those are the components. Chris Hillebrandt: I think the reality is we've started to size up the opportunity longer term. But want to remind everybody, this is a year of transition for our company. You know, we're executing the sale agreement. We're managing through DISH. Putting a reorganization of the go-forward team in place. And so while we're focused on working to become a best-in-class operator, and updating systems and improving operational effectiveness, by streamlining and automating processes and tools, it's going to take a while. So we accelerated our activity now as a response to the current situation with DISH. And we have good ideas of where we're gonna go. But I think we'll have to guide in the future as we make progress as we really need to focus in on execution given all that's coming at us this year. This is really a plan of execution for Crown as we become a standalone US focused tower company. Eric Luebchow: Alright. Thanks, guys. Operator: Our next question comes from Richard Choe with JPMorgan. Please go ahead. Richard Choe: Hi. I wanted to follow-up on the discretionary CapEx and augmentation. The $150 million to $250 million, how will that contribute to, I guess, new leasing revenue? Do you expect to see some of that this year, or is it more for future years? And where could that go over time? Sunit Patel: Yeah. So I think some of that we have the opportunity to do ground lease buyouts, I think benefits our cash flows going forward. Some of it is for new tower builds. We see opportunities for that. So those and then the third component would be investments in systems and platforms, which should drive better operating effectiveness and efficiency going forward. Richard Choe: And as we look forward, what's the willingness for Crown to do more MLAs? And is it something that carriers still want, or are we moving more to a pay-as-you-go type of method over the next few years? Sunit Patel: I don't think we've seen any change there. We've generally operated with the MLAs with our clients. You know, we go through various phases here and there, but that's been a general approach. Chris Hillebrandt: In general, I would say that operators prefer having the certainty of understanding an operating agreement and being able to anticipate cost. And, therefore, it's something that I think the industry as a whole prefers along with the customers. Richard Choe: Got it. Thank you. Operator: Our next question comes from Nick Del Deo with MoffettNathanson. Please go ahead. Nick Del Deo: Hey, thanks for taking my questions. Or, Sunit, just a moment ago, you alluded to new tower builds. You know, the use of CapEx and seeing opportunities. I know that Crown has done a lot from a new build perspective, at least in a material way, for a number of years. Are you able to dimension the number of new builds you're targeting, or at least how it's changed versus recent years or any attributes of the towers you're looking at, like initial yield? Sunit Patel: Yeah. Hard to quantify it at this point. I mean, the key criteria is having the capital and being willing to do it if it makes economic sense. We do know that as data demands are growing, people need coverage in various areas. One example of this, I think, is the recent Verizon closed the Frontier deal, AT&T closed the Lumen deal. There's a big move towards convergence. So when you think about the geographies of where Frontier operates, so where the Lumen properties are, we think there'll be opportunities as they look to provide a converged offering, which means they'll need both wireless coverage including fiber to the home. So, you know, that's just one example of an area where there might be opportunities and others. So tough to quantify at this point, Nick, but I think it's just saying, we're willing to look at that when it makes sense. Chris Hillebrandt: Yeah. Maybe to build on that, one is we've said we're gonna be very selective and really only pursue opportunities that have those attractive economics that Sunit mentioned. But more importantly, if you look at the dynamics of the industry, one of the things that's happened since COVID is the price to build a new tower has gone up considerably. And so it has been a headwind for the industry in terms of build overall. In terms of the business case that you have to have. And oftentimes, in the past, we would build a single carrier tower and hope to get additional colocators, become increasingly difficult. And so for us, although our volume is not high, it's typically we will focus in on those towers where we have a minimum of two customers committed. So that we know that the economics make sense and the return profiles are correct. And it's something that, you know, if you look back historically over the last ten years, and I know because I've worked both in the disruptive part of the tower industry and now here as a leader of the big three. Is that traditionally MNOs haven't always looked for the big three tower companies to provide those new tower builds. But that's starting to change and the conversations we're having with customers are that they would like a one-stop-shop based on ease of doing business with and strategic partnerships with tower companies like Crown. And so we think there's an opportunity there. We're sizing that up. We're exploring it. We will be incredibly disciplined in the go-forward because that CapEx spend has to be with the right return before we move forward in any kind of scale in this part of the industry. Nick Del Deo: Okay. That's great color. Thanks for sharing all that. Can I ask one about the '26 leasing forecast? I guess, can you share anything about the degree to which the amount you're budgeting for is locked in you know, whether due to MLA commitments or because you have leases that are already signed versus activity that you've estimated? Sunit Patel: Yeah. I think at this point, about 80% of our organic growth is contracted. Nick Del Deo: Okay. Great. Thank you both. Operator: Our next question comes from Brandon Nispel with KeyBanc Capital Markets. Please go ahead. Brandon Nispel: Hey, guys. Two questions pretty similar on the leasing core leasing number, the $65 million is that weighted more first half, second half this year? And really, is it concentrated in any one of the big three customers or more evenly split? And then I'm not sure I heard it, but post the fiber transaction, have your thoughts around what you want your financial leverage to be changed just given the leasing levels are quite a bit lower than when you initially announced the transaction. Thanks. Sunit Patel: Yeah. I mean, as we said, our framework hasn't changed in terms of our capital allocation. We still look to keep our leverage in that six to six and a half range that we've announced last March, I think. So no change there per se. And in terms of leasing activity, I think it'll be a little more weighted towards the back half. Brandon Nispel: Thank you. Operator: Our next question comes from Brendan Lynch with Barclays. Please go ahead. Brendan Lynch: Great. Thanks for taking my questions. Maybe just to start on the longer-term outlook. Appreciate that the 3.5% is kind of the trough here in 2026, but you've previously guided to a 4-5% growth through 2027. Obviously, with DISH, that doesn't seem achievable at this point. But maybe you could give some color on what the longer-term growth rate might be either out through 2027 or if you could give even further comment here, that would be helpful. Sunit Patel: Yeah. I mean, I don't think, at least from my recollection the years, we've provided any outlook beyond the current year. So no specifics to provide there other than I would just mention that the combination, the backdrop of sort of constant demand growth on mobile data traffic continues to grow. Combined with our clients, you know, buying more spectrum and having plans to deploy more spectrum and more spectrum being available, we feel pretty good about the long-term outlook, but I don't think we've provided the outlook beyond the current year, at least the last few years to date. Brendan Lynch: Okay. Thank you for that. And maybe just on software upgrades, obviously, has been a consideration more recently. Your customers are clamoring for more spectrum. Nobody denies that. But maybe the potential for them to deploy more of it via software upgrade instead of new leasing might be a headwind all else equal. Can you just give some commentary on how you think that's going to affect the industry going forward? Chris Hillebrandt: Maybe I start and you can jump in. So if you're referencing as an example, AT&T's deployment of the 3.45 spectrum, specifically where they had already deployed radios and antennas that could utilize that band on a portion of their portfolio. And we're able to very rapidly roll out that spectrum basically with just a software to unlock those channels. That certainly does exist in some cases. But as an example, the other spectrum that AT&T purchased, the 600 megahertz, these are typically new radios and new antennas. Because the physics are such that, you know, you have these massive MIMO antennas for the low bands that provide the so-called beachfront property spectrum in terms of spectrum goes further. It penetrates in buildings for urban and suburban type scenarios. This is something that they don't currently have deployed and would potentially involve having new antennas and new radios deployed out at sites. In order to take advantage of that spectrum. So it really depends on the exact frequencies and whether those frequencies that have been purchased already been pre-deployed on a certain number of sites, whether they're able to do that. In the case of AT&T, as I just said a second ago, it's a portion of the sites that they had the equipment on. There's still a number of additional sites that would have to deploy in order to take advantage of deploying frequency. So that's a good case study, I think. Hopefully in answering your question. Sunit Patel: Yeah. And also software upgrades are very helpful, but at the same time, remember there are limits to how much data rates can be pushed through and the power required to do that. So ultimately, like any of these things, if you look at the rate of bit growth, you know, that's why radios and antennas have to keep getting replaced over time. Brendan Lynch: Thank you very much. Operator: Our next question comes from David Barden with New Street Research. Please go ahead. David Barden: Hey, guys. Thank you so much for taking the question. It's nice to talk to you again. So my first question is, I don't want to throw Ric under the bus, but Ric and I are probably the two oldest guys on this call. And I don't remember the last time there was a time when a carrier decided we're not gonna pay our bills. So could you walk us through exactly what happens when the carrier doesn't pay their bills? Are you gonna send a team of guys out there and snip wires or are you gonna, like, rip this stuff down and sell it to China for scrap metal? Like, what does that look like, and how do you account for that? Like, I just don't know. So that's question number one. Then the second question would be, just your guys' understanding. So you know, we've been talking a lot to governments, to carriers about the C band, upper C band auction, its proximity to the radio altimeter band up at the 4.2 to 4.4, and, you know, how that could slow down deployments and I'm wondering if you guys have a view on kind of how the next big massive spectrum auction that's gonna happen in the United States could ultimately affect the tower industry. Thank you. Chris Hillebrandt: Yeah. Well, maybe just start with the first one. I mean, we don't really want to go into disclosure of our specific commercial agreements with a specific customer as a practice. But at the end of the day, if a customer doesn't pay and they're in default, and you serve them and you terminate the contract, then there's an obligation for them to remove their equipment in a timely basis as per the terms of the contract. Right? So it's on them. It's not you. It's them. David Barden: It's on them. It's them. So and ultimately way DISH is gonna do that. Chris Hillebrandt: Yeah. So, well, we'll see. We'll see what happens there as they approach their cure period. The contract has been terminated, and it's their obligation to remove the equipment. You know, more broadly speaking, I've been in the industry a long time as well, almost thirty years or thirty years, half of it as an operator. And I've also can't remember times since maybe before the consolidation of those regional carriers that ultimately became T-Mobile or part of AT&T or Verizon where we had somebody just turn out the lights and walk away from obligations like they have. It's pretty amazing, actually, to witness this in my lifetime. On your second question to try to answer it. So if you recall when the initial C band auctions had occurred and they started to deploy, was a number of concerns about potential interference with the altimeters and the avionics. And it caused a bunch of headaches working with the FAA and the industry in order to come up with a plan on how they would deploy that, which has subsequently been fixed. There were some good lessons learned there of how the MNOs can work alongside with government to come up with solutions to be able to deploy it. And so it's not as if this will be the first time that they had to navigate through these types of challenges. And again, while there was an initial hiccup in the deployment, they very rapidly solved it and I think earna better position now overall as a result of a solution that worked for all parties. So these will consistently be challenges as you start to auction off spectrum that has uses in use by others, including government entities. Figuring out how to best clear the bands and provide the use of that spectrum putting it to work. There's clearly a huge demand by operators to have access to additional spectrum. And from what the FCC has signaled, they're in a position with that 800 megahertz that they've indicated that they intend to auction in '27 is to take rapid action to put it to use. And more importantly, that rises the tide for all boats and all tower companies as a result of that spectrum being deployed. So we support it. We believe it's the right thing to do for public resource. Which is again why we support ultimately DISH's sale of the spectrum to AT&T and SpaceX. David Barden: So thank you, Chris, and I really appreciate that. And if I could ask one follow-up, Sunit, when Charlie fails to follow through on his obligation, to remove the equipment, how long does it take before we find out? And then what happens? Sunit Patel: Again, I hesitate to answer specifics on that because you can imagine these are fairly large contracts with all kinds of provisions. So, I mean, I just leave it at that. But what I will say is we are doing everything we can within the contract in Washington as Chris was talking about to make sure we are enforcing our rights and being aggressive about it. David Barden: Understand. Thank you guys so much. I appreciate it. Chris Hillebrandt: You bet. Operator: Our next question comes from Batya Levi with UBS. Please go ahead. Batya Levi: Great. Thank you. One more follow-up on the leasing question. The slowdown that you that we're potentially seeing excluding DISH, is that across the board or maybe specific to a player? And can you help us understand the amendment versus densification mix? Is the back half weighted more related to potentially densification efforts flowing through? And another one on the cost side, how does the $65 million lower cost outlook compare to your prior expectations given the progress you've made last year? Thank you. Sunit Patel: Yeah. Thanks. I think, first of all, on the slowdown point, as I was saying, if you look at the 2025 numbers in the 2026 guide, if you were to adjust for the change in other billings, the growth this year is about what it was last year in the same ZIP code. So, not much change there, I would say, compared to last year. Most of it's accounted for change in other billings. And then in terms of the proportion on call over versus amendment, we haven't seen anything. It's about the same ratio as we've seen last year. And then the yeah. I mean, the leasing activity, as I said, is in line with what we are seeing last year, excluding the impact of DISH in both periods. Batya Levi: And on the cost side? Sunit Patel: On the cost side, I think that we did say upon the announcement of the transaction, we provided the guide, post the close of the transaction that we are, you know, taking some costs out. So I think you're seeing here is in line, but I think the bigger point that we've talked about in previous calls is we think there is continued opportunity for us to make some investment in platforms and systems in the next couple of years drive better customer experience, whether it's cycle times or interactions with customers, more efficiency, higher productivity levels. I think as Chris Hillebrandt mentioned, we are on a pathway to pursue a series of initiatives that we think both in terms of investment and automation that we think including some AI efforts that we think will continue driving improvement on the cost side over the next couple of years. Batya Levi: Got it. Thank you. Operator: Our final question comes from Ari Klein with BMO Capital Markets. Please go ahead. Ari Klein: Thanks. I imagine there are some legal costs associated with DISH. Is that in G&A? Is it of any significance? And then the composition of share repurchase and debt repayment is a little different than previously discussed. With flash repurchases, is that largely to maintain leverage ex DISH? Sunit Patel: Yeah. So let me cover the legal cost. So I mean, we thought about it as we provided our guidance. There can always be something extreme, but I think it's factored into the guidance that we provided on your second question. Sorry. Give me a sec. Yeah. I mean, on your second question, I think the capital allocation framework we'd outlined was for leverage of six to six and a half. So if you look through that, with the change in the DISH outlook and you look at our EBITDA and AFFO, outlook, we thought it made sense to pay down more debt than stay within the range because as we said previously, the key for us is to be investment grade. So this keeps us in the leverage ratio with outline and continues to preserve financial flexibility and also provide good risk-adjusted returns for our shareholders. Operator: At this time, there are no more questions. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Arm Holdings plc American Depositary Shares third quarter fiscal year 2026 Webcast and Conference Call. At this time, all participants 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, please 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 first speaker today, Jessica Vall, Head of Investor Relations. Please go ahead. Jessica Vall: Thank you very much, and welcome to our third quarter fiscal 2026 earnings call. On the call are Rene Haas, Arm Holdings plc American Depositary Shares' Chief Executive, and Jason Child, Arm Holdings plc American Depositary Shares' Chief Financial Officer. During the call, Arm Holdings plc American Depositary Shares will discuss forecasts, targets, and other forward-looking information about the company and its financial results. While these statements represent our best current judgment about future results, our business is subject to many risks and uncertainties that could cause actual results to differ materially. In addition to any risks that we highlight during this call, important risk factors that may affect our future results and performance are described in a registration statement on Form 20-F filed with the SEC. Arm Holdings plc American Depositary Shares assumes no obligation to update any forward-looking statements. We will refer to non-GAAP financial measures during this discussion. Reconciliations of certain of these non-GAAP financial measures to their most directly comparable GAAP measures can be found in our shareholder letter, as can a discussion of certain projected non-GAAP financial measures that we are not able to reconcile without unreasonable effort and supplemental financial information. Our earnings materials are available at investors.on.com, and with that, I'll turn the call over to Rene. Rene Haas: Thank you, Jessica, and welcome, everyone. Arm Holdings plc American Depositary Shares delivered a record third quarter. Revenue grew 26% year on year to $1.24 billion, our fourth consecutive billion-dollar quarter. Royalties increased 27% to a record $737 million, driven by record units with strength across AI and general-purpose data center. Our data center royalty revenue has grown more than 100% year on year, and we expect in a few years our data center business to be our largest business, larger than mobile. License revenue was $505 million, up 25% year on year, as more leading companies signed high-value licenses for next-generation technologies. That performance lifted our non-GAAP EPS to 43¢, even as we continue to increase R&D investment. Our performance this quarter reinforces the strength of the Arm Holdings plc American Depositary Shares platform and our continued commitment to investing in innovation across a broad spectrum of compute technologies. The fundamentals of the Arm Holdings plc American Depositary Shares business have never been stronger. AI is changing how compute is built and where it runs across cloud infrastructure, edge devices, and physical systems. The industry requires platforms to deliver high performance, energy efficiency, and flexibility across a broad range of power envelopes and use cases. Only Arm Holdings plc American Depositary Shares' compute platform can address these demands, supporting AI workloads ranging from milliwatts to gigawatts. To align with how our customers deploy AI, we've organized ourselves around three business units: Edge AI, Physical AI, and Cloud AI. Edge AI comprises the smartphone and IoT businesses. Physical AI includes automotive and robotics, and Cloud AI encompasses data center and networking. A key driver of our royalty momentum is the compute subsystem or CSS. We launched CSS nearly two and a half years ago, and demand continues to exceed expectations. This quarter, we signed two additional CSS licenses for Edge AI tablets and smartphones, bringing us to 21 CSS licenses across 12 companies. Five customers are now shipping CSS-based chips, including two shipping a second-generation platform. And the top four Android smartphone vendors are shipping CSS-powered devices. CSS helps customers get to market faster by lowering integration risk and complexity. As demand scales, it increases the value that Arm Holdings plc American Depositary Shares delivers per chip, creating a significant tailwind to royalties. In Cloud AI, the shift towards inference is reshaping data center design, and increasingly, that inference is agent-based. These workloads are persistent, always on, and power constrained. This is a fundamental change in how AI systems operate. This is because agent-based AI requires coordination across many agents running continuously, and that the CPU can only do coordination. As this model scales, customers need CPU chips with higher core counts and better power efficiency to operate continuously within tight power and cost constraints. This trend directly benefits 1 billion cores deployed, and Arm Holdings plc American Depositary Shares' share amongst the top hyperscalers is expected to reach 50%. Leading hyperscalers are launching new products with increased core counts to address this opportunity. AWS launched its fifth-generation Graviton processor with 192 cores, doubling the core count from Graviton four and delivering 25% higher performance and up to 33% lower latency versus Graviton four. NVIDIA's next-generation Vera CPU features 88 Arm Holdings plc American Depositary Shares-based cores, up from 72 cores in the gray CPU generation. Microsoft introduced Cobalt 200, built on the higher performance Arm Holdings plc American Depositary Shares Neoverse CSS v3 with 132 cores, up from 128 cores in Cobalt 100, which was based on the prior Neoverse n2 platform. And Google previewed its second Arm Holdings plc American Depositary Shares-based server processor with Axion-powered m4a instances delivering up to 2x better price performance and 80% better performance per watt in the comparable x86 offerings. Google has now migrated over 30,000 applications to the Arm Holdings plc American Depositary Shares instruction set. We are also seeing more integrated platform designs to improve system efficiency, often translating to more AI output or more tokens per watt within the same power envelope. AWS integrates Graviton with Arm Holdings plc American Depositary Shares-based Nitro DPUs and training accelerators, and NVIDIA pairs GPUs with Arm Holdings plc American Depositary Shares-based gray CPUs and Arm Holdings plc American Depositary Shares-based blue field GPUs, which has transitioned to Vera, delivering a 6x increase in GPU compute capability over the prior generation. Together, these trends make clear that as AI inference becomes more agent-based, the importance of CPUs is only increasing. And as a result, Arm Holdings plc American Depositary Shares' role at the center of the modern data center architecture continues to grow rapidly. Outside the data center, AI is now moving to everyday devices. The edge and physical AI markets are opening up new growth opportunities. These systems operate in real-time under strict power and safety, and reliability constraints. Where efficient and predictable general-purpose compute is essential. Arm Holdings plc American Depositary Shares' strengths, power efficiency, perceivable latency, and always-on operation are best suited to on-device agents that continually monitor inputs, prioritize tests, and invoice models when needed to preserve battery life. Our common software foundation across devices, vehicles, and robotics customers scale deployments without rebuilding software stacks. We now see that momentum in customer innovation. Rivian announced its third-generation autonomy computer based on the Arm Holdings plc American Depositary Shares-based Rivian autonomy processor. The first production vehicle based on a custom Arm Holdings plc American Depositary Shares chip and the first to deploy Arm Holdings plc American Depositary Shares v9 in a production car. Tesla's upcoming Optimus humanoid robot is also powered by a custom Arm Holdings plc American Depositary Shares-based AI processor and platform from leading silicon providers like NVIDIA's Jets and Thor, and Qualcomm's Dragon Wing platforms are scaling Arm Holdings plc American Depositary Shares-based solutions across robotics and autonomous systems. To close, AI is moving to every environment and every power envelope. Arm Holdings plc American Depositary Shares provides the foundation for that shift. A platform that spans milliwatts to gigawatts, a developer ecosystem over 22 million developers, more than 80% of the global total. We are now seeing the results of strategies we put in place years ago, focusing on the data center, power efficiency, and compute subsystems. As a result, as more and more applications move to AgenTic AI, Arm Holdings plc American Depositary Shares will be the compute platform connecting cloud, edge, and physical AI use cases. And with that, I'll now hand it over to Jason. Jason Child: Thank you, Rene. We have delivered another strong quarter. Total revenue grew 26% year on year to a record $1.24 billion, marking our fourth consecutive quarter above $1 billion. Royalty revenue exceeded our expectations, growing 27% year on year to a record $737 million. The biggest growth contributors were smartphones with higher royalty rates per chip, and in the data center where our revenues continue to grow triple digits year on year as we see ongoing share gains from custom hyperscaler chips. Royalty revenue from edge AI devices such as smartphones continues to grow much faster than the market. All the major Android OEMs are now ramping smartphones with chips based on both Arm Holdings plc American Depositary Shares v9 and CSS. In Cloud AI, data center royalty revenue continues to double year on year, with the ramp of Arm Holdings plc American Depositary Shares-based chips by all major hyperscaler companies. We are getting a further benefit as the build-out of these new AI data centers is driving increased deployment of networking chips, particularly DPUs and smart NICs, where Arm Holdings plc American Depositary Shares has a very high market share. In physical AI, the automotive market grew double digits year on year and contributed to our strong royalty performance. Overall, royalty revenue growth continues to reflect Arm Holdings plc American Depositary Shares' royalty per chip and rising market share. Turning now to licensing. License and other revenue was $505 million, up 25% year on year. Growth was driven by strong demand for next-generation architectures and deeper strategic engagements with key customers. We signed two new Arm Holdings plc American Depositary Shares ATA or Arm Holdings plc American Depositary Shares Total Access Agreements during the quarter and two new CSS licenses, both with leading smartphone handset OEMs. These agreements reflect the continued investment by our customers in our next-generation Arm Holdings plc American Depositary Shares technology. Of the $505 million of license revenue, our agreement with SoftBank for Technology Licensing and Design Services contributed $200 million. SoftBank has become an increasingly important customer as they build out their AI compute strategy, including their recent acquisitions such as Ampere and Graphcore. We believe that the revenues we are receiving from SoftBank are durable as they relate to current generations that will continue as SoftBank executes on its roadmap. As always, licensing revenue varies quarter to quarter due to the timing and size of high-value deals. So we will continue to focus on annualized contract value, or ACV, as a key indicator of the underlying licensing trend. ACV grew 28% year on year, maintaining strong momentum following the 28% year on year growth we reported in Q2 and Q1. This continues to be above our long-term expectation of mid to high single-digit growth for license revenue. Turning to operating expenses and profits. Non-GAAP operating expenses were $716 million, up 37% year on year due to strong R&D investment. These investments in R&D reflect ongoing engineering headcount expansion to support customer demand for more Arm Holdings plc American Depositary Shares technology, including innovation in next-generation architectures, compute subsystems, and into our exploration into chiplets and complete SoCs. Non-GAAP operating income was $505 million, up 14% year on year. This resulted in a non-GAAP operating margin of about 41%. Non-GAAP EPS was $0.43, close to the high end of our guidance range, driven by both higher revenue and slightly lower OpEx than expected. Turning now to guidance. Our guidance reflects our current view of our end markets and our licensing pipeline. For Q4, we expect revenue of $1.47 billion, plus or minus $50 million. At the midpoint, this represents revenue growth of about 18% year on year. We expect royalties to be up low teens year on year and licensing to be up high teens year on year. We expect our non-GAAP operating expense to be approximately $745 million and our non-GAAP EPS to be $0.58, plus or minus $0.04. The strength of customer demand we are seeing today, combined with a growing base of long-duration contracts at structurally higher royalty rates, provides increasing confidence in our future revenue profile. This confidence allows us today to invest in next-generation architectures, compute subsystems, and silicon that are needed to enable higher performance, greater efficiency, and more AI use cases. We believe this virtuous cycle of customer demand and ambitious investment positions Arm Holdings plc American Depositary Shares for sustained growth over the long term. Just before we get into the Q&A portion of the call, as you will have seen, Arm Holdings plc American Depositary Shares is hosting an event on March 24, and I'm sure there will be interest about what we are planning to announce. There'll be a million ways of asking what we may or may not be announcing. Please be patient as we won't be providing any details ahead of the event. With that, I'll turn the call back to the operator for the Q&A portion of the call. Operator: Thank you. And one on your telephone and wait for your name to be announced. To withdraw your question, please press 1 and 1 again. We will now take the first question. One moment, please. And your first question today comes from the line of Joe Quatrochi from Wells Fargo. Please go ahead. Joe Quatrochi: Rene, you touched upon in the prepared remarks, so I was kind of curious if you could just maybe give us a little more detail on just how you view Arm Holdings plc American Depositary Shares' role and the role of the CPU in AI and cloud data centers and just how does that change as we start to see more proliferation of AI agents? Rene Haas: Yeah. Thank you for the question. There are a number of shifts taking place in the data center, as I mentioned in opening remarks. You know, first off, as the shift moves away from exclusively training to predominantly inference, that is a workload that launches a number of different solution paths. One of them that we're seeing is around AgenTeq AI. And the agents that are actually talking to other agents or having to control workflows such as service tickets or other work streams, those are very, very well suited for CPUs. Because CPUs are very, very power efficient, always on, very, very fast latency. And what we are seeing is already an increased deployment of CPUs to address that problem. Now it's just not CPUs that are good for that problem. It's the number of CPUs you have and, obviously, given the power constraints inside the data center, the efficiency of those CPUs. So for all those reasons, that's a very positive tailwind for Arm Holdings plc American Depositary Shares. And in particular, we're seeing those proof points now, as I mentioned, where the latest generation of CPU chips from the hyperscaler providers and also NVIDIA have increased the number of cores. And we think that only continues. Joe Quatrochi: Thanks for that. And just as a follow-up, one for Jason. I know you're not giving fiscal '27 commentary today, but just how do we think about the puts and takes of this royalty revenue growth and the risks that are associated with the potential like demand destruction that we're seeing, you know, in consumer electronics potentially from memory? Jason Child: Yeah. Yeah. That's a it's a great question and something we spend a lot of time looking at. So in particular, you know, I think MediaTek last night talked about something like around a 15% reduction in unit volume for next year. And that's pretty consistent with what we've heard from other smart and handset providers around what they think the memory supply chain constraints could provide. So we've done our own kind of analysis of it. What's interesting is we're hearing from our various partners that they're really trying to make sure that they protect the high end of the market, so the premium and flagship portion of the market. Which is great for us because that's where all of our CSS and v9 royalties are. So the highest, by a significant margin. And then on the very bottom end of the segment, that's where most of the supply chain constraints will probably be felt. For us, that's V8 and even older generations that are dramatically smaller royalties. So I think, if you were to say, what if there's a 20% reduction in volumes next year? For us, that would translate to probably somewhere around a 2% or 4% at worst. Impact on smartphone royalties. If you then project that across the whole business, it'd be a 1%, maybe 2% negative impact on total royalties. The good news is because, as Rene mentioned, the cloud AI or infrastructure business has been continuing to grow ahead of our expectations. It's actually growing at a level that's more than compensating for those kind of risks on the memory and mobile side. So I think we have a very good setup for next year and not too concerned about at least the royalty revenue impacts that we might see from these unit volume and supply chain constraints. Joe Quatrochi: Helpful. Thank you. Operator: Your next question today comes from the line of Simon Leopold from Raymond James. Please go ahead. Simon Leopold: Great. Thank you. Appreciate you taking the question. First one is, I'm hoping you're able to shed some light on this. But wondering what your thoughts on are whether or not SoftBank will potentially need to sell some of the Arm Holdings plc American Depositary Shares stock that it holds to finance some of the investment you've talked about making and how we should think about the implications for your shares? Then I've got a quick follow-up. Rene Haas: Sure. Yeah. Thanks for the question. You know, that's one that we read a lot about, and there's a lot of speculation on chat boards and whatnot about that. I can tell you from talking to Masa about this, and I would quote him directly, he is not interested in selling one share of Arm Holdings plc American Depositary Shares stock. And that doesn't mean two shares or three shares. That means any shares. He's very long on the company. He's very, very bullish. As am I, about our long-term prospects. And he has no interest in selling. There's been a lot of writing about it. But I can tell you from a direct conversation and direct conversations plural, that I've had with them. That's just not the case. Simon Leopold: Okay. And then just as a follow-up, you've provided a forecast for some deceleration in the royalty revenue growth. I'm just wondering if you could elaborate on the trend. Is it more difficult comps? Or is there something else shifting that we should be considering? Jason Child: Yeah. This is Jason. I'll take that. I would say the royalty trends for next year are pretty consistent now. Absolute dollars, maybe a little bit lighter just because of what you're now seeing on the memory shortage side. Like maybe one or 2% impact largely due to that. The growth percentage is down a bit because of the overperformance that we saw last quarter and expected to see again this quarter. So we are coming off of a stronger comp. Now the obvious question then is because you've had stronger growth both in Q3, you know, we thought we'd grow about 20%. We grew 27%. So, you know, $30 million beat or more. And now seeing some of that flow through into Q4, will that flow into next year as well? Right now, too I'd say too hard to say. You know, there's a lot of talk about memory and even away shortages. And so, you know, that stuff doesn't affect us as much as many of the full fab of semiconductor companies. But I'd say right now, we'll give you updates as we learn more. But overall, the absolute magnitude of royalties for next year, expect to be pretty close to what we were thinking what we said earlier this year. But, you know, we'll see if this recent strength continues and allows us to take things up as we proceed into next year. Simon Leopold: Very helpful. Thank you. Operator: Thank you. In the interest of time, please limit yourself to one question only, and rejoin the queue for any follow-up questions. You'll now go to the next question. And your next question today comes from the line of Vivek Arya from Bank of America. Please go ahead. Vivek Arya: Thanks for taking my question. I actually just had two clarifications. One is I was hoping you could quantify the exact amount of data center revenue. I know you said that it doubled, but how much is it so we can get a sense for, like, what the magnitude is versus the overall company sales. And then the clarification the other clarification I had was, I think you mentioned software contributed $200 million. I somehow recall the original expectation was about $178, $180 million. And if you could clarify that and what what are you embedding for March and onwards, from that contribution? Thank you. Jason Child: Yeah. The well, the $178 last quarter, it was it was so no new deals were signed. It's just the deals from last quarter. It was $178 for the quarter. The full quarter has the impact now is about $200. So nothing new. It's just a full quarter impact. I would expect that $200 going forward is the right run rate going forward. Vivek Arya: And the data center revenue? Jason Child: Yeah. Data center revenue we provide the details on that once a year. I think at the beginning of this year, we said it had hit double digit. And because it's growing so much faster than the rest, assume it's gonna be, you know, somewhere in kind of the teens to probably getting closer to 20%. As Rene said, over the next, yeah, two to three years, you should expect to see it get similar or maybe even larger than smartphone business, which is in the, you know, kind of 40 to 45% of total business. Vivek Arya: Thank you. Operator: Thank you. Your next question comes from the line of Mehdi Husseini from Susquehanna Financials. Please go ahead. Mehdi Husseini: Yes. Just thank you. Thank you for taking the question. Just as a follow-up to the smartphone topic, to how should I think about the migration to the v9 higher royalty? Is going to help offset lower smartphone units. Rene Haas: Yeah. So I'll let Jason provide the detail, but again, as a reminder, with the way that we handle v9 for smartphones, particularly v9 CSSs, every smartphone cycle, we deliver a brand new CSS. Each time we deliver the brand new CSS, the royalty rates are generally increased year on year. So when we think about v9 in smartphones, the appropriate way to think about it is it's all CSS it's all moving to CSS now. And as a result of that, we get priced every year with the royalty increase year on year. Jason Child: Yeah. And in terms of the guidance that I just gave in terms of if there's a minus 20 degree unit impact, there's at most a kind of four to 6% revenue impact just specifically within smartphones. That would that would be incorporating the higher royalty rate per unit that's already been contractually agreed to and that we assume will be shipping later in the year. Mehdi Husseini: Okay. Thank you. Bye. Operator: Thank you. Your next question comes from the line of Vijay Rakesh from Mizuho. Please go ahead. Vijay Rakesh: Yeah. Hi, Rene and Jason. Just a quick question on the on your partnerships. As your partner SoftBank executes on its AI roadmap, will we be expecting, like, an Arm Holdings plc American Depositary Shares custom ASIC down the road given the substantial partnership that you have with them? With the $200 million a quarter NRE that you're getting? How should we look at that, the timing, and how that'll impact the fiscal 2027, let's say. Jason Child: Yeah. Not nothing yeah. Hi, Vijay. Nothing we can say specific about any products that you're you're asking about. So, unfortunately, not much more we can say there. Vijay Rakesh: Got it. Thank you. Operator: Thank you. Your next question today comes from the line of Krish Sankar from TD Cowen. Please go ahead. Krish Sankar: Hi, thanks for taking the question. Rene, I just wanted to find a little bit about how to think about Arm Holdings plc American Depositary Shares' IP penetration rates or percentage rate in AI data center semis today, and where do you think that evolves over the next three to five years? Rene Haas: Hey. It's a it's a wonderful question. I think what we're gonna see over the next three years is an evolving of how these data center chips are built out. And what do I mean by that? You know, today, you've got a classic architecture where you've got a CPU which connects into an accelerator. The CPU does some work. The GPU does some work. I think we're gonna start to see over time is a morphing of the workloads that the CPU takes that the GPU used to do. And as I mentioned, you go to a GenTeC inference, that's gonna mean more CPUs, which could be more different custom chips that are CPU based. In addition, the inference workloads, which are dominated by two pieces of area of work, specifically prefill and decode, you could see some specific solutions around that, that continue to extend. Things like what a Grok has done, for example, you could still see more kind of innovation across that area. I also think, you know, you asked about the data center, but I think we're gonna start to see a lot of that migrate to the smaller form factors. Where different combinations of IP and solutions are gonna be needed. To address areas where power is much more constrained, particularly around physical AI. And then the lower edge devices. So I think there's a lot of innovation to come in solving the AI problems because one thing that's clear is that these AI workloads are going to be running on every single piece of hardware. That has compute. And because the vast majority of the compute platforms out there today are already Arm Holdings plc American Depositary Shares-based, gives us a gigantic opportunity to mold where that goes. Krish Sankar: Got it. Thanks, Rene. Operator: Thank you. Your next question comes from the line of Harlan Sur from JPMorgan. Please go ahead. Harlan Sur: Good afternoon. Thanks for taking my question. On compute subsystems, obviously, you continue to drive solid momentum with two more licenses added in the quarter. The value out of CSS that we hear from your customers is resonating extremely well. Right? It improves their productivity. It improves their overall system performance. They're willing to pay a higher licensing fee and higher royalty fee for that value added you mentioned. I'm curious to know what percentage of the royalty mix is CSS today, and what proportion of the royalty revenue could it become over the next two to three years? Rene Haas: Yeah. Thank you, Harlan. I'll let Jason take that. Jason Child: Yeah. So, Harlan, yeah, a lot of progress on CSS with the, you know, the five CSSs that have actually already been turned into silicon and actually something we're receiving royalties on. It's it's had a material impact. Think of CSS last year. I think it was just kind of approaching double digit. And this year, it well into double digit. Think of it as being into the teens. And then I would say, you know, over the next couple of years, I expect it to probably it could be upwards of 50%. But, you know, we'll have to see. I think, you know, the primary drivers for acceleration of CSS has really been mostly around our customers needing to shorten the cycle time and CSS, you know, tip that's that cycle time about in a half. And so, you know, stay tuned, but I would expect to continue to see that acceleration occur and to continue to see I think right now, every CSS customer that's had a chance to, you know, sign up for the next version or kind of renew for the next generation, has all done that. So that's certainly a really key indicator of the value that, as you said, customers are seeing from it. Harlan Sur: Yeah. Absolutely. Thank you. Operator: Thank you. Your next question comes from the line of Charles Shi from Needham and Company. Please go ahead. Charles Shi: Yes. Thanks for taking my question. I think going back, maybe it was one year, you guys kind of soft and guided, FYE '26 and FYE '27 growth, should be around 20%. You are definitely delivering that the FY '26. We definitely will see how you think about FY '27, you know, about the quarter. But any early view you guys can provide on FY '28? I know I'm asking and plus two year here, but you guys did do that. Going back about a year. And I was hoping if you can provide any early view into the outer year. Thank you. Jason Child: Yeah. I would say for '26, as you said, we said at least 20%, and I think now we're guiding to '22 at the midpoint. So as you said, exceeding that target. For '27, not guiding on full year, in terms of kind of at a high level, the 20% growth rate I think, certainly is very reasonable. And not anything that we back away from. In terms of '28, we haven't thrown anything out there yet. I'd say maybe stay tuned. You know, there are opportunities as we contemplate, you know, other possible offerings and what that could do to our numbers is still something we're working through. So we'll give you an update on '28 sometime down the road. Charles Shi: Thank you. Appreciate that. Operator: Thank you. Your next question today comes from the line of Srini Pajjuri from RBC. Please go ahead. Srini Pajjuri: A couple of clarifications, guys. On the memory impact, I guess, talked about you quantified that impact. But, Jason, the outlook for the next quarter on the royalties, being up low teens, do you think memory is already having an impact on the smartphone volumes? Is that why it's on the upload teams? And then to add to that, you talked about CSS accelerating. I'm just curious, given the pressure on the bill of materials do you anticipate or are you seeing any impact in terms of the adoption of CSS and V9 I guess, look into the next few quarters given the bill of materials challenges? Thank you. Rene Haas: Yes. Thanks for the question. I'll take the second part first, and then Jason will take the first part on memory. Question was regarding CSS pricing impacting bill of materials. No. We're not seeing any of that at all. What we are seeing is that the value gained by accelerating time to market outweighs anything that customers are considering. Given the complexity of building these chips. The increased cycle times, through the fabs going from five nanometer three nanometer to two nanometer means that the design windows are really short and missing the first few months of shipment or having any kind of delay would be critical to profits. So based on that, we've really not had many discussions with anyone regarding the bomb impact, the value that we create relative to profits gained by the customer is what really drives the decision point. And then regarding the memory, impact on the next quarter, I'll let Jason address that. Jason Child: Yeah. The memory impact, very minimal, I would say. And that's not really the driver of the guidance on the growth. Absolute growth in royalties has much more to do with typically seasonality, our Q4 or calendar Q1 is always one of the slower quarters. And the one thing that happened a year ago is we did have Mediatek chip come out in Q4 of a year ago or Q yeah. Our Q4 calendar Q1 of a year ago. Which was unusual timing. So we are lapping that. So it's much more about kind of what we're comping and to some extent seasonality. But overall, you know, full year royalties, I would expect to be in that north of you know, 20% range, which is kind of what we were expecting early in the year. And still expect Q4 or calendar Q1 to be stronger than what we previously expected. So it's really the year on year growth piece is really more of a seasonality slash seasonality comping kind of an unusual one-time release from a year ago. Srini Pajjuri: Thank you. Operator: We will now go to the next question. And your next question comes from the line of Andrew Gardiner from Citi. Please go ahead. Andrew Gardiner: Good afternoon. Thanks for taking my question as well. Jason, perhaps one for you on the OpEx side. We've clearly seen significant investments in the business particularly in R&D, given everything that you guys are doing. You've given us a bit of a steer on fiscal '27 revenue growth. Utility R&D has been growing at a faster rate than revenue in the current period. Is that something we can expect to continue into fiscal '27 given everything that you guys have got in front of you, or will we actually start to see R&D growth slow relative to the revenue? Thank you. Jason Child: Sure. So a little early to talk full year. I can tell you right now, our expectation is that the Q4 to Q1 step up will be similar to last year. Think last year, it was you know, low double-digit sequential growth, and you should see the same kind of sequential growth as a year ago. I right now, I would say the growth after Q1 is probably gonna to moderate more so than it did this year. We did see pretty significant step-ups throughout the year. I don't expect there to be quite significant step-ups for next year. But as we progress more into next year, we'll give you a little more color, but that's the high-level I'd say, modeling approach I would take right now. Andrew Gardiner: Thank you. Operator: Thank you. We will now take the next question. And the question comes from the line of John DiFucci from Guggenheim Securities. Please go ahead. John DiFucci: Thank you. Rene, you've seen a lot in technologies in technology over the years. So I'm gonna ask a question that's kind of a little bit self-serving here. I'm curious how you'd characterize what's happening in the stock market recently as it pertains to the software sector. And if you might, since you're at least partially a software company, how does AI affect your business other than driving demand? In other words, how should we think of how you'll leverage AI? In the design of chips and systems? Rene Haas: Yeah. Well, regarding the stock market's reaction to software company, I had a great answer to that. I'd probably be in a difficult position than the one that I have. I'm not sure I can I'm in a great position to discuss what the near-term impacts are to the stock market, but what I can say after, you know, watching and being in technology my entire career, we do see these kinds of things time to time where investors or the market gets jittery around what the broad impacts are when in the midst of fairly significant technology disruptions. I can say for our business, you know, given the fact that we are an intellectual property provider that goes into physical things chips, AI is not gonna replace a physical chip anytime soon. They're kind of linked at the hip, if you will, relative to you need the hardware to run the software. I think there's just enormous opportunity, however, still for growth in the overall sector. Because when I think about where AI actually is operating truly inside the enterprise, it's very When I think about our own company and things like our payroll systems or purchase order systems or our SAP systems. There's some AI going on there, but not nearly enough to be massively transformative yet. And I think part of that is just the complexity of integrating these large systems and changing software workloads. So I think we're in super early days, to be quite frank, and having, you know, been in technology again my entire career and have seen lots of technology disruptions this one feels a little bit like the final frontier in terms of the amount of productivity and change that AI can benefit. We're still all trying to get our arms around it. If you just even look at the numbers of spend, I heard earlier today, Google or Alphabet announcing a $180 billion CapEx spend. That used to be what semiconductor companies just spent a year on fabs. Times times a few. So we're in uncharted waters. And maybe that's why you're seeing some jittery numbers relative to how the market reacts. But where we sit there's just huge demand for compute. And that's what Arm Holdings plc American Depositary Shares does. And, so I think in the long game, I'm super excited about the opportunity for us. John DiFucci: Really appreciate your thoughts, Rene. Thank you. Operator: Thank you. We will now take our final question for today. And the final question comes from the line of Timm Schulze-Melander from Rothschild and Co. Please go ahead. Timm Schulze-Melander: Yes. Hi, there. Thanks for taking my question. It's a two-parter for Rene, please. You've talked a lot about inference in the AI future. You just referenced the Grok architecture. And I really wanted to ask you, what are your thoughts or how should we think about SRAM SRAM at the edge, some of these different memory and what they could mean for your business. And then the second part is just the cadence of power efficiency for Arm Holdings plc American Depositary Shares. Is there something that we should think about in terms of the average annual or per v8 to v9 energy for compute efficiency, that you see going forward? Thank you so much. Rene Haas: Yeah. So I'll take the latter part first because it kind of bridges into the first. We look at how to address power efficiency twenty-four seven. And the reason for that is increasingly as you get into these smaller form factors, the one thing that you don't get much liberty on is battery life and space. So as a result, we have to always think about operating a constrained environment where you're adding more and more demand of compute. When you add AI onto something that already has to drive a display or open an app or recognize the voice, it's a constant thing that we think about and worry about. I think we're very well positioned to address it because we are the incumbent in many of these platforms. So it is something we spend a lot of time and energy on. To your first part of the question on SRAM, and different memory technologies, absolutely, that's something we're highly involved in. To oversimplify a computer, a CPU needs memory, and memory needs a CPU. Period, and stop. So when you're designing a piece of hardware, the two go very much hand in hand. And there is a lot of work and research being done about not just SRAM, but alternative memory technologies and solutions that can address these increasing demands on AI. So again, it's a just question prior to yours in terms of the overall broad opportunity. You know, what people in our space tend to worry about is that there isn't hard problems to go think and work on and develop new technologies for. We don't have that problem. Every single end application is gonna be impacted by AI. We believe every end application will run AI through Arm Holdings plc American Depositary Shares. So we're spending a lot of time and energy, and you can see by our investments, come up with innovative ways to address that. Timm Schulze-Melander: Great. Thank you so much. Operator: Thank you. I will now hand the call back to Rene for closing remarks. Rene Haas: Yeah. Thank you, and thanks for all the thoughtful questions and we could tell by the range of the questions we were talking about memory prices inside the quarter. And then, what alternative memory technologies could look like years from now. I think that's a very good way to sort of describe the current quarter, but how we're very, very bullish about Arm Holdings plc American Depositary Shares long term. We delivered the best quarter in our history. We delivered the best quarter in our history on royalties, which is really an indicator for the strategies we have going forward. And we have a huge amount of customers shifting to Arm Holdings plc American Depositary Shares in a big way with more CPU counts. That being said, the quarters that we're most excited about are the ones ahead of us. We think we have huge opportunity, as I mentioned, in the new areas of physical AI, cloud AI, and edge AI. And we intend to do everything we can to make Arm Holdings plc American Depositary Shares the compute platform of choice. For all AI workloads. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day, ladies and gentlemen. Welcome to the ePlus Third Quarter 2026 Earnings Results Conference Call. As a reminder, this conference call is being recorded. 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 at that time, please press star then the number one on your keypad to raise your hand and enter the queue. If you would like to withdraw your question at any time, simply press star one again. Thank you. I would now like to introduce your host for today's conference, Mr. Kleyton Parkhurst. Senior Vice President Sir, you may begin. Thank you for joining us today. On the call is Mark Marron, Kleyton Parkhurst: CEO and president Darren Raguel, COO and president of ePlus Technology. Elaine Marion, CFO and Erica Stoker, general counsel. I want to take a moment to remind you that the statements we make this afternoon that are not historical facts may be deemed to be forward-looking statements and are based on management's current plans, estimates, and projections. Actual and anticipated future results may vary materially due to certain risks and uncertainties detailed in the earnings press release we issued this afternoon and our periodic filings with the Securities and Exchange Commission including our most recent annual report on Form 10-K, quarterly reports on Form 10-Q, and other documents that we file with the SEC. Any forward-looking statement speaks only as of the date on which the statement is made. The company undertakes no responsibility to update any of these forward-looking statements in light of new information, future events, or otherwise. In addition, we will use certain non-GAAP measures during the call. We have included a GAAP financial reconciliation in our earnings release which is posted on the Investor Information section of our website www.eplus.com. I would now like to turn the call over to Mark Marron. Mark? Mark Marron: Thank you, Clay. Good afternoon, everyone, and thank you for joining us today for our third quarter fiscal 2026 earnings call. The momentum we are seeing across the business continues to affirm our strategy and our focus on efficient operations, which is driving strong bottom-line results. A few key things to note. We are seeing the most strength across our key focus areas of AI, cloud, networking, and security. We believe our ability to bring these capabilities together through integrated solutions is resonating in the market helping us gain market share. We saw growth across all customer size segments with a particularly strong performance in the mid-market and enterprise space. Throughout the year, we have consistently delivered strong broad-based growth and continue to achieve operating leverage with the strategic alignment of our workforce towards higher growth areas and disciplined expense management. All while continuing to invest in the areas most important to our customers. And our strong balance sheet gives us the flexibility to invest organically, pursue strategic acquisitions, and return capital to our shareholders. Today, our Board of Directors approved a quarterly dividend of $0.25 per common share. During the quarter, the company repurchased over 200,000 shares. Turning now to a brief overview of the financial results of the quarter. Net sales grew 24.6% to $615 million. Our product sales increased 32.2% year over year led by a strong performance in data center and cloud, networking, and security. Demand tied to AI initiatives continues to drive infrastructure modernization across customers of all sizes. Services were flat as strong managed services were offset by weaker professional services revenue. We saw an increase in storage and cloud service as the continued build-out of data centers and underlying infrastructure suggests a long runway of opportunity across the ecosystem and ePlus is well positioned to benefit from this trend. Offsetting this was a decrease in project work due in large part to delays from customers in our retail sector. Our service offerings continue to play an increasingly important role as customers look for ePlus to help assess, design, deploy, and manage AI use cases. Security also continues to be an important business driver for us. Overall, security gross billings for products and services grew 16.4% year over year and is up 27.6% for the trailing twelve months. Customers continue to prioritize cybersecurity investments as threat levels rise due to AI. Our expanding security capabilities are resonating with our customers, we are well positioned to meet demand here too. This includes helping our customers around their governance and risk frameworks, as well as providing data governance advice to ensure the right classifications and permissions are in use to support AI consumption of data. I will also provide guidance on the correct protection architectures to secure AI workloads both in development and production. Moving on to profitability. Net earnings from continuing operations increased 129.3% to $33.4 million from the $14.6 million in the prior year quarter. And adjusted EBITDA increased 97% to $53.4 million with a margin of 8.7%, three hundred twenty basis points higher than the same period of the prior year. Closing out the financial commentary, our fiscal year 2026 operating performance has been particularly strong with net sales up 22% and adjusted EBITDA up 55% year to date. This reflects healthy demand trends combined with disciplined operational execution. With respect to industry trends, AI continues to be a growth driver. For us, AI adoption continues to accelerate across our customer base and remains a powerful tailwind as we are seeing AI-driven investments drive demand across data center, security, cloud, and networking. We continue to look for ways to enhance and expand our AI envisioning sessions, and AI acceleration offerings to help customers identify use cases that would benefit their company and provide cost-effective solutions to help them get started. This includes working on AI-specific solutions and services to address areas of need, address any financial constraints, and help supplement their current workforce. Overall, we remain focused on expanding our solutions portfolio, growing our professional and managed services capabilities, and extending our geographic reach. We continue to evaluate acquisitions and investments that enhance our position in higher growth areas, help us scale, provide access to new customers, markets, and capabilities, and support our long-term vision of delivering comprehensive workplace transformation solutions. In summary, our third quarter and nine-month year-to-date results reflect our diversified business model, emphasis on high-growth areas, and our disciplined execution. We believe we are well positioned for continued growth supported by industry demand trends, operating leverage, and financial flexibility. I will now turn the call over to Elaine. Elaine? Elaine Marion: Thank you, Mark, and thank you everyone for joining us. Today, I will review our financial performance in the 2020. Our third quarter results demonstrate the resilience and scalability of our business model as we delivered double-digit growth across all key metrics. Consolidated net sales increased 24.6% to $614.8 million as compared to the same three-month period in the prior year. Led by continued broad-based growth across customer sizes and verticals. With notable strength from mid-market and enterprise customers with some outsized projects from enterprise customers. Importantly, we delivered this growth while operating expenses increased a more modest 6%, underscoring operating leverage. Driven by our strategic focus areas of AI, cloud security, and networking, we delivered 15.6% growth in quarterly gross billing to $982.1 million and 18.7% growth in year-to-date gross billings, which approached nearly $3 billion. For the quarter, product revenue grew 32.2% year over year to $501.9 million reflecting growth across all categories. And service revenue totaled $112.8 million, down slightly from $113.6 million in the prior year period. Managed services revenue grew 10.5% led by continued demand for cloud and enhanced maintenance support offerings, while professional services revenue declined 7.8% due to project delays from customers in our retail sector. Services remain a strategic focal point for ePlus. As we continue to add capabilities in our managed services segment to build out our recurring revenue base. Sales across our customer verticals remain broad-based with telecom, media, and entertainment accounting for 27% of net sales on a trailing twelve-month basis, and technologies led in health care each accounting for 13%. And financial services at 9%, with the remaining 25% divided among other end markets which have been growing. Third quarter consolidated gross profit totaled $158.7 million up 26.8% from $125.1 million in the prior year quarter. And consolidated gross margin came in at 25.8% up 40 basis points from 25.4% last year. Product segment gross margin expanded 170 basis points to 23.8% benefiting from a higher gross margin on sales, offset by a lower impact from the sales of products that are recorded on a net basis. Professional services gross margin was 39.2% down from 40.1% in the prior year due to the blending of services from our acquisition of Bailiwick while managed services margins decreased slightly to 29% from 29.8%. Operating expenses increased 0.1% to $115.2 million in the quarter mainly due to increased variable compensation reflective of the increased gross profit. Continuing operations headcount declined 3.4% to 2,166 as we emphasized roles in our strategic high-growth areas. Operating income totaled $43.5 million and earnings before taxes were $45.6 million compared to $16.5 million and $19.9 million respectively, in 2025. Other income totaled $2.1 million compared to $3.4 million in the prior year. Our effective tax rate came in at 26.7% essentially in line with 26.9% in the prior year. Net earnings from continuing operations were $33.4 million or $1.27 per diluted share more than double the $14.6 million or 55¢ per diluted share reported in the year-ago period. Discontinued operations net income was $1.7 million due to the settlement of a legal matter compared to the $9 million reported in 2025. Net earnings from discontinued operations per diluted share were $0.06 compared to $0.36 in the prior year quarter. Non-GAAP diluted earnings per share from continuing operations more than doubled to $1.45 from 71¢ in the prior year. Adjusted EBITDA for the quarter totaled $53.4 million nearly doubled to $27 million we reported in 2025. Adjusted EBITDA growth significantly outpaced gross profit and net sales growth, demonstrating the meaningful operating leverage in our business model. Now I would like to review our results for the nine months ended 12/31/2025. Consolidated net sales increased 22.2% to $1.86 billion up from $1.52 billion in the first nine months of fiscal 2025, driven by balanced growth across products and services. Year-to-date consolidated gross profit rose 23.7% to $469 million and gross margin expanded 30 basis points to 25.2% led by strong product margins. Year-to-date consolidated net earnings from continuing operations totaled $98.7 million 68.5% above the $58.6 million reported in the first nine months of fiscal 2025. Diluted EPS from continuing operations increased to $3.74, from the $2.19 per diluted share reported in the prior year. Discontinued operations net earnings for the first nine months was $8.9 million or $0.34 per diluted share versus $24.2 million or $0.91 per diluted share in the first nine months of fiscal 2025. Non-GAAP earnings per share from continuing operations grew 59% to $4.23 up from $2.66 in the prior year period. Turning to our balance sheet, cash and cash equivalents at quarter-end totaled $326.3 million down from $389.4 million at the end of the last fiscal year, primarily due to working capital needs. Our strong cash position provides financial flexibility and enables us to pursue organic and inorganic investments while also allowing us to return capital to shareholders. Inventory at quarter-end was $241 million up from $120.4 million at the end of fiscal 2025 primarily due to an increase in projects in process. Inventory days outstanding were twenty-two days, above the fifteen days reported in the prior sequential quarter, and thirteen days in the prior year. This contributed to an increase in our cash conversion cycle to forty-one days from thirty-two days in last year's fiscal third quarter. We continue to take a disciplined approach to capital allocation with a focus on organic and inorganic investments in our key strategic areas and returning capital to shareholders through dividends and share repurchases. In line with this framework, we repurchased over 200,000 shares during the quarter. We are also very pleased to announce a quarterly dividend of 25¢ per common share payable on 03/18/2026 to shareholders of record on 02/24/2026. Our third quarter demonstrates the resilience of our business and continued execution on our strategic priorities. With that, I will turn the call back to Mark. Mark? Mark Marron: Thank you, Elaine. We reported a solid quarter and year to date with double-digit growth across all key metrics. Our third quarter and year-to-date results reinforce the strength of our strategy, the demand momentum across our portfolio, and the scalability of our operating model. Importantly, we see this momentum continuing. Accordingly, we are increasing our full-year guidance for net sales, gross profit, and adjusted EBITDA growth. We are raising our net sales guidance to 20% to 22% year-over-year growth an increase from the prior guidance of mid-teens. This increase is against fiscal year 2025 $2.01 billion from continuing operations. Gross profit is now expected to grow at a rate of 19% to 21%, as compared to the prior guidance of mid-teens from fiscal year 2025's $515.5 million from continuing operations. We now expect adjusted EBITDA to increase 41% to 43% over our fiscal year 2025 adjusted EBITDA of $141 million from continuing operations. This is an increase from our prior guidance that was twice the pace of net sales when net sales were expected to be in the mid-teens. As we look ahead, we are also mindful of potential near-term risks, including the industry-wide memory shortage. The global memory chip market is experiencing a notable supply squeeze and rapid unexpected price increases. Demand for advanced memory components, especially those used in large AI systems and data centers, is outpacing the industry's ability to produce them. While this dynamic could impact certain customer deployments or timing, we believe we are well positioned to manage through it given our diversified supplier relationships and close coordination with customers. Still, it is a development we must monitor closely. We are entering the last quarter of the year with strong momentum and balance sheet resources to continue investing while supporting our capital allocation priorities. Our focus remains on executing our long-term strategy, delivering consistent results, maintaining disciplined capital allocation, and supporting our customers as they invest and grow. The progress we have made year to date underscores the strength of our strategy and successful execution and positions us well for the future. We are excited about the opportunities ahead and remain focused on driving sustainable growth and long-term shareholder value. I want to close by thanking our ePlus team for their continued dedication and execution in delivering another strong quarter. Their efforts are critical to delivering value to our customers and our shareholders. Thank you for joining us today. We will now open the call for questions. Operator: Thank you. We will now begin the question and answer session. Again, if you would like to ask a question, please press star then the number one on your telephone keypad to raise your hand and enter the queue. If you would like to withdraw your question at any time, you can simply press star 1 again. We will pause just for a moment to compile the roster. Your first question comes from the line of Margaret Nolan with William Blair. Your line is open. Margaret Nolan: Hi. Thank you. And congrats from me on the quarter and the guidance. I wanted to dig into the comment one of you had made about outsized projects from enterprise customers. Can you fill us in a little bit on the nature of these? Know, how big they are, the drivers of them, and then how many quarters of kind of that outsized impact do you potentially expect until it reverts to normal or moderates? Mark Marron: Okay. First off, thanks, Maggie, for the quick appreciation of the quarter. So a couple of different things happened in the quarter. I will touch on a few of them and then address your enterprise piece. One, we saw growth across all product segments and customer size segments. What was really interesting is our mid-market customer had the biggest growth. So that is kind of our sweet spot. So some of the things we have talked about throughout the years about our strategy and where our focus is, around AI, cloud, security, and networking is really taking hold. What we were trying to message, if you will, as it relates to the enterprise customers. We had a few of our large enterprise customers that had fairly large quarters in Q3. We do not think that will be a major slowdown in Q4, but we do not think we will be able to replicate that. And that kind of shows in our guidance that we gave for the year. Margaret Nolan: Okay. Great. Thank you, Mark. And then on the professional services piece, you mentioned some project delays from retail customers. Are those more, like, push outs where you would expect maybe that revenue to materialize in March? Or fiscal 2027. Then any insight on you know, what is the nature of these delays and whether that could be more widespread across your services business? Mark Marron: Yeah. I would expect, Maggie, more '27 in 2027 or, I guess, 2026 or fiscal 2027. Is when you would see it. So we do not expect it to be a long term. It was just a few customers that delayed projects specifically in the retail and consumer space. That affected that. That is why our PS was down. You know, our staffing was down a little bit as well, but we are not as concerned on that. And then the other thing just to note, if you remember, last year, our services were up significantly over 50%. That was really due to the Bailiwick acquisition. So it was a combination of a tough compare you know, a few customers that kind of slid off this quarter that will slide into next fiscal year. And then staffing being down. I will highlight as well our MS to grow our managed services. Sorry. So we feel like we are in a pretty good spot overall. Okay. Margaret Nolan: Thank you. Mark Marron: Alright. Thanks. Stay warm in Chicago, Maggie. Operator: Again, if you would like to ask a question, please press star then the number one on your telephone keypad. Your next question comes from the line of Greg Burns with Sidoti and Company. Your line is open. Greg Burns: Good afternoon. I just wanted to touch on the inventory build and the, I guess, the timing of those projects. When do you expect to be able to deliver against that inventory that you are carrying on your balance sheet? Elaine Marion: Yeah, Greg. So sequentially, the inventory increased about $85 million and that is really in concert with what we are seeing with the increase in just demand for the quarter as well. So the projects are fluctuating in and out. There will be a progression of inventory over time, but we are also seeing new orders as well. So I would expect the inventory level to be a little more inflated in the next several quarters. Mark Marron: And traditionally, Gregor, AI and inventory pick up the end of the year a little bit as well. Okay. Is there any way you could I do not know. Maybe we are not at the point yet, but to quantify the impact AI is having for you, maybe any kind of additional kind of color you could give us to maybe understand kind of the size of that business now versus maybe the growth rates? Mark Marron: Yeah. Hey. Hey, Greg. We have kind of talked about it. What was interesting this quarter versus some of the prior quarters? AI was somewhat of a headwind. We now see it as a tailwind, and we have talked about this in prior quarters. What is happening now is everybody is starting to define their use cases figure out how to take advantage of these AI capabilities. What we have always talked about is people have to modernize their legacy systems and that is where we are seeing the growth. If you look at our data center cloud growth, if you look at our networking growth, which by the way, networking we have talked about it in previous quarters, It was kind of down a while back because the supply chain people had to digest it while they are through that. They are now AI enabling their networking and refreshing stuff based on timing. A lot of what you are seeing in the growth in our product areas is being driven by AI. Also, from a security perspective, there is a lot going on with governance risk and compliance, data governance, and I would call it even threat protection like, you know, building the road maps for our customers as they try to take advantage of the AI capabilities. But it has been a very nice add for us over the last few quarters related to the different product areas. Greg Burns: Alright. And then you had mentioned your ability to offer kind of integrated solutions across all the areas you mentioned, like AI cloud networking. How important is that becoming for you? Could you just maybe talk I heard you mention that in the past. So how important is that dynamic to your ability to continue to grow and gain market share? Mark Marron: Yeah. I think it is I think it is one of our differentiators, Greg. I think a lot of customers are looking to just lock down a few key partners or strategic vendors to kind of deal with. I would almost liken it to if you remember, back in the day with Convergent when that came out with compute and storage and virtualization, that is what kind of put us on the map in that space because we were able to bring all those vendors together in a tight solution while providing managed services around it. Greg Burns: Okay. Alright. Great. Thank you. Mark Marron: No problem. Anything else? Operator: And with no further questions in queue, I would like to turn the conference back over to Mark for any closing remarks. Mark Marron: Alright. Thank you, everyone, for joining us today for the earnings call. We look forward to updating you on our Q4 and fiscal earnings call in May. Thanks for taking the time today. Take care. Operator: This concludes today's conference call. You may now disconnect.
Operator: Greetings, and welcome to the Coherent Quarter Fiscal Year 2026 Earnings Call. It is now my pleasure to introduce your host, Mr. Paul Silverstein, Senior Vice President of Investor Relations for Coherent. Please go ahead. Paul Silverstein: Thank you, operator, and good afternoon, everyone. With me today are James Anderson, Coherent's CEO, and Sherri Luther, Coherent's CFO. During today's call, we will provide a financial and business review of 2026 and the business outlook for 2026. Our earnings press release can be found in the Investor Relations section of our company website at coherent.com. I would like to remind everyone that during our conference call, we may make projections or other forward-looking statements regarding future events and the future financial performance of the company. We caution you that such statements or predictions are based on information that is currently available and that actual results may differ materially. We refer you to the documents that the company files with the SEC, including our 10-Ks, 10-Qs, and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in the projections or forward-looking statements. This call includes and constitutes the company's official guidance for 2026. If at any time after this call, we communicate any material changes to this guidance, we intend that such updates will be done using a public forum such as a press release or publicly announced conference call. Additionally, we will refer to both GAAP and non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends. For historical periods, we provided reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release and investor presentation that can be found on the Investor Relations section of our website at coherent.com. Let me now turn the call over to our CEO, James Anderson. James Anderson: Thank you, Paul, and thank you, everyone, for attending today's call. As the world's leading innovator and provider of photonic technology and solutions, Coherent is at the center of an extraordinary expansion of optical networking infrastructure that's enabling tremendous growth in data traffic in the scale across, scale out, and scale up networks of AI data centers. As a result of the AI build-out, we saw strong revenue and profit growth in our December. We also experienced another step function increase in our bookings, which we expect to increase again in our current quarter. Given the extraordinary strength and visibility of demand from our customers, combined with our continued rapid expansion in production capacity, we expect a period of sustained strong revenue growth over the coming quarters. In particular, we expect continued strong sequential revenue growth in both our March and June quarters, and we expect our fiscal 2027 revenue growth rate to exceed our fiscal 2026 growth rate. The key growth drivers that we see over the coming quarters are growth in both 800 gig and 1.6 T transceivers, growth from the ramps of new products such as OCS and CPO solutions, and ongoing exceptionally strong demand in our product for DCI and scale across. In addition, we are now seeing demand signals that indicate a pickup in the growth of our industrial business over the course of this calendar year, led by strong orders from our semi-cap equipment customers. Overall, we're excited about the growth outlook over the coming quarters. We're also focused on driving meaningful operating leverage and expect to continue to deliver EPS growth at a significantly faster rate than our expected revenue growth rate. With that overview, let me provide some additional details on our recent quarter and what we expect moving forward. Turning to our Q2 operating results, revenue increased by 9% sequentially and 22% year over year on a pro forma basis, which excludes revenue from our recently divested aerospace and defense business. Non-GAAP gross margin expanded by 24 basis points sequentially and 77 basis points year over year. The combination of revenue growth and gross margin expansion drove non-GAAP EPS growth of 11% sequentially and 35% year over year. I'll now provide some highlights from our two operating segments. In our data center and communications segment, which now accounts for over 70% of our revenue, we saw an acceleration of our sequential growth rate with Q2 revenue growing by 11% sequentially and by 34% year over year, driven by strong growth in both the data center and communications markets. In our data center business, we drove a substantial acceleration in our sequential growth rate, with Q2 revenue growing 14% sequentially and 36% year over year. The acceleration of sequential growth in Q2 was driven by very strong execution from our production teams. Given the exceptional demand and our rapidly expanding capacity, we expect double-digit sequential growth in data center again in both our March and June quarters. Given that this is our largest and fastest-growing business, I'd like to provide some additional details on both the demand and supply picture within our data center business. Q2 data center revenue growth was driven by growth in both 800 gig and 1.6 gig transceivers. In Q2, we experienced another step function increase in our data center bookings with a book-to-bill ratio that exceeded 4x as customer demand continues to increase and customers place orders further out in time, which provides us with strong visibility for the coming quarters. The strength of our product portfolio combined with our vertical integration and our expanding US manufacturing footprint provide a clear competitive advantage with our customers. We expect revenue growth in the current quarter to be driven by a combination of growth in both 1.6 T and 800 gig transceivers as well as growth in our OCS systems. We see strong demand for our 1.6 T transceivers across multiple customers and continue to expect both 800 gig and 1.6 T to grow significantly in calendar '26. We expect 1.6 T to ramp significantly over the coming quarters, with the early phase of the ramp driven by our EML and silicon photonics-based transceivers, followed by our 200 gig VCSEL-based 1.6 T ramping in the second half of this calendar year. On the supply side, to address the extraordinary growth in demand, we are investing in the rapid expansion of our production capacity. Paul Silverstein: For example, we significantly increased our indium phosphide production. James Anderson: In Q2, and we are executing on track to our plan to double our internal indium phosphide production by the fourth quarter of this calendar year. As a reminder, our indium phosphide capacity expansion is driven by our ramp of six-inch wafer production. A six-inch wafer compared to a three-inch wafer will produce more than four times as many chips at less than half the cost. Our production team is doing an outstanding job ramping our six-inch indium phosphide production, and I'd like to take the opportunity to thank our team for executing ahead of our plan in Q2. We are ramping production in parallel at two sites, Sherman, Texas, and Yarfala, Sweden. We are in production with three different types of key transceiver components on six-inch indium phosphide, EMLs, CW lasers, and photodiodes. Our six-inch yields continue to exceed the yields of our three-inch production lines. In addition, we have multiple six-inch indium phosphide substrate suppliers, and we have secured committed substrate supply that supports our expected doubling of capacity by our December. In short, we are very pleased with our ramp of the world's first six-inch indium phosphide production lines and expect this production ramp to support significant revenue growth and margin expansion of our transceiver products over the coming quarters. We also expect to continue to supplement our internal indium phosphide capacity with continued sourcing from external suppliers. For example, EML supply from our external suppliers increased sequentially in Q2, and we expect it to increase again in the current quarter and during this calendar year through continued long-term partnership with our key external suppliers. We also continue to invest in the expansion of our transceiver module assembly capacity. We are expanding our production capacity in Malaysia, Vietnam, and other locations. Overall, I'm very pleased with the continued expansion of our production capacity to meet the rapid growth in our demand. I'm equally excited regarding our progress on other key data center products and technologies. Specifically, I want to provide updates on our CPO and OCS products, which we expect to be significant contributors to our long-term growth and profitability. Transceiver technology platforms continue to evolve, and we are well-positioned as we continue to make progress on LPO, LRO, CPO, and MPO-related products and technologies, with a growing number of engagements across a wide range of customers. In particular, we recently secured an exceptionally large purchase order from a market-leading AI data center customer for a CPO solution that includes our new high-power CW laser that began sampling last year. Beyond the outstanding performance of this solution, a key factor in the customer's decision to partner with Coherent was the fact that our high-power CW laser is produced on our six-inch indium phosphide line in our Sherman, Texas facility. We expect this significant design win to generate initial revenue toward the end of this calendar year, with a more significant revenue contribution next calendar year and beyond. We also have engagements across multiple other customers for both indium and 200 gig VCSEL-based solutions for CPO and MPO applications. In Q2, we also saw strong progress for our optical circuit switch platform based on our differentiated non-mechanical liquid crystal technology. OCS backlog grew sequentially in Q2, and we now have over 10 customer engagements. Shipments and backlog include both 64 by 64 and 320 by 320 system sizes, with most of the backlog weighted toward the larger system size. We expect OCS revenue to grow sequentially in the current quarter and the coming quarters as we ramp production capacity as fast as possible to meet the rapidly growing demand and the over $2 billion of expected addressable market opportunity for this over the coming years. In our communications market, Q2 revenue grew 9% sequentially and 44% year over year. Growth continues to be driven by our products for data center interconnect and scale across as well as strong growth in traditional telecom applications. We expect our communications business to grow sequentially in the current quarter as well as our June. The strength we are seeing in communications is broad-based in terms of both products and customers. We continue to see extremely strong demand for our products addressing the data center interconnect market opportunity. These include our ZR and ZR plus coherent transient products as well as lasers and other components that we sell to system OEMs. For example, we recently secured a significant multiyear design win with a leading DCI OEM which utilizes Coherent's industry-first uncooled three-pin micropump solution. We're also seeing strong demand in our traditional telecom business, driven by ongoing market recovery and new product introductions, such as our new award-winning multi-rail technology platform. We're also experiencing very strong demand across our broader communication product portfolio, including pumps, amplifiers, line cards, and systems. Turning to our industrial segment, revenue grew 4% sequentially and was flat year over year on a pro forma basis, excluding revenue from the recently divested aerospace and defense business. Sequential growth in Q2 was driven by our industrial lasers and engineered mid-materials product lines. We expect the industrial segment to be roughly flat sequentially in the current quarter on a pro forma basis. However, looking ahead, we expect improving demand. For example, we saw a significant increase in orders in Q2 from our semi-cap customers, which we expect to translate into sequential growth for our industrial business in our June quarter and the remainder of this calendar year. At the recent Photonics West Conference, we highlighted a number of compelling long-term growth areas for our industrial product lines, including data center XPU cooling solutions based on our 300-millimeter silicon carbide and thermodyte technology. Thermoelectric generators for improving data center energy efficiency through waste heat recovery, excimer laser annealing systems for Gen 8 OLED fabs, high-power lasers for direct fusion energy generation, and excimer lasers for processing superconducting tape used in magnetic fusion applications. This wide range of differentiated solutions positions our business for significant long-term growth. Finally, I'd like to provide an update on our portfolio optimization. Last week, we completed the sale of our product division based in Munich, Germany, which makes tools for materials processing. The sale of this product division is expected to be immediately accretive to both gross margin and EPS. As a result of this sale and other operational streamlining initiatives, we exited 10 sites over the past quarter, which brings the total number of sites that we've either sold or exited to 33 over the past roughly six quarters since we began this initiative. We plan to continue to streamline our footprint and exit additional underutilized and unnecessary sites over the coming quarters. In summary, we delivered strong revenue and EPS growth in Q2 and expect both fiscal 2026 and fiscal 2027 to be strong growth years for Coherent, given our exceptional demand from our customers and the rapid expansion of our production capacity. I'd like to thank my Coherent teammates for their strong execution and the incredible innovation that they are driving every day for our customers. I'll now turn the call over to our CFO, Sherri Luther. Sherri Luther: Thank you, Jim. In our second quarter, we continued to drive strong double-digit year-over-year revenue growth, gross margin expansion, and strong profitability. Capital allocation continues to be an area of focus where we maintained our debt leverage ratio below two times. I will now provide a summary of our Q2 results. Second quarter revenue was a record $1.69 billion, up 7% sequentially from the first quarter and up 17% year over year, driven by growth in AI data center and communications demand. On a pro forma basis, excluding revenue from our aerospace and defense business, which we sold in Q1, Q2 revenue increased 9% sequentially and 22% year over year. Our Q2 non-GAAP gross margin was 39%, a 24 basis point improvement compared to the prior quarter and a 77 basis point improvement as compared to the year-ago quarter. We continue to execute on our gross margin expansion strategy, where we generated sequential and year-over-year increases in gross margin primarily in the data center and communications segment. These improvements were driven by reductions in product input costs, efficiency gains from improved cycle times in the manufacturing process, as well as yield improvements. Pricing optimization also continued to contribute meaningfully to our gross margin expansion. Second quarter non-GAAP operating expenses were $321 million compared to $304 million in the prior quarter and $283 million in the year-ago quarter. Operating expenses as a percentage of revenue declined to 19% as compared to 19.2% in the prior quarter and 19.7% in the year-ago quarter. SG&A expense as a percentage of revenue declined to 9.6% in Q2 as compared to 9.8% in the prior quarter and 10.2% in the year-ago quarter. Due to our continued progress on driving efficiencies and greater leverage in SG&A. We have made significant progress on our ERP consolidation project, where we expect most of the company to be on a single ERP platform by the end of this fiscal year. In addition, we are executing on our low-cost region within our G&A functions, that will continue to show benefits throughout this fiscal year and more meaningfully into our fiscal year 2027. The sequential and year-over-year increases in R&D were primarily in the Data Center and Communications segment as we continue to focus on investments with the highest ROI that drive the future growth of the company. Our second quarter non-GAAP operating margin was 19.9% compared to 19.5% in the prior quarter and 18.5% in the year-ago quarter. Second quarter non-GAAP earnings per diluted share was $1.29 compared to $1.16 in the prior quarter and $0.95 in the year-ago quarter. From a capital allocation perspective, we maintained our debt leverage ratio at 1.7 times, down from 2.3 times in the year-ago quarter. Our capital expenditures in the second quarter were $154 million as compared to $104 million in the prior quarter and $106 million in the year-ago quarter. We are focused on supporting the exceptional customer demand in data center and communications. As a result, we are rapidly expanding our capacity and expect our capital expenditures to increase sequentially over the remainder of this fiscal year. We have made good progress in strengthening our balance sheet, including significantly reducing our debt leverage, refinancing our debt, and improving our working capital. With a strong balance sheet and focus on improving profitability, the company is well-positioned to support the exceptional customer demand with investments to rapidly expand our production capacity. As Jim noted, at the end of last month, we closed the sale of our product division based in Munich, Germany, that makes tools for materials processing. For reference, over the past four quarters, this business contributed average quarterly revenue of $25 million with a gross margin well below Coherent's corporate gross margin. The sale will reduce our employee headcount by approximately 425 employees. We expect to use the proceeds from the sale to reduce our interest expense by paying down debt, which will be immediately accretive to our gross margin and EPS. I will now turn to our guidance for 2026. Our Q3 outlook includes $5 million of revenue from the period prior to the close of the sale of the Munich product division at the January. We expect revenue to be between $1.7 billion and $1.84 billion. We expect non-GAAP gross margin to be between 38.5% and 40.5%. We expect total operating expenses of between $320 million and $340 million on a non-GAAP basis. We expect the tax rate for the quarter to be between 18% and 20% on a non-GAAP basis. We expect EPS of between $1.28 and $1.48 on a non-GAAP basis. In summary, I'm very pleased with the strong results in our second quarter. We remain focused on expanding profitability with disciplined execution against our long-term financial target model. We are excited about the significant growth trajectory ahead. This momentum reinforces our confidence in driving long-term growth and durable value creation for our shareholders. That concludes my formal comments. Operator, please open the call for Q&A. Operator: 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. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask analysts to limit themselves to one question and a follow-up so that others have an opportunity to do so as well. One moment, please, while we poll for questions. Our first question comes from Samik Chatterjee with JPMorgan Chase and Co. Please proceed with your question. Samik Chatterjee: Yes. Hi. Thank you. Thanks for taking my questions. And Jim, hope your leg is healing. Now. Hopefully, things are better on that front. Maybe for the first question, really just on demand, how would you characterize? I mean, you gave some of the book-to-bill numbers that you're seeing, but how would you characterize the visibility there in terms of maybe duration, like how long is the visibility in terms of demand that the customers are providing? And vis-a-vis, how should we think about the capacity ramp for indium phosphide in particular? How are you planning that out? Particularly, how to think about the contribution of six-inch to that capacity ramp? I have a follow-up. Thank you. James Anderson: Yeah. Thanks, Samik. And, yes, the leg is doing much better. Thank you for that. I appreciate that. On the demand question, yeah, I would say, you know, I'd call the demand that we're seeing and the visibility extraordinary. If I just look at, you know, a couple highlights from last quarter, you know, if we look at our data center business, you know, I was really pleased with the acceleration of our sequential growth rate to 14% sequential growth. And then we also saw, as I mentioned in the prepared remarks, over 4x book-to-bill ratio. So just seeing incredibly strong demand, and we're seeing bookings go further out in time than we would have in the past, which is great for us for visibility. So number one, you know, bookings being booked out, you know, through the rest of this calendar year and most of the bookings we're getting now are into calendar '27. So most of our calendar '26 is booked out and calendar '27 is filling very, very quickly. That's important to us because it gives us just great visibility. And then we're also getting really good detailed long-term forecasts from our big customers. You know, a lot of times those forecasts go out, you know, two, three years. So we're getting forecasts that go out into calendar '28, which, again, is great for visibility. And then the third thing I would mention with respect to visibility is the number of long-term supply agreements that we've either signed with customers or are in the process of signing. Where, you know, the LTA will provide a guarantee to our customers for a certain amount of supply in exchange. They give us a guarantee on a certain amount of demand. And there's often some sort of financial commitment from our customers like investment for CapEx, etcetera. So I would say all those things combined, the visibility of the business is the best it's ever been. Which gives us just kind of great confidence in terms of the go-forward growth that we're seeing. On the second part of your question on indium phosphide ramp, again here, really pleased with the team's execution here on the six-inch indium phosphide ramp. You know, one of the key metrics that I look at in terms of how we're making progress is wafer starts. And remember our goal that we mentioned last quarter was that we wanted to double indium phosphide capacity by the end of this calendar year. And if you look at the number of wafer starts that we're starting this quarter, we're basically at 80% of that target capacity already. So we're starting wafers at 80% of the goal of doubling capacity, which is really strong and frankly, ahead of schedule. In fact, last quarter, we more than quadrupled the number of wafer starts from our September quarter to our December quarter. So I think that for me, that's a really good important leading indicator on how we're progressing on the indium phosphide ramp is that, you know, being at 80% of target in terms of initial wafer starts. Now that's the beginning of the production line. Right? It does take a number of quarters before those wafer starts or a number of months before those wafer starts transition into products and to customers. And the typical time from a wafer start to a transceiver shipment is about six months. So but that's a great leading indicator on our indium phosphide ramp. And we're already seeing the benefits this quarter from the initial production that started in our September. So I'm really pleased with that ramp. And again, you know, the reason we're so focused on that is because a six-inch wafer versus a three-inch wafer is more than four times as many chips at less than half the cost. And so we're really pleased with that ramp. And then, Samik, it sounded like you had a follow-up. Samik Chatterjee: Yep. Yep. Just quick. OCS, I mean, clearly demand is strong, but any way to quantify for us what the magnitude of the backlog from the 10 customers is? Or maybe in terms of, like, material impact to revenues, how should we be thinking about when does it get to maybe more than, like, a $100 million revenue number? In terms of timing? Should it be this fiscal year or next year? How to think about that? Thank you. James Anderson: Yeah. Thanks, Samik. Yeah. In terms of OCS, this is gonna sound like a common theme. But here again, demand is very strong. We are very focused on the production ramp now. So backlog is good. It grew in the December versus the September. We expect revenue to ramp to grow this quarter. And really, the revenue to ramp throughout this calendar year and into next year. And we are just 100% focused on ramping capacity and production as fast as possible. The demand is very strong. We're engaged with over 10 customers. The size of the market has only grown since we assessed it about a year ago. And so tremendous opportunity, and we're ramping production as fast as possible. And we'll probably give some more specific milestones in terms of revenue as we progress through the year, but it will certainly contribute to our revenue growth throughout this calendar year and certainly contribute next year as well. Samik Chatterjee: Got it. Great. Great. Thank you. Thanks for taking my questions. Operator: Our next question comes from Simon Leopold with Raymond James. Please proceed with your question. Simon Leopold: Thanks very much for taking the questions. The first thing I wanted to ask about was you had highlighted some progress correction on the 1.6 terabit, which is, I guess, I'd call it an emerging cycle. So maybe if you could put some milestones around this to help us understand when does that cost $100 million per quarter? And how does the competitive landscape stack up for that product? And then I've got a longer-term question I'll follow-up with. James Anderson: Yeah. Thanks, Simon. So first of all, both 800 gig and 1.6 we expect to continue to grow for this calendar year. We saw growth in both 800 gig and 1.6 last quarter. We expect both to grow again this quarter. You know, 800 gig is the biggest portion of revenue still. We expect that to grow on a year-over-year basis this year. 1.6 is growing much faster, but it's growing off of a smaller base than 800 gig. I would say the 1.6 ramp has accelerated the demand from the customers as it accelerated. We're ramping with multiple customers. I see that as a really a key main growth driver for us throughout this year. We don't typically break out revenue by data rates, but those two 800 gig and 1.6 will absolutely be key growth drivers for the company this year, this calendar year. And 1.6 will continue to ramp into the following calendar year as well. In fact, a lot of the orders that we're seeing right now are certainly for 800 gig, but a tremendous amount of orders on 1.6 T. And so that's great. That provides great visibility in terms of the demand moving forward. And then maybe just mention what I did on the prepared remarks, which is our initial ramp is driven by both EML-based transceivers for 1.6 T as well as silicon photonics. But we expect VCSEL-based 1.6 T transceivers to start to ramp in the second half of this year. So really pleased with the progress and the rate and pace and the growth we see ahead for 1.6. Simon Leopold: That's good. And then I heard also you've gotten a qualification on the CPO package optics. I'm gonna ask about what happens next, which is thinking about scale-up opportunities. Are we in the time frame yet where you're engaging customers for scale-up architectures? Maybe if you could give us some sense of kind of thinking about that market opportunity, which I imagine may be years away, but have to get you're engaged in the engineering aspects already. Thank you. James Anderson: Yeah. Certainly. So that CPO purchase order that we received, and it was a massive purchase order. And that's for a solution based on our high-power CW laser. We're really pleased with that. That is initially, that will be deployed in scale-out, but we expect that to lead to scale-up deployments over time. And I would say that, you know, there is very active engagement and design win progress on scale-up on CPO, all sorts of CPO-related solutions for scale-up across multiple customers. I would call that very active, deep engagements. On the size of the scale-up opportunity, I would say it's actually difficult to size. It is tremendous. Some of the forecasts that we've seen from our customers are very, very large. Right? If you think about, you know, within the scale-up opportunity, you know, all of that network today, the networks within the racks are electrical. And as those networks convert to optical over the coming years, the amount of optical content that we gain in the scale part of the network is just tremendous. And we're very well-positioned. You know, there's a couple different ways that we expect to supply customers in that space. You know, we can certainly supply them at the component level by providing high-power CW lasers, detectors, fiber optical cable. But we're also planning to supply those customers at a higher level as well. So for instance, external laser sources, the pluggable laser sources that would plug into the front panel, also CPO module assemblies, etcetera. So there's a variety of ways that will support that market. But we see that as a tremendous growth opportunity as in scale-up, and I wouldn't call it years out, I think it's sooner than that based on the plans that we're seeing from our customers. Simon Leopold: Great. Thank you very much. Operator: Our next question comes from Ruben Roy with Stifel. Please proceed with your question. Ruben Roy: Jim, I'd like to keep the discussion going on CPO. And it's great to hear about the large order and the timeline end of the year into next year. High level, how are you thinking about content CPO relative to the strength you're seeing currently with 800 gig and the nascent 1.6 terabit module strength? Do you think that these will I think the consensus is that these technologies will coexist, but I'd love to get your thoughts on the content opportunity and the growth opportunities that you look at into 2027 as CPO ramps? Thank you. James Anderson: Yeah. Thanks, Ruben. Yeah. We really view it as it's additive. The way we think about it is, you know, pluggable transceivers will remain the dominant form factor in certainly, in scale across and in the scale-out networks, through at least the rest of this decade. Right? So we see very strong growth in those pluggable formats in scale across and scale out over the coming years. And what we see in CPO is CPO starting to get deployed initially in scale-out, and we're seeing that. That was the purchase order that we procured, etcetera. But we believe that CPO the big growth in CPO is actually driven by scale-up. And that is a very tangible opportunity based on the customer engagements that we have. And that will we believe the scale-up CPO opportunity will dwarf the opportunity in scale-out. It will be orders of magnitude larger. And so we view that as all incremental TAM for the optical industry in general and certainly for us as well, since that network is 100% electrical today. All of that optical content and scale-up is incremental TAM. Ruben Roy: That's helpful. Thanks, Jim. And a quick follow-up. You talked about 800 gig versus 1.6 terabit mix. And just wondering, I assume you're starting to see some demand for 200 gig in differential EMLs and that type of thing. As you think about later this year into next year and sort of the mix, what are the margin implications as you approach 40% gross margins here on the modules themselves? James Anderson: Yeah. The 1.6 T gross margins we expect to be higher. Generally, what we see as an industry is with each new data rate, the ASPs of each new data rate go up over the prior data rate. So we expect 1.6 We're seeing 1.6 ASPs that are higher than 800 gig. And then, generally, especially at the beginning of the life cycle of the data rate, the gross margins are higher. So we expect 1.6 gross margins to be higher. And so we view the 1.6 ramp as margin accretive for us. And then certainly, you know I'm sorry. Yeah. Just one other point also factor in that is as, you know, as we ramp six-inch indium phosphide capacity, which supports both 800 gig and 1.6 transceivers, that six-inch capacity is a gross margin driver for us as well in our transceiver business. Ruben Roy: Great. Thanks for the detail, Jim. Operator: Our next question comes from Thomas O'Malley with Barclays. Please proceed with your question. Thomas O'Malley: Thanks for taking my question. Jim, in preamble, you talked about a book-to-bill ratio that exceeded 4x as customer demand continues to increase. And customers are placing orders further out in time. Obviously, a lot of really good opportunities in the data center segment, but maybe you could spend some time talking about the components of that backlog. Where is the greatest area of strength? Obviously, you have the OCS side, the module side, on the laser side. Maybe spend a little time just measuring out those vectors to give us a little bit of a feel for what's contributing to most of that strength given we're hearing from others in the industry a lot specific numbers. I know you don't do that, but anything that you can to help us on that. James Anderson: Yeah. Thanks, Thomas. In terms of that book-to-bill last quarter, I would say the majority of that vast majority was driven by 800 gig and 1.6 transceiver bookings. It's a combination of, you know, growth that we expected from 800 gig, continued growth even maybe stronger, a little bit stronger than we had expected, and then an acceleration in 1.6 T. So both 800 gig and 1.6 T bookings were incredibly strong. We expect that to continue into this quarter as well. In addition to that, bookings for OCS contributed last quarter. If I look at the current quarter and what we're expecting in bookings, we expect it to be another incredibly strong quarter in terms of bookings. And it's really a combination of those four things I mentioned, primarily 800 gig and 1.6 transceiver bookings. Over time, it starts to be more and more 1.6 bookings. And then, you know, I would say CPO and OCS as well. So those are really the main drivers within the data center bucket of bookings. The other place where we are seeing very strong bookings is in the communications business. So I would say the growth that we're seeing in DCI data center interconnect products, very, very strong. That's growing faster than our overall growth rate in communications. But we continue to see strong demand beyond DCI in the kind of traditional telecom space, as well. So that would be the other place where we're seeing strong bookings. Thomas O'Malley: Thanks, Jim. And then just as a follow-up, you talked about indium phosphide capacity doubling by year-end. Your competitor talked about 40% increases, which they're kind of blowing through in a short period of time. It seems like the industry is bringing a lot of supply online. Broadcom's talking about some additional capacity as well. Maybe talk about when you see the industry getting the product that it needs. Are we still in a position where the industry is short? Just given the incremental capacity additions, when do you think you'll be at equilibrium in that business? Thanks. James Anderson: Yeah. It's a great question. It seems like every quarter, we think we're gonna catch up and then the demand increases. So I don't foresee the supply-demand getting back in balance this calendar year. I don't think it happens next calendar year. And if the forecasts that we're seeing from customers for indium phosphide laser supply that they need for scale-up, I think we could be in a very sustained long period of supply-demand imbalance on indium phosphide, which is exactly why we're super focused on ramping our six-inch capacity as quickly as possible. That near-term goal is to double our capacity by the end of this year. But we're driving goals beyond that that are very aggressive in terms of our continued ramp of indium phosphide capacity. And the demand that we're seeing from the customers absorbs all of that capacity and then some. Thomas O'Malley: Operator, if we could go on to the next question. Operator: Our next question comes from Blayne Curtis with Jefferies. Please proceed with your question. Ezra Weener: Hi, Ezra Weener on for Blayne. Thanks for taking my questions. Just the first one, obviously, pricing is coming up for your externally sourced components. But at the same time, you guys are signing LTAs. Talk a little bit about pricing and how you're thinking about gross margins within that context? James Anderson: Yeah. In terms of input cost, I think you're talking about input cost to our pricing. Yeah. We view it as we are seeing some higher pricing input costs with respect to externally sourced things like EMLs. But that is really offset by our internal indium phosphide ramp. Right? So I would say the net is, you know, we're in a much better position over the coming quarters as we continue to rapidly expand our indium phosphide production capacity, and that's a gross margin benefit for us. So the net is positive for us. So we feel pretty good in terms of our position with respect to indium phosphide cost. Another way to look at it is anytime the kind of market price of indium phosphide goes up, it makes our internally sourced indium phosphide that much more valuable. Right? In terms of a differential. And then, you know, I would say in terms of our own pricing, you know, we continue to see, you know, the ability to continue to optimize pricing. I think Sherri mentioned in her prepared remarks that some of our gross margin improvement last quarter was based on pricing optimization. We continue to see opportunity to optimize pricing, especially in an environment where demand is very strong. And so, you know, we believe we're in a good price environment across all of our businesses. And maybe, Sherri, do you want to comment anymore on the effects of gross margin, or did that cover it? Sherri Luther: Yeah. Sure. Just a couple of things I can add. You know, when you look at the improvement that we saw both quarter on quarter and sequentially in gross margin, or quarter on quarter and year over year, key elements of that were certainly cost reductions where we saw lower product input costs in the data center and communications part of our business was actually an area where we saw more of the magnitude of that benefit. We had lower product input costs for key elements, you know, larger components of our BOM, so that was really good to see. We also had improvements in the manufacturing process that enabled greater throughput and efficiency and yield improvements. And, again, that was in the data center part of our business, so that was really good to see as well. And then on the pricing optimization side, we actually sequentially saw even greater improvement in price optimization in a number of areas in our business. So these are key elements of our gross margin expansion strategy that we've rolled out as part of our strategy at our Investor Day last year. And we're continuing to focus on that. Really pleased with the progress that we've made to date on that. In fact, the other thing I'll add is that if you look at our 39% gross margin for this most recent quarter that we achieved and you compare that to where we our FY 2024 gross margin, we've actually improved our gross margin by 470 basis points through the elements of the strategy that I've described here. So I'm, you know, really pleased with the progress. We're still I would consider to be in early stages as we continue to drive toward that greater than 42% target. Ezra Weener: Got it. Thank you. Then for the follow-up, just wanted to ask about the six-inch ramp and kind of the timing of that and also what the long term looks like. So how should we expect that to layer in? And longer term, do you expect the heavy majority of your capacity to be six-inch and you talk a little bit about the advantage of that relative to peers? James Anderson: Yeah. On the second part of the question over the long term, yeah, essentially, all of the capacity that we're adding now is six-inch. We're adding a little bit of three-inch, but all of the but beyond that, the vast majority is six-inch capacity. And that'll continue. So over time, six-inch capacity would just become more and more, a bigger percentage. And if you can if you think about us doubling capacity year over year and almost all of that coming from six-inch. The other way to think about it is by the end of this calendar year, about half of our capacity will be six-inch, and it'll grow it'll grow from there in the following years. And in terms of the ramp progress, as I shared, in terms of wafer starts, we're already at 80% of that goal to double our capacity this year. We have plans to significantly expand it beyond just doubling capacity in the following years. It's a little too early to talk about that, but as we get move throughout this year, I'll get some guideposts on future years and the expected continued ramp of indium phosphide. And then I think you asked about cost structure advantage. Yeah. So the basic cost structure advantage is a six-inch wafer compared to a three-inch wafer. You get, you know, over four times as many products out of that wafer at less than half the cost. So it's a tremendous cost savings. And that's been a key factor in, I think, why, you know, our customers have been selecting us as well. So for instance, that very large, high-power CW purchase order that we just received. A big reason for that was because that high-power CW laser will be manufactured on six-inch indium phosphide, and it will be made in Sherman, Texas, US-based manufacturing. So that's definitely something that's factoring into our customers' decisions on why to select Coherent is that advantage in six-inch capacity. And the location of it. Ezra Weener: Got it. Thank you very much. Operator: Our next question comes from Papa Sylla with Citigroup. Please proceed with your question. Papa Sylla: Thank you for taking my and congrats on the results. So Jim, I guess my first question is on indium phosphide capacity. Ramp as well. So any way you can update us, at this point on the mix of your internally kind of developed indium phosphide transceivers I believe previously you reached 50% or so. Any color on where we are at this point? And perhaps ties to that as well, do you have any target in mind on longer term, what kind of mix you are looking at? James Anderson: Yeah. Thanks, Papa. What we've said in the past to what we've shared is that, you know, in the past, our amount of indium phosphide internal versus external supply is the majority of our indium phosphide, for instance, lasers are supplied from internal sources. And now if I look forward, I would expect just given the rapid pace of our six-inch production over the coming, you know, this year and following years, I think the percentage that's internally sourced will grow over time. Now that said, you know, we expect to continue to utilize external suppliers as well. We think there's, you know, there's good reasons for that with customers and with supply chain resiliency. And so we expect to continue to utilize external sources. But over time, you know, the internal sources will become a bigger proportion of the supply. Papa Sylla: Got it. That's helpful. And for my follow-up is kind of on OCS. It's very good to hear that your engagement is growing. I think you're about seven now. Kind of it's go it went up to 10 now. So it would be helpful if you can remind us, kind of the prior seven, what kind of workload would those seven engagement or projects relate to? Related to? Or and also for the additional three as well. Any color on are those AI focus or what kind of workload they are kind of related to? James Anderson: Yeah. Thanks, Papa. Hey. Yeah. I'll talk in terms of applications that we're seeing OCS. You know, I think initially, we were seeing OCS adoption in where, you know, OCS has historically been used for instance, in a spine part of the network or in a redundancy type of application. But, you know, as we've engaged with more customers and as we've engaged more deeply with existing customers, then there's been a broadening of the applications that we're seeing for OCS. So whereas, you know, maybe initially, there most of the applications were in the scale-out portion of the network, we're certainly seeing now applications of OCS even in the DC portion of the network. And as we're deeply engaged with customers on their scale-up plans, so optical within scale-up, we're now seeing customers, you know, talking about using OCS within scale-up network as well. And so it's really been a broadening of not just customers, but application. And that's why, you know, when we assess the size of this market a year ago, we assessed it at about I think it was about $2 billion by the end of this decade. That we likely undersized it. And if we reassessed it now, it would be well above $2 billion. So we've seen customers and applications just continue to grow. Papa Sylla: Thank you. That's very clear. Operator: Our next question comes from George Notter with Wolfe Research. Please proceed with your question. George Notter: Hi, guys. Thanks very much. I just want to come back and ask about your ability to manufacture all this stuff. Obviously, the demand is quite impressive right now. I think we hit the kind of indium phosphide pretty well, but I'm just curious, like, you know, transceiver supply in Malaysia, Vietnam, obviously, you've got a telecom business as well. I'd be curious on, like, what things look like in terms of utilization rates, you have enough capacity? Do you need to expand capacity? And then any sense that you'd look to use outsourcing as well? Thanks a lot. James Anderson: Yeah. Thanks, George. Yeah. So we've been more focused on updating you on indium phosphide because that's kind of been the constraint across the industry, and we've been by that. But in parallel, we have certainly been building out capacity of, for instance, transceiver assembly and test. So I shared last quarter that within Malaysia, we opened a new facility within Malaysia. Second facility in Penang, Malaysia. We also are now planning to build transceivers at our Vietnam facility. So Vietnam already makes a number of the components that go into our transceivers. We're now starting to build transceivers within Vietnam, so that's an expansion. So we've been expanding assembly and test capacity. We're also expanding you mentioned about telecom. For our DCI and telecom products, we're also rapidly expanding capacity for that as well. So, yeah, I would say really across the board, we're ramping capacity as quickly as possible. I feel like that's kind of my main job right now is ramping capacity. And so, yeah, given the strong demand that we're seeing, that's definitely a focus across the organization and across many different product lines. And then I think you asked about outsourcing as well. Yeah. We are very open to outsourcing, and we do use a number of different partners for outsourcing. And the way we always approach it is if manufacturing something provides us a technical, like, a technology benefit that our customers care about or if it provides a cost structure benefit, then we'll do it in-house. But if it doesn't provide either one of those two benefits, then yes, we will look to outsource. And there's a number of places where we've historically outsourced things that we're looking at moving forward. So what we keep insourced is things that are technically beneficial to our products and cost structure advantage. You know, obvious example of that is six-inch indium phosphide where we're the world's only producer of six-inch indium phosphide. So, yeah, we're certainly open to outsourcing, and we'll continue to look for opportunities to leverage outsourcing. George Notter: Super. Thanks very much. I appreciate it. James Anderson: Thanks, George. Operator: Our next question comes from Karl Ackerman with BNP Paribas Asset Management. Please proceed with your question. Karl Ackerman: Yes, thank you. Jim, thanks for more detail on the growth magnitude into 2027. But could you speak to the investments you're making today to drive growth and whether OpEx growth could grow at perhaps half of sales growth? I ask because in March, would have thought you'd see maybe less growth, more stability in OpEx from the sales and material processing business. So if you could tie that together too, that'd be helpful. And I have a follow-up, please. James Anderson: Yeah. Maybe I'll let Sherri talk about the OpEx growth, but maybe just a little bit of a preamble as from an OpEx standpoint, from maybe from an R&D standpoint, you know, our approach is, you know, we have a large number of businesses that have tremendous growth ahead of them. And we want to make sure we're maximizing that opportunity. And so if those businesses require R&D, we're certainly going to scale the R&D to maximize the opportunity. Think, you know, and we'll certainly scale, you know, at revenue, maybe a little bit less than revenue. But I think the big opportunity to drive operational leverage is in SG&A. And so maybe with that, I'll hand it off to Sherri and maybe provide some additional comments on that. Sherri Luther: Sure. Absolutely. Thanks for the question, Karl. So, from an OpEx perspective, on the R&D front, as Jim said, I mean, we're focusing on making those investments that drive the long-term growth of the company and when you look at our year-over-year R&D growth, you see that it increased 16%. So we're, you know, we're definitely investing in R&D, and those areas are, you know, very heavily in data center and communication part of our business, because that's where we're seeing the long-term growth. And so that's very important. But on the flip side of it, from an SG&A perspective, the target that we put out at our investor day for SG&A was 8% of revenue, and that is, you know, we've got a little ways to go. We've certainly improvement. I'm really pleased with the progress that we've made on that. We are sequentially and year over year, we are, you know, have come down in terms of the percentage of revenue and are driving towards that target. And then, you know, on the R&D side of it, just to complete the picture, the target that we've given at our investor day was 10% of revenue. And so, you know, we're focused on making those investments. I think it's just a matter of, you know, how fast you can spend because, you know, certainly commitment is there, and we want to make sure that we make those investments. And so I'm pleased with the investments we've made to date, and that's the way that we're going to continue looking at this. Right? Investing in R&D, but at the same time trying to get more efficiency and leverage out of SG&A. That's how you can kind of think about it going forward. Karl Ackerman: Very helpful. And for my follow-up, at SPIE, you presented several new products across your industrial portfolio. And you spoke about improving orders today in semi-cap. Are you seeing a marked recovery across your broader industrial business excluding semi-cap, or is it too early to call out definitively yet? Thank you. James Anderson: Yeah. Good question. I would say across broader industrial probably too early to call out a broad-based industrial recovery, but we're certainly seeing a very strong pickup in semi-cap. So we saw strong orders in the prior quarter, in our December quarter. And we expect those orders to start to generate sequential revenue growth for us in our June quarter. And through the second half of this calendar year as well. Semi-cap is a big segment for us, and so a pickup in growth in orders there is meaningful for us. Karl Ackerman: Thank you. Operator: Our next question comes from Ryan Koontz with Needham and Co. Please proceed with your question. Ryan Koontz: Super. Thank you. I wanted to ask about the comms business. You highlighted multi-rail, which I assume is kind of a would be driven by some of these scale across densifications. Jim, how are you thinking about kind of the timing and your content there for these multi-rail density upgrades on long-haul fiber? James Anderson: Yeah. Thanks for asking, Ryan. So first of all, we love this new multi-rail product. It provides a really great ability to upgrade for, you know, service providers, network operators to upgrade within their existing footprint and get essentially a lot more traffic through an existing optical infrastructure. So really pleased with this product. We think it's very distinctive in the marketplace. And we would expect the ramp to start in the end of the second half of this year. We're seeing really good design wins and orders in on this product, and revenue contribution would start in the second half of this year. And then I would say just more generally, you know, that kind of DCI portion of our business and even just the traditional telecom we've seen really good growth there. You know, last quarter, we saw a 9% sequential growth, but it was 44% year-over-year growth. We expect that segment of communications to be sequentially up in the March and the June. Based on the strong demand that we're seeing. And here again is another place where we've seen growing backlog. And we sell at multiple different kind of levels within that part of the market. We sell at the system level as we were just talking about. We also sell at the module level with ZR, ZR plus. Coherent transceivers, and then we'll sell components as well. So things like pump lasers, and other products like that. And we've seen strong demand across all those categories. Ryan Koontz: Great. And just a follow-up, if I could, maybe touching on the 3D sensing market. Jim, and transition to multi-junction. How are you thinking about that transition relative to that part of the business? James Anderson: Yeah. The 3D sensing I would just reiterate what we've said before, you know, that we won, you know, significant new agreement with Apple that they announced as part of their American manufacturing program, this past summer. And that revenue from that new partnership with Apple starts to kick in in the second half of this calendar year. It's a great multiyear partnership. We're really happy with that. You know, it's another example of a major customer leveraging our US manufacturing footprint in Sherman, Texas. In the case of that business, that's six-inch gallium arsenide that's been running in Sherman, Texas for quite a while. And so it's six-inch gallium arsenide VCSEL technology. And, yeah, big new partnership. We're really happy about that. And, you know, revenue should kick in here in the second half of this calendar year. Ryan Koontz: Appreciate that very much. Thanks. James Anderson: Operator, I think we have time for maybe one more question, operator. Operator: Sure. Vivek Arya with Bank of America Securities. Please proceed with yours. Michael Mani: Hi. This is Michael Mani on for Vivek Arya. Thanks so much for taking our questions. To start, I just want to understand how much gross margin leverage is your six-inch indium phosphide ramp driving for you right now? And as you look out over the next couple of quarters, like, what is the expected gross margin improvement as you are able to double supply year over year? And just bigger picture, as you think about the 42% longer-term target for gross margins, where you stand today? Like, what are the biggest contributors to getting there? Thank you. James Anderson: Yeah. Maybe I'll start with the first part of the question on maybe the indium phosphide, and Sherri can answer the second part sort of on broader gross margin drivers. But I would say, you know, this quarter, we're starting to see the benefits of the six-inch production this quarter because, remember, we started six-inch production in the September, and it usually takes roughly six months from, you know, the start of wafer production to when the products get put into a transceiver and actually ship to customers. So we'll see a little bit of benefit this quarter, but that benefit will start to build over the coming quarters. And if you fast forward to instance for the end of this year, where half of our internal capacity is running on six-inch, you can kind of think about it as that half of our internal six-inch capacity is roughly half the cost of the other half. Right? Because six-inch is, yeah, where the cost is roughly or the product is the product cost is roughly half of three-inch. So that's kind of a rough way to think about the cost benefit. And, Sherri, do you want to talk about some more general gross margin drivers? Sherri Luther: Sure. Sure. Michael, so when you look ahead to our gross margin, you know, whether it's, you know, 39.5%, which is the midpoint of our guide for Q3, and certainly to our long-term target model of over 42%. The biggest contributors there are going to be, you know, certainly cost reductions, and that is a large bucket which includes product input costs, some of which I talked about earlier. And we certainly saw benefits during the quarter from product input cost reductions in our data center and communications business, but that also includes yield improvements that we continue to drive and that we every quarter, we're seeing benefits from yield improvements, and I'm really excited, you know, to continue to see that. There's always going to be opportunity for that, so we're going to keep driving that, as well as the lower product input cost. And the other part is going to be pricing optimization. As we continue to get the value for our products. And so we've continued to see sequential improvements in the magnitude of pricing optimization. So that's really good as well. Now the timing of these programs, it's going to differ. Some will be near term, some will be longer term just depending on the various initiatives. So the magnitude of the benefit in any particular quarter is, you know, will likely fluctuate just because of the nature of the projects. But the other benefit certainly will also be volume. You know, as we ship higher volume, that will benefit us as well. And then mix, you know, there can always be headwinds from mix on a quarterly basis. So that's kind of the puts and takes within the gross margin line. Michael Mani: Great. Thank you. Very helpful. And just my quick follow-up. As we are as the 1.6 terabit ramp gets underway, understood that, you know, it's mainly EML and CW lasers within the way right now, but between two, do you see a significant shift between silicon photonics and EML? In terms of what that mix looks like for 1.6 especially and as you look out over the next year with CPO seemingly getting bigger as an opportunity, does that make you rethink how much CW laser capacity you need understanding, you know, there's plenty of flexibility to do both, but just curious on that shift. Thank you. James Anderson: On the first part on EML versus silicon photonics, since we have both products and we're ramping both products, it's really up to the customer on what mix they want, and it just kind of depends on the application. And so we just build whichever version is needed for the customer application. And there's not a big financial difference for us on either one of those. And we believe we're, you know, we're just we're very well positioned competitively on both an EML-based 1.6 T transceiver and silicon photonics. And then the second part of the question is, you know, we're certainly ramping the indium phosphide capacity for the transceiver demand that we're seeing, but we're also on top of that ramping capacity to support the high-power CW laser demand that we've got ahead of us as well. Michael Mani: Thank you. James Anderson: Thanks, operator. Operator: We have reached the end of our question and answer session. I would now like to turn the floor back over to James Anderson for closing comments. James Anderson: All right. Thanks, everyone, for joining today's call, and we're certainly on track for another outstanding year of revenue and profit growth for our fiscal 2026 and very well positioned for an even stronger fiscal 2027. Given the exceptional demand we're seeing and our rapidly expanding capacity. Once again, I want to thank all of my Coherent teammates for all their hard work and dedication. Operator, that concludes today's call. Operator: You may disconnect your lines at this time. Thank you for your participation.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the QUALCOMM Incorporated First Quarter Fiscal 2026 Earnings Conference Call. At this time, participants are in a listen-only mode. Later, we will conduct a question and answer session. A reminder, this conference is being recorded on February 4, 2026. The playback number for today's call is (877) 660-6853. International callers, please dial (201) 612-7415. The playback reservation number is +1 375-8127. I would now like to turn the call over to Mauricio Lopez-Hodoyan, Vice President of Investor Relations. Mr. Lopez-Hodoyan, please go ahead. Mauricio Lopez-Hodoyan: Thank you, and good afternoon. Today's call will include prepared remarks by Cristiano Amon and Akash Palkhiwala. In addition, Alex Rogers will join the question and answer session. You can access our earnings release and a slide presentation that accompany this call on our Investor Relations website. In addition, this call is being webcast on qualcomm.com, and a replay will be available on our website later today. During the call today, we will use non-GAAP financial measures as defined in Regulation G. You can find the related reconciliations to GAAP on our website. We will also make forward-looking statements, including projections, estimates of future events, business or industry trends, or business or financial results. Actual events or results could differ materially from those projected in our forward-looking statements. Please refer to our SEC filings, including our most recent 10-Ks, which contain important factors that could cause actual results to differ materially from the forward-looking statements. And now to comments from QUALCOMM Incorporated's President and Chief Executive Officer, Cristiano Amon. Cristiano Amon: Thank you, Mauricio. Good afternoon, everyone. Thanks for joining us today. In fiscal Q1, we delivered record revenues of $12.3 billion and non-GAAP earnings per share of $3.50. Within QCT, record revenues of $10.6 billion were driven by strength in flagship handsets. We also saw another quarter of record revenues in automotive and positive momentum in IoT across industrial edge networking applications and smart glasses. Licensing business revenues were $1.6 billion, while global consumer demand for handsets, especially premium and high tier, exceeded our expectations with healthy sell-through observed through fiscal Q1 in the first few weeks of 2026. In the coming quarters, the handset industry will be constrained by the availability and pricing of memory, particularly DRAM. As memory suppliers redirect manufacturing capacity to HBM to meet AI data center demand, the resulting industry-wide memory shortage and price increases are likely to define the overall scale of the handset industry through the fiscal year. Given the current environment, several handset OEMs, especially in China, are taking a cautious approach in reducing their chipset inventory. This is reflected in our guidance for the upcoming quarter. We will continue to work closely with our customers and suppliers as the situation evolves. Akash will share more details on the memory impact in his prepared remarks. And now some key highlights from the business. We are pleased with the continued expansion of the premium and high-tier smartphone segments and traction of Snapdragon platforms, including broad OEM adoption for dual flagship products. For Samsung's upcoming family of premium-tier devices, we expect approximately 75% share consistent with prior expectations. It's important to note that during the quarter, ByteDance launched the first AgenTek AI smartphone powered by the Snapdragon 8 Elite. This is a significant milestone in the transition toward AI-native smartphones, the precursor to the agentic experiences shaping the future of mobile. With the development of agents and AI becoming the new UI, intelligent wearables are evolving into personal AI companions and quickly emerging as the next mobile computing category. Our early investments in this area, including powerful and power-efficient chipsets, advanced connectivity including micro power Wi-Fi, as well as ambient sensing and perception technologies, position Snapdragon XR wear and sound as the platforms of choice for the industry. We're pleased to be working with seven of the nine largest cloud companies globally, and more than 40 personal AI devices are in production or development. In PCs, we introduced the Snapdragon X2 Plus, an expansion of our second-generation platforms purpose-built for the enterprise and commercial segment. The X2 Plus is powered by the third-generation Qualcomm Orion CPU, which delivers up to 35% faster single-core performance and up to 3.5 times faster multi-core performance compared to the competition in previous generations. Our Hexagon NPU provides up to 5.7 times and 3.4 times faster inferencing versus competitors' NPU and GPU respectively. Eighteen Snapdragon-powered PCs debuted at CES from ASUS, HP, Lenovo, and Microsoft. The ASUS Zenbook A16 was one of the standouts, featuring the Snapdragon X2 Elite Extreme and is the fastest Snapdragon-powered laptop to date. It features our 18-core third-generation Orion CPU and 80 TOPS hexagon NPU for AI workloads in an Adreno GPU delivering up to a 2.3 times improvement in performance per watt versus the prior generation. X2 Elite Extreme enables desk-class performance, advanced graphics, and more than 21 hours of battery life in an ultra-light 16-inch form factor. We remain on track to commercialize 150 Snapdragon X power PCs this year. Demand for our Snapdragon digital chassis solutions remains incredibly strong, and we announced several collaborations with top automakers, OEMs, and service providers during the quarter. We signed a letter of intent for a long-term supply agreement with Volkswagen Group, which spans many brands including Audi and Porsche. Under this intended agreement, we would provide advanced infotainment and connectivity capabilities powered by our digital chassis across multiple vehicle segments, price tiers, and markets. We would also serve as the group's primary technology provider for its software-defined vehicle architecture, developed through its joint venture with Rivian Automotive. In addition, we're collaborating with the group's automated driving alliance formed by Cariad and Bosch to accelerate the development of highly automated driving systems. We're very proud that the newly launched RAV4, Toyota's top-selling vehicle globally and one of the best-selling cars worldwide, is powered by our Snapdragon cockpit platform, delivering premium AI-enabled in-vehicle experiences. We also announced new and expanded collaborations with Hyundai, Movies Deep Motor, Li Auto, Zeeker, Great Wall Motor, NIO, and Cherry, bringing our total design wins for Snapdragon Elite platforms to 10 programs. In industrial IoT, we continue to expand our portfolio of advanced computing, connectivity, and AI solutions for an increasing number of verticals. With the recent acquisition of Algenxx, we augmented our Dragon Wing vision portfolio and Qualcomm Insight platform with its AI-based low-power image signal processing solution. At CES, we also introduced two new Dragon Wing processors delivering on-device intelligence for security-focused drones, smart cameras, and industrial vision AI TVs, media hubs, and video collaboration systems. Additionally, the launch of our new Dragon Wing IQX series marked our entry into the industrial PC space with best-in-class compute performance and efficient edge AI engineered for PLCs, advanced HMIs, edge controls, and panel and box PCs. This quarter, we formally announced our expansion into advanced robotics and introduced a full suite of robotics technologies and solutions, including the Dragon Wing IQ 10 series. Our general-purpose robotics architecture supports advanced perception and motion planning using models such as VLAs and VLMs, allowing robots to perceive, reason, adapt, and act in real-world environments. As part of a complete hardware-to-software stack, IQ 10 is designed to accelerate the commercialization of household, industrial, and humanoid robots. It combines heterogeneous edge compute, safety-grade SoCs, and end-to-end AI. In a short period of time, we have engaged with AdventTech, Eplux OuterCore, Booster Figure, KUKA Robotics, Robotech AI, and ZenMotion to help define the compute architecture for their robotics and humanoid platforms. The physical AI in robotics space is experiencing rapid growth driven by advances in edge AI and sensor fusion, and QUALCOMM Incorporated is one of the best-positioned companies to enable this next frontier of AI. We will do this by leveraging our strengths in high-performance, power-efficient computing, connectivity, and edge intelligence, as well as our experience in ADAS and autonomy, industrial and safety-grade silicon, and perception and sensing technologies. Many of the drivers of our leadership in automotive are applicable to advanced robotics. Finally, we continue to develop our data center solutions and engage with leading hyperscalers, cloud service providers, sovereign AI projects, and other global partners. We remain encouraged by the positive feedback on our CPU and innovative AI processing and memory architecture for next-generation inferencing data centers. Additionally, the recent developments in the industry validate platforms QUALCOMM Incorporated's view of the importance of specialized and power-efficient AI as inferencing becomes the key driver of data center growth. In fiscal Q1, we completed the Alpha Wave SEMI acquisition, adding high-speed wire connectivity technology to further strengthen our platforms. We also acquired Ventana Micro Systems, reinforcing our leadership and commitment to expanding the RISC V standard in the ecosystem, and development of our high-performance RISC V CPU for data center workloads. We look forward to providing more information, including an update on our roadmap at our next investor event. We will also share our progress in robotics, automotive, next-generation autonomy, industrial IoT, and 6G. I will now turn the call to Akash. Akash Palkhiwala: Thank you, Cristiano, and good afternoon, everyone. Let me begin with our strong first fiscal quarter results. Total revenues of $12.3 billion and non-GAAP EPS of $3.50 were both records, with non-GAAP EPS coming in at the high end of our guidance. QTL revenues of $1.6 billion and EBITDA margin of 77% at the high end of our guidance, driven by higher units and favorable mix. We delivered record revenues in QCT of $10.6 billion, including strong year-over-year growth across automotive and IoT. QCT handset revenues reached a record $7.8 billion, reflecting the benefit of recently launched flagship smartphones. QCT IoT revenues of $1.7 billion grew 9% year-over-year, driven by demand across consumer and networking products. In QCT Automotive, we delivered another record quarter with revenues growing to $1.1 billion, up 15% versus the year-ago period on increased demand for our Snapdragon digital chassis platforms. QCT EBT margin of 31% came in line with expectations, exceeding our long-term target of 30%. Lastly, we returned $3.6 billion to stockholders, including $2.6 billion in stock repurchases, and $949 million in dividends. Before turning to guidance, I'd like to address the impact of the memory industry dynamics on our financial outlook. The fundamentals of our handset business remain favorable. A stable global economic environment, total handset shipments exceeding expectations in December, especially in the premium and high tier, a strong design win pipeline for our Snapdragon chipsets. However, increasing demand for memory solutions in AI data centers is driving near-term uncertainty in memory supply and pricing for handset OEMs. As a result, the handset OEMs are taking a cautious approach in planning their business. We've seen several OEMs, especially in China, take actions to reduce their handset build plans and channel inventory. Our guidance for the upcoming quarter reflects the latest signals from these customers, which includes reduced chipset orders, aligned with their scaled-back expectations for build plans. We expect to return to our prior run rate and growth trajectory for QCT handset revenues when these conditions normalize. Now turning to guidance. In the second fiscal quarter, we are forecasting revenues of $10.2 billion to $11 billion and non-GAAP EPS of $2.45 to $2.65. In QTL, we estimate revenues of $1.2 billion to $1.4 billion, EBT margins of 68% to 72%, reflecting normal sequential trend. In QCT, we expect revenues of $8.8 billion to $9.4 billion, EBITDA margins of 26% to 28%. We are forecasting QCT handset revenues to be approximately $6 billion as a result of the impact of memory constraints I just outlined. We anticipate QCT IoT revenues to grow by low teens percentage versus the year-ago period, driven by growth across industrial and consumer products. QCT Automotive, following another record quarter, we expect year-over-year revenue growth to accelerate to greater than 35% in the second fiscal quarter. Lastly, we expect non-GAAP operating expenses to be approximately $2.6 billion in the quarter. The sequential increase is driven by typical calendar year resets, certain employee-related costs, and completion of our acquisition of AlphaWave, to further strengthen our platforms for next-generation AI data centers. In closing, we are pleased with our strong first-quarter performance, delivering record results across the following metrics: total company revenue, non-GAAP EPS, QCT revenues, QCT handset revenues, and QCT automotive revenues. While near-term QCT handset guidance is being impacted by memory industry dynamics, the underlying fundamentals around consumer demand for handsets and Snapdragon product leadership remain strong. Our second-quarter guidance reflects the continued revenue acceleration across automotive and IoT, with their combined growth outpacing the run rate required to achieve our long-term revenue targets. Our product announcements and strong customer engagement at CES 2026 further demonstrated our momentum across multiple growth vectors. In automotive, we have reinforced our technology leadership with 10 design wins for Snapdragon Ride Elite and Cockpit Elite, eight global programs for Snapdragon Ride Flex, and continued success in building an automated driving stack ecosystem for our customers. In robotics, we announced a full suite of technologies, including the industry-leading Dragon Wing IQ 10 chipset platform, and engagement with several players in the ecosystem to drive commercialization of our products. In industrial, we showcased our ability to serve a wide spectrum of customers, from global enterprises to local developers, with an expanded portfolio that offers advanced edge computing and AI solutions across industry verticals. This concludes our prepared remarks. Back to you, Mauricio. Mauricio Lopez-Hodoyan: Thank you, Akash. Operator, we're now ready for questions. Thank you. Operator: First question comes from the line of Joshua Buchalter with TD Cowen. Please proceed with your questions. Joshua Buchalter: Hey guys, thank you for taking my question. I wanted to start with the handset outlook. Any other factors that are driving the weakness beyond the memory pricing? It was good to hear the reiterated Samsung share. But I think, you know, most importantly, how should we think about the TAM for the year and do you feel like this inventory correction is sort of the last true shoe to drop in the March that you're seeing? Thank you. Cristiano Amon: Thanks, Joshua, for the question. I will start and I'll ask Akash to add more color. It's 100% related to memory. Actually, I'll say the macroeconomic indicators have been strong. We look at the handset demand has been strong, I think because of our licensing business, we have a good understanding of the overall demand. We look at sell-through data also very strong. Unfortunately, I think, what we saw in Q1 as we guide to Q2 is 100% sized by the availability of memory. So as you all know, as all the indications show that DRAM availability for consumer electronics, especially handsets, is actually down bias on a year-over-year because of the prioritization of HBM for data centers. I think the market is going sized by that. And I think we saw the reaction right away from our customers adjusting, I think, their build production to the memory they have available. And I don't know if Akash, you'd like to add some more color to that. Akash Palkhiwala: No. I think that covers it. Joshua Buchalter: Okay. Thank you, Cristiano. I guess the follow-up, I mean, just back me into the guidance you just gave on QCT, I mean, that auto number is implying a pretty sharp acceleration sequentially. Is this some of the ADAS wins that you've talked about previously layering in? And maybe you could speak to, you know, both the drivers and the durability of this higher watermark that you're guiding to? Thank you. Cristiano Amon: No. Thank you very much. As we have said consistently, I think the pipeline we have built in automotive is continued to translate into revenues, especially as new cars ramp and new cars launch. And I think that's why we continue to see record revenues in automotive. We know we don't move with the industry. We move primarily with our share gains. I think we're very excited about the trajectory. I will say we feel good about all the projections we have made about the size of the revenue when you look at our targets for fiscal 2029. It's all going in the right direction. And we continue to have more design wins. I think our position in the industry becomes stronger. I think with the platform, we've seen traction with Flex, which both the ability to bring ADAS and digital cockpit in the same chipset across other tiers. We're seeing now some of the major, I think, volume drivers SOP. We did announce a very broad partnership with Volkswagen Group. And to your comment, it is correct. We're getting more traction with ADAS once OEMs were able to see the stack that we launched with BMW that was an option for them. We're seeing interest and those things are progressing very well. Operator: The next question is from the line of Samik Chatterjee with JPMorgan. Please proceed with your question. Samik Chatterjee: Hi. Thanks for taking my questions. I have one on data center and one on the smartphone side. Maybe on the data center, Cristiano, if you can give us an update in terms of the progress with your customers on that front. And given sort of the volatility we are seeing in memory, is that sort of being more disruptive to making progress with your customers, or instead, is it sort of augmenting some of the piece of the discussions given sort of big focus on that side of the sort of bill of materials as well? And I have a follow-up. Thank you. Cristiano Amon: Thank you so much, Samik. So let me start with the data center. I think everything is going in the way we have planned. I think the only public customer announced today is Humane that is progressing well. We have started shipping. We have been working with them in ISV on third-party workloads. We're encouraged about the progress our teams are doing on our roadmap. We continue to get very positive feedback, I think, from broad engagements. You would imagine that a company at our size will be engaged in conversations with some of the largest hyperscalers and cloud service providers in the industry. We have something very unique. We always said we have a dedicated platform for the disaggregated data center. We do very, very well in certain workloads such as decode with our different approach to compute and memory. If anything, I think the transaction of Grok kind of validates that when you think about this aggregated data center, you have specialized hardware versus just a GPU that would do everything. And we're getting good traction. What we're really focused on right now is on execution. I think we had identified some of the milestones. We're executing on two fronts. It's CPU. We added a RISC V CPU now to our roadmap in addition to Orion, which is ARM compatible. And we're executing on AI250 with our new memory architecture. And we will provide details of our roadmap in our investor event. But so far everything is on track. We still restate that we expect 2027 to start showing in revenues. And we feel good. We're just going to keep executing that. And if I don't know, Akash, you want to add anything before I go to memories? Akash Palkhiwala: No. I think the only thing I'll add on data center is we've mentioned previously that we expect this to be a multibillion revenue opportunity in a couple of years. And so everything that Cristiano outlined kind of just reiterates that opportunity for us. Cristiano Amon: Okay. So the memory thing and look, I think we're going to see how this thing played out. Going to give you maybe a little bit of the dynamics. When we step back and we look at the business, we're very, very happy with everything in the business. We just wish there was more memory. And the handsets get hit the most given its scale and its cycle time. So we expect the impact is going to be more muted in other business. For example, automotive is a little bit less sensitive to memory price increases. As you pointed out, the impact on handset and the bond. Having said that, when we go back to situations that we saw in the past, I think the best proxy is what happened during the pandemic. The premium and high tier has proven to be more resilient to price increases. And we think that that may be affected that play out, but the most important thing is to that issue is not just the price. The issue is just availability. So I think the memory availability will determine the overall size of the handset market. OEMs are very likely to prioritize premium and high tier how they have done in the past. That could be less impacted and we will see the reaction on consumers as their price increase for the finished product. I do stand by what I said. I think the whole fiscal year mobile handset size will be determined by memory availability. We're just going to monitor this on a quarter as phones get repriced, tiers kind of shift towards high-end premium, and we'll see what happens in the marketplace. Samik Chatterjee: Got it. If I just can quickly follow-up on that question on the OEM prioritizing the higher tier, I mean, within that higher tier, do you expect them to downshift in terms of tiering of the chipsets or the SoCs that they go for just to be able to manage their overall cost, in relation to what they need to pass on to consumers? And that's it for me. Thank you. Cristiano Amon: So as a general trend, and I wanted to emphasize what we saw in the quarter, yes, there's a memory shortage, but when there was memory, we saw the results were very good. Consumer demand was very good. And what we have seen, which has been going on like for years now, the premium tier continues to expand. In a market that is being relatively flat, which is the handset market, we have seen growth in the mix with the premium tier expanding. So I think that's a factor that is likely going to drive OEMs to continue to be focused on the premium tier. I did mention one thing in my prepared remarks, which is a dual flagship strategy that we have adopted and that has been also very well received, I think, by the market. You probably see that when you think of different OEMs, how they have like ultra or different categories and they have multiple tiers of the premium tier. I expect that's going to play. But overall, our hope is that the premium tier will be more resilient granted the memory that is available is the memory that's available. Operator: The next question is from the line of Ross Seymore with Deutsche Bank. Please proceed with your questions. Ross Seymore: Hi, guys. Thanks for asking the question. Mentioned a couple of different things on the handset side for my first question. But I guess what it comes down to is what percentage of your handset business do you think is in China? Considering that you cited them as being especially hit? And do you think normal seasonality is likely to occur after this step down in the March or is that too difficult to tell? Akash Palkhiwala: Yes, think on your first question, Ross, we don't really kind of break down by regions. But if you think about the percent of volume that is driven by the Chinese OEMs, but then adjusted down for the tiers that they play in. So our exposure would be less than what you would just see based on the units. Ross Seymore: And the seasonality side? Akash Palkhiwala: The seasonality on the handset side, I think you think of the seasonality in the demand from the consumers is going to be consistent with what we've seen in the past. I think consumers will wait for premium tier launches, and there are significant purchases that happen when that plays out. I think to Cristiano's earlier point, it's really a question of how supply aligns against the demand. We don't have a demand issue, as we said earlier. The demand continues to be strong. Our design win pipeline continues to be strong. And then it's just a question of supply alignment with it over the next few months. Ross Seymore: And then I guess just for my follow-up on the OpEx side of things, you gave a good explanation why it's popping up a bit in the March. After that, are there any adjustments given what you're saying in the memory side? Or are you guys kind of investing right through this? Akash Palkhiwala: I think it's the way we've guided the March is a reasonable way of thinking about the rest of the year. I think our focus, as we've said before, is the following framework on OpEx. Really kind of reduce the investments in mature businesses and use it to fund the diversification priorities. And then we have these acquisitions, including Alphawave, kind of driving incremental expense and investment in data center. But it's really just focused on those things as we've been extremely disciplined over the last several years. And grown OpEx significantly slower than revenue and gross profit, that framework for our operating plan doesn't change going forward. Ross Seymore: Thank you. Operator: The next question is from the line of Stacy Rasgon with Bernstein Research. Please proceed with your question. Stacy Rasgon: Hi, guys. Thanks for taking my questions. So the first one, want to ask that seasonality question a different way. I think it was really getting a June. Like, you usually, just seasonally, know your revenue stepped down. In June. And so you're guiding $6 billion in handsets. You're guiding $6 billion in March, which is down about 13% year over year. Are you expecting, just given what you're seeing in the memory market right now, a similar and what you what can be supplied a similar type of year over year growth, like, for instance, in June? Do you think this, $6 billion number given it is sort of supply constrained is, a good number to have given the current supply that that is out there until things normalize? Like just how do we think about June in the context of March, given the March decline in the context of the memory situation? Akash Palkhiwala: Yeah. So, Stacy, we're given the uncertainty in the market, we're obviously not guiding beyond the second quarter at this point. But as Cristiano said earlier, when you think about the demand fundamentals, are strong. And really, it's a question of how supply aligns against it. And we expect that supply will really the financial forecast for the year for the rest of the fiscal year. Specifically, of between quarters, you should think of March as a reasonable way to model June as well. Is really kind of similar seasonality profile that you would seen in other years. Stacy Rasgon: Got it. Thank you. And for my follow-up, I wanna ask just about QTL. So I it sounds like the demand is there, but we just don't know how many handsets are gonna be able to be I guess, in that context, how are you thinking about sort of, like, just a typical QTL run rates in the various quarters through the year? Do you think they're similar to what we've seen in past? I think your guidance is maybe in line to maybe slightly below what would we typically see for March? Akash Palkhiwala: On the Yeah. Stacy below? I mean, how do think about that? Yeah. Stacy, it's Akash. So let me try to address it a couple ways. I think first is just strong performance in December quarter. We saw units, handset units higher than expectation in the quarter. I think as you go into the next quarter, we are guiding QTL just slightly below what we did last year. So pretty consistent with trend. But, of course, that's subject to supply considerations. As you think about the full year at this point, given the supply, we have a negative bias on units, but really we're going to have to see how it plays out as we go through the through the next several months. Stacy Rasgon: Got it. So maybe a touch below those similar to what we saw in March seems reasonable. Akash Palkhiwala: Given what we know right now. Stacy Rasgon: I think that's the framework that I outlined is the way we are thinking about it. Stacy Rasgon: Got it. Okay. Thank you, guys. Operator: The next question is from the line of Timothy Arcuri with UBS. Please proceed with your question. Timothy Arcuri: Thanks a lot. Akash, I wanted to ask about the op margin guidance in QCT. The drop through is more than 100%. I mean, it's not surprising that margins would come down. They seem to be coming down pretty quickly, like, faster than I would have thought. Is there is there something else going on there? I know that, you know, wafer costs are going up and you know, MediaTek said on their call that they're still gaining share at the high end. Something going on to make the drop through more than 100% on the top line for March? Akash Palkhiwala: No. There isn't, Tim. I think, we're expecting gross profit to be large gross profit margin to be largely in line with the December. And so it's just the scale of the revenue coming through and the OpEx guidance that we provided. Cristiano Amon: Ahead. Sorry. I just want to add one thing. No. Look, we saw how I think the other company reported as well. Very consistent view of VENCO on what we're seeing sequentially on the quarter. It's just whole market is kind of being adjusted to the new build out reality. So we actually don't see anything other than that in remind you of the seasonality that we always have regardless of this memory issue. A lot of the premium tier launch in Chinese New Year. So you actually you normally see some of the Chinese go down on a sequential basis because they just build for the premium launches. Timothy Arcuri: Okay, thanks. And then, do you have any update on the Huawei license? I know we're still waiting for it. And maybe what's the sticking point? And is there risk, we talked about this before, but is there a risk and precedent for for the big customer if you don't sign a license with Huawei? Thanks. Alex Rogers: Thanks for that. This is Alex. Really no update on the Huawei discussions. The discussions are still underway. In terms of sticking points, I really can't get into what are confidential discussions. I see these two sets of negotiations as, you know, fairly distinct, actually significantly distinct, operating on different paths. And as you know, with the other with the other company, whenever we see a renewal date on the horizon, we start discussions very well in advance. And so that's underway, and we don't have any update on that. Timothy Arcuri: Okay. Thank you. Operator: The next question is from the line of C. J. Muse with Cantor Fitzgerald. Please proceed with your questions. C. J. Muse: Yes, good afternoon. Thank you for taking the question. I guess curious obviously, the DRAM makers have been talking about satisfying only 50 to 70% of the demand, and they're highlighting you know, shortages into 2028. So curious how you're planning for you know, a situation where this could be sustained. Are your Chinese customers looking to design in CXMT? And could you get qualified inside of that? I would assume your business with Samsung would be strong given their internal supply from DRAM and as well as your supply chain in terms of, you know, your wafer commits to TSM guess, how are you managing all of that given all this great uncertainty? Akash Palkhiwala: Look. Very good question. And I and I'm gonna I know it's obvious, but just in case, I'm gonna use this opportunity make clarification. For handsets, we don't buy memory. I think there are some memory that gets stacked on models, but the majority of memory is purchased directly by our customers. You should expect given our scale, we're probably among the first to be qualified with every memory provider. Every single memory you can imagine has CXMT and other smaller companies, we have been qualified. And also we have flexibility versus some of the other companies. If you actually double click, you're going to see we have flexibility about working with new versions of memory as well as older version of memory on our platform. Platforms. We have multi-generation memory controller. So from a platform we're going to work with whatever is available. I think that's kind of the approach we always took when you have shortage. So the second part of the question, which is the bigger question. Look, the trend I think of growth in the data continues and it's pretty obvious. I think memory vendors have prioritized the build out of HBM. And I think some of the data that you just provided is kind of what we see. As I said before, it's very clear indication that as of today, the availability of memory for consumer electronics year over year has been below the demand and we see that in handsets. You start to see commentary on gaming consoles and other consumer electronic devices. We can't really predict if this will continue for 2027 or 2028. I think there's is capacity build out in plans. It all depends also how how much the trend on data center continues to accelerate. It is fair to assume at this point that for the fiscal year, the size of the handset market which one that is probably getting the blunt of the impact in our business, is going to be defined by the availability of DRAM. And CJ, your second part of your question on wafers, for leading nodes, as as you know, kind of leading nodes are constrained on the wafer side as well. But we have great relationships with our suppliers, and so we're confident that we'll have enough wafers to address the demand. C. J. Muse: Thank you. And I guess as a follow-up, curious if we do see a mix shift higher Snapdragon but, you know, unit volume's lower, how should we think about that impacting your QCT EBT margins? Akash Palkhiwala: Yes. I mean, as you know, well, CJ, we do very well in the premium and high tiers. And so as the volume shifts up, that is usually a benefit for us. Operator: The next question is from the line of Benjamin Reitzes with Melius Research. Please proceed with your questions. Benjamin Reitzes: Yes. Hey, guys. I wanted to just kind of keep going on the memory side. As we you know, kinda look at Apple, and their their propensity for double digit growth, maybe even the whole year, just seems like they are going to continue to get disproportionate you know, share of the available DRAM. Is it possible you know, how do you kinda navigate that with with all your partners? And I guess the question would be, does that add to some of the uncertainty that could linger into the next fiscal year, with one vendor getting disproportionately this kind of unit growth and obviously, the kind of allocation they get. Cristiano Amon: Look, it's hard to make prediction, but I will also probably remind you that we have another large customer that also have memory division as well. So I think as a general statement, I think it is probably a fact that OEMs of larger scale will have probably better ability to have enough memory and they will make priority calls than OEMs of smaller scale. But I think at this this problem is probably going to be industry wide. I don't think any OEM has been immune. In general, I think the statements we seen broadly in the industry is not a demand issue, it's also supply constraint. Benjamin Reitzes: Okay. Well, look, there's been a lot of questions on that. Just my next one, I just wanted to double click on the data center. And I know you got asked about whether there'll be memory available for that, but just in terms of the recent events that validate, I believe the decoding aspect of your solution. I was wondering if you could just provide a little bit of an update there. What's happened since Grok? With NVIDIA? And you know, the Howard discussion is going beyond humane. And just that overall trend. And your ability to play. Thanks. Cristiano Amon: Look, I'll here's what I can say without a bank front running our investor event. First of all, I think we are I would describe it like this. I think there's a lot of companies right now, they recognize, I think the technology and the technical capability of QUALCOMM Incorporated. I think our track record on technology execution has been very successful. And I think we also understand some of the dynamics on compute in memory, I think given the breadth of our IP roadmap. We're probably one of the few companies that go from sub-five watts to now all the way to 500 watts. And we have said in the past as we're going to enter this market, we needed to kind of intercept where the market is going and we're going to be really, really focused on inference and especially the disaggregated I think you pointed to the right way. Think for example decode applications we believe we're incredibly competitive. Not only from a power consumption, but also from an overall TCO. Compute density, memory density. And we're really focused on execution. The feedback we have been given from a lot of the large companies on the technical side and on the product side is very positive. Now the ball is in our courts to execute have harder available and that kind of show the results. And or just going to be continue doing that. Operator: Thank you. That concludes today's question and answer session. Mr. Amon, do you have anything further to add before joining the call? Cristiano Amon: The only thing I want to add, look, it's unfortunately, I think that the whole is impacted by memory, but we remain incredibly encouraged about I think the foundation we set up with the company to be relevant to many industries. So we are on track to the commitments we made on the diversification revenues for the company for fiscal 'twenty-nine. We have in a record time, I think being having a very good traction in the future opportunity of robotics, physical AI and a robot is the best example I can provide other than autonomous driving of what Edge AI is. And we believe that we are creating really a completely different company with relevance in many, many markets. And we'll just continue to execute. I think on our roadmap. I would like to thank all of our partners suppliers, they're dealing with us in this memory shortage. And our employees. And we look forward to talk to you next quarter. Operator: Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
Operator: Good afternoon. Thank you for standing by, and welcome to the Wolfspeed, Inc. Second Quarter Fiscal Year 2026 Earnings Call. At this time, all participants are in a listen-only mode. 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 one on your telephone keypad. If you would like to withdraw your question, please press star followed by the number two. We ask that you limit your questions to one question and one follow-up. Thank you. Please note today's call is being recorded. And I would now like to pass the conference over to your first speaker today, Tyler Gronbach, Vice President of Investor Relations. Please go ahead. Tyler Gronbach: Thank you, Operator. Good afternoon, everyone. Welcome to Wolfspeed's Second Quarter Fiscal 2026 Conference Call. Today, Wolfspeed's Chief Executive Officer, Robert Feurle, and Chief Financial Officer, Gregg Lowe, will report on the results for 2026. We would also encourage you to reference the slides that were published on the IR website today as we will be referring to them during the call today. Please note that we will be presenting non-GAAP financial results during today's call, which we believe provide useful information to our investors. Non-GAAP results are not in accordance with GAAP and may not be comparable to non-GAAP information provided by other companies. Non-GAAP information should be considered as a supplement to and not a substitute for financial statements prepared in accordance with GAAP. Reconciliation to the most directly comparable GAAP measures is in our press release and posted to the Investor Relations section of our website, along with a historical summary of our other key metrics. Today's discussion includes forward-looking statements about our business outlook, and we may make other forward-looking statements during the call. Such forward-looking statements are subject to numerous risks and uncertainties. Our press release today and the SEC filings noted in the release mention important factors that could cause actual results to differ materially. Now I'll turn the call over to Robert. Robert Feurle: Thank you, Tyler. Good afternoon, everyone. We appreciate you joining us on today's call. As you can see on slide three, we've continued to build solid momentum across the business since reporting our fiscal first quarter results. From achieving 50% quarter-over-quarter growth in AI data center revenue to producing a 300-millimeter silicon carbide wafer, securing key customer wins, and most recently, completing CFIUS clearance, we've been moving the business forward on multiple fronts. Under our refreshed leadership team, Wolfspeed has sharpened its operational discipline and strategic focus to ensure consistent execution. Since I've joined the company, we've brought top-tier talent from across the semiconductor industry, people who recognize our unique position in the silicon carbide market, in helping us scale execution to better serve our customers and meet future market demand. As we outlined on our last call and cover on slide four, we're concentrating in a few key areas: strict financial discipline, advancing our technology leadership, and driving operational excellence. A central theme across these priorities is diversifying our revenue base, particularly in industrial and energy, including applications tied to AI-related power demand and grid modernization. By continuing to support our broad base of automotive and other device and material customers, during Q2, we continue to fortify our sales, marketing, and product teams, adding experienced leaders with deep semiconductor knowledge and strong customer relationships. These hires are already helping us extend our reach into emerging power device opportunities. More on this later. And foremost, we are making solid progress in applying strict financial discipline across the organization. Following our financial restructuring, Wolfspeed has a stronger capital structure, net debt of approximately $600 million, annual cash interest expense lowered by approximately 60%, and strong liquidity, which includes approximately $700 million in 48D cash tax refunds we recently secured. Our cash position is $1.3 billion. As we move forward, we are operating with strict financial discipline, aiming to maintain our balance sheet strength and stability through diligent execution. Consistent with this focus, our second priority is advancing technology leadership across the entire silicon carbide value chain. As you can see on slide five of our presentation, we've positioned the company to win in both devices and materials, leveraging our vertically integrated 200-millimeter footprint. Central to extending our technology leadership is our approach to deploying our R&D resources. We streamline R&D to focus exclusively on high-return programs in the highest growth markets. Our third priority centers on our commitment to driving operational excellence. We're focused on differentiating through quality, customer responsiveness, time to market, and supply chain resilience. As shown on slide six of our presentation, the secure and scalable infrastructure remains a core differentiator for the company. As we execute our strategy and support growing customer demand, we remain focused on driving cost out of our footprint, processes, and products, even as we navigate underutilization headwinds. We officially completed the shutdown of all 150-millimeter device production over the Durham campus roughly a month ahead of schedule, transitioning our entire device platform to a higher efficiency 200-millimeter manufacturing. We continue to improve production efficiency and speed to optimize the earnings potential of the business. The results of these efforts will be even more apparent when demand accelerates and we begin to increase fab utilization. As I mentioned earlier, a central theme across these three priorities is diversifying our revenue base in key verticals where I believe we can extend our leadership position, particularly in mid to high voltage applications. To accomplish this, we have organized our go-to-market strategy around four verticals that we believe will drive growth in our business in the near to mid-term: auto, industrial energy, aerospace and defense, and materials. And we're already seeing strong traction from these early efforts. Our first vertical, automotive, remains a core market despite muted EV demand due to a mix of macro and structural factors, which include higher interest rates in the US and Europe, elimination of certain government incentives in the US, excess supply across the market, and intensifying competition globally, including China. Despite weaker near-term demand, our portfolio is aligned with OEMs that produce efficiency, range, and power density. A great example of this is our recently announced partnership with Toyota, one of the most respected quality-driven automakers in the world, to power the onboard charging systems for their BEVs. Thanks to the efforts of our leadership team that's strengthening our relationship with the top global EV OEMs, we are now sampling across several key strategic programs. While these headwinds are creating a softer demand environment in the near term, silicon carbide remains a foundational technology for EV and other platforms. As highlighted on slide seven, silicon carbide continues to capture share in high voltage applications where performance, reliability, and system-level efficiency are critical, positioning it as the preferred technology over both silicon and GaN. In industrial and energy, our second vertical, we're leveraging our expertise to expand our reach, concentrating on AI data center power, grid storage, solid-state transformers, and broader grid modernization applications. We have the expertise to extend our knowledge into the AI data center opportunity, which operates at significantly higher voltages than legacy data centers. As I mentioned, as voltages increase, we believe an increasingly larger portion of this addressable market will be better served with silicon carbide technology over legacy silicon-based solutions from grid to rack. As you can see on slides eight and nine of our presentation, Wolfspeed has strong momentum in this area. The AI revolution is fundamentally reshaping data center requirements and accelerating the shift from general-purpose facilities to purpose-built AI infrastructure that demands unprecedented power density and efficiency, playing directly into Wolfspeed's strength. Our devices are already embedded in critical AI data center power systems, and we have doubled our data center revenue in the last three quarters, with 50% quarter-over-quarter growth from Q1 to Q2. Further, we are actively collaborating with a broad ecosystem of partners to support the industry transition from legacy 400-volt architectures to next-generation 800-volt AI platforms. Data center build-outs and widespread electrification have driven a surge in global energy demand. There are two key solutions to rising energy needs. The first is bringing online new energy sources like wind and solar. We're already seeing silicon carbide adoption across wind and solar applications, as evidenced by our recently announced collaboration with Hope Wind to advance the next generation of wind power solutions. Turning to our third vertical, aerospace and defense, we believe there is a growing opportunity due to the tailwinds from defense modernization and electrification, including direct energy platforms. The US government has already recognized silicon carbide as strategically significant to national security, with both the Department of Defense and the Department of Energy designating it as a critical material. Additionally, the US government has emphasized the strategic importance of a secure domestic semiconductor supply chain for national security applications, and we believe Wolfspeed is best positioned to support those needs. As you can see on slide 10, Wolfspeed is not only entrenched in established high voltage markets like 800-volt automotive, solar, and industrial, but we believe we are also positioned to lead in the next wave of emerging high-growth applications from AI data centers, grid modernization, to aerospace and heavy equipment. These opportunities demand material innovation that silicon carbide can deliver. Which brings us to our fourth vertical, materials. In materials, we're executing a clear two-pronged strategy: scale and strengthen 200-millimeter leadership for power devices today while advancing 300-millimeter capabilities to expand our long-term addressable opportunities. First, on 200-millimeter, material quality is increasingly critical as customers push into higher voltage, higher power density applications. Substrate performance influences everything that matters downstream: device yield, reliability, and system efficiency. So our priority is delivering high-quality 200-millimeter wafers at commercial scale. Because Wolfspeed moved earlier to commercialize 200-millimeter in a scaled manufacturing environment, we believe we're best positioned to support not only our internal device roadmap but also merchant demand as the market continues to mature. Second, we are very proud to have recently produced a single crystal 300-millimeter silicon carbide wafer, a meaningful milestone that clearly demonstrates Wolfspeed's long-standing materials innovation. Importantly, our view of 300-millimeter is not that it replaces 200-millimeter for power devices in the near term, but it helps lay the groundwork for silicon carbide beyond power. Different end markets can value material properties like thermal conductivity and optical performance. One example is optical-grade silicon for next-generation AR/VR systems. Their compact, lightweight design demands high brightness and effective thermal management. Taken together, this combination of industry-leading 200-millimeter materials for power today plus early validation of a 300-millimeter platform that can unlock emerging applications over time reinforces our belief that Wolfspeed can maintain and extend its leadership in silicon carbide material. Our efforts against our three strategic priorities, coupled with our vertical go-to-market strategy, enable Wolfspeed to capitalize on the incredible opportunity created by the transition from silicon to silicon carbide. Now I'd like to turn it over to Gregg, who will walk through our financial performance for the quarter and provide more details on our path forward. Gregg Lowe: Thank you, Robert, and good afternoon, everyone. I'll begin with a brief overview of our second quarter performance. Then I'll walk through the key financial impacts from our restructuring and the adoption of fresh start accounting, and finally, I will share our outlook for the fiscal third quarter. Starting with an update on some highlights of our second quarter, which we've illustrated on slide 12 of our presentation, are as follows. We continue to make progress implementing strict financial discipline, focusing on the aspects of the business within our control. The closure of the Durham 150-millimeter device fab one month ahead of schedule is a good example of that. We upsized and collected the $700 million cash tax refund in Q2. We also improved $89 million in working capital management, excluding the headwind of final payments linked to our restructuring, and further reduced both operating expenses and CapEx investments. Now I'll review our quarterly financial results and speak to some of these updates in more detail, which you can see on slide 13 of our presentation. We generated $168 million of total revenue, in line with the midpoint of the guidance range we provided last quarter. Power revenue was $118 million, of which Mohawk Valley contributed approximately $75 million. This includes some of the last time buy shipments from the Durham Campus ahead of the closing I referenced earlier. As Robert mentioned, the revenue tracking is a mix between a weaker automotive market and fast-growing mid to high voltage revenue. This is linked to the good traction in AI and data center space. Materials revenue was $50 million, driven largely by a tightening demand environment and increased competition in the market. Non-GAAP gross margin for the second quarter was negative 34%, which included several adverse effects. First of all, a $39 million drag related to fresh start accounting, $23 million of which is related to inventory step-ups, which we digested in the quarter, as well as a recurring $60 million increase related to amortization for intangible assets. Furthermore, we recorded $14 million of costs related to specific inventory reserves, which further adversely affected the margins in Q2. The impact of underutilization in our manufacturing sites stood at approximately $48 million in Q2. As Robert noted, we completed the closure of the Durham 150-millimeter device set at the end of November, one month ahead of schedule, which improved gross margins by $5 million in the quarter. We'll continue to see benefits going forward as we focus on our 200-millimeter device manufacturing in Mohawk Valley. We've continued to reduce non-GAAP operating expenses, which are now $200 million lower on a run-rate basis versus last year. At the same time, we continue to invest in R&D to reestablish and extend our technology leadership. The GAAP operating expenses totaled $83 million in the quarter, including approximately $24 million of restructuring and position-related items. Adjusted EBITDA for the second quarter was negative $82 million and included the impact of the previously discussed fresh start accounting implications as well as the underutilization. Adjusted EBITDA is largely unaffected by fresh start accounting impacts on a go-forward basis. Now turning to cash flow, which remains one of our top priorities. We are making strides in reducing our working capital by reducing inventory and receivables. Our disciplined focus contributed approximately $90 million to ending cash, partially offset by the final liability management payments of $64 million we made in Q2. Our operating cash flow for Q2 successor period was negative $43 million. As you can see on slide 14, we have also continued to reduce CapEx, which was just $31 million in the second quarter, which were primarily linked to prior commitments. This is a substantial improvement from approximately $400 million of CapEx in the second quarter of last year. Looking ahead, we remain committed to a disciplined capital allocation strategy and drive CapEx further down over time as prior commitments start to fall off. As announced earlier, we have received $700 million of 48D tax credit in the quarter. We have used a part of our cash to reduce $175 million of our first lien debt. In addition to retiring some of our first lien debt, approximately 1.5 million shares have been converted from our second lien convert, resulting in a debt reduction of approximately $18 million. Together, this forms a first step to further improve our balance sheet post-emergence and will deliver $25 million in annual interest savings. We ended the quarter with $1.3 billion in cash and short-term investments. This stronger liquidity position enables us to pursue our strategic priorities with confidence. We have made significant progress in addressing our capital structure thus far, and we recognize that we have further work to do in this area. We believe our results in Q2 reflect meaningful progress in improving our operations, enhancing capacity, and improving our earnings potential. But there is still work ahead of us to improve further factory utilization as one of the main levers. Next, I'll review the impacts on the financials as a result of the adoption of fresh start accounting. I would also encourage you to reference our press release, slides 15 and 16 of our presentation, and Form 10-Q for additional details on this topic. As you know, over the past year, we took important steps to strengthen our capital structure, positioning Wolfspeed to emerge from our restructuring on firmer financial footing. As part of these efforts, it's required that we adopt fresh start accounting, which marks a true reset for Wolfspeed. With fresh start accounting, our income statement for 2026 is split between the predecessor period ending on 09/29/2025, which reflects activity up to and including our emergence from Chapter 11, and a successor period beginning 09/30/2025, which reflects our results after emergence. We were able to emerge from Chapter 11 on the first day of the fiscal quarter, so our successor period effectively includes all operating income for the quarter. Unless I say otherwise, the details that I will outline in a moment pertain to the successor period only. Because fresh start accounting requires that fair values are estimated for a company's assets, liabilities, and equity as of the date of emergence, certain pre- and post-emergence financial and operating results will not be comparable. All adjustments related to fresh start accounting are non-cash. As part of the fresh start process, we remeasure our assets and liabilities to fair value anchored to the court-approved enterprise value at the midpoint of $2.6 billion. Our new debt, measured at fair value, replaced the legacy debt. We also recorded a $1.1 billion gain from emergence, which reflects approximately $3.7 billion in debt forgiveness, offset by approximately $2.6 billion of net adjustments to assets, primarily property, plant, and equipment. Looking ahead, we expect a net reduction of approximately $30 million per quarter in depreciation and amortization compared to pre-emergence Wolfspeed, due to the lower property, plant, and equipment on the balance sheet partially offset by the step-up in intangibles. The application of fresh start accounting also results in fair value adjustments to step up work in progress and finished goods and step downs in our raw materials. The $23 million step-up related to work in progress and finished goods was recognized in COGS during the second quarter, resulting in a one-time headwind, as I mentioned earlier in my gross margin comments. The favorability from the $70 million step-down related to raw materials will only be realized in the P&L over the next several quarters. While fresh start accounting limits comparison across the predecessor and successor period, I want to reiterate that adjusted EBITDA is largely unaffected by fresh start accounting impacts, except for this quarter. Lastly, we received final clearance from CFIUS to allocate equity shares to Renesas in connection with our previously approved restructuring agreement. This regulatory approval enabled the release of approximately 16.85 million shares of new common stock to Renesas. In addition, we completed the distribution of the final two equity recovery representing approximately 871,000 shares to our legacy prepetition shareholders. Our total shares outstanding are now 45.1 million. Finally, let's turn to our outlook on slide 17 of our presentation. While the automotive end market remains volatile in the near term, we are encouraged by the growing momentum in key strategic areas such as AI data centers and other industrial and energy applications. These emerging opportunities represent meaningful long-term growth drivers, but they will take time to scale and offset the continued softness in EVs. During 2026, we expect revenues between $140 million and $160 million. The decline is driven primarily by accelerated customer purchases in our first fiscal quarter, as certain customers build up inventory by placing orders from the Durham fab prior to its planned closure, certain customers pursuing second sourcing of products during Wolfspeed, and weaker EV demand. The company expects OpEx to be flat to slightly down sequentially as we remain confident in controlling operating costs through actions already implemented. Lastly, due to the ongoing fresh start accounting impacts, Wolfspeed will not yet provide a numeric gross margin guide but does expect further quarter-over-quarter improvements driven by ongoing operational actions. However, gross margin is expected to remain negative in fiscal Q3. As we mentioned on last quarter's call, we expect to provide an update on our long-range plan in 2026, where we will give an update on the long-term financial targets and capital allocation plans. With that, I'll return the call back over to Robert. Robert Feurle: Thank you, Gregg. Across the business, our team is working tirelessly to drive progress against our strategic priorities and to mobilize our scale and technology advantages. All of these efforts are intended to strengthen our ability to capture the next wave of growth in silicon carbide. While the near-term demand picture remains dynamic, two trends remain clear. First, electrification is happening across new markets every day. Second, voltages will continue to increase, necessitating more power density and increased energy efficiency. We are building a stronger, more resilient Wolfspeed. With an improved financial foundation, experienced leadership team, and our vertically integrated platform, we are strategically positioned to drive long-term growth and value as we define the future of silicon carbide technology. Operator, we are now ready to take questions. Operator: Thank you. We will now begin the Q&A session. If you'd like to remove your question, press star followed by 2. Again, to ask a question, press star 1. And as a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question. And during the Q&A session, we ask that you please limit your questions to one question and one follow-up. The first question comes from the line of Brian Lee with Goldman Sachs. You may proceed. Brian Lee: Hey, guys. Good afternoon. Thanks for the updates here. Appreciate the slide deck as well. A lot of new information. So maybe the first question, just thinking about the strategy, you mentioned the diversification away from EVs, you know, key segments like AI, grid modernization, AI data centers. Maybe just walk through a little bit of how that's gonna work and then what it requires for you to change how you go to market and maybe the timeline involved. Then I had a follow-up. Robert Feurle: Yeah. Thanks, Brian. At the end of the day, look, what we're doing is we're pretty much looking to pivot away from being a one-trick pony focused on EVs. This means here, when I started, I kind of turned the organization, the go-to-market organization, to be application-oriented, yeah, and from coming from a product or a setup, which means they really need to know automotive, industrial energy, and aerospace as the defense and pretty much take these application requirements into what does it take to build these products. And I think what you can see here with our progress quarter over quarter in AI data centers, that revenue growth here is really starting to pay off. In addition to that, it's also to get the right sales organization and the right channel strategy in place. Right? So this means a clear tiering of what are the key accounts in this respect application segment. But, also, especially, IE segments, these are it's a large number of customers. So really getting a channel strategy around distribution and specifically for the US, a rep structure in place. This is all in progress as we brought in some really good new talent from the outside from other big semiconductor companies. Brian Lee: Great. That's helpful color. And then maybe just a follow-up on the financials and the balance sheet. You know, a lot's changed, and maybe more is gonna change. But could you guys remind us, is there any expected interest rate step-up on the first lien this year or next year? And then I think up, you know, until recently, the 2031 converts were sort of in the money, but are you contemplating doing any sort of additional financing strategic maneuvers, with respect to the, you know, the first lien and the convert, just given, you know, the equity and where it's been trading? Thank you. Gregor Von Isom: Gregor, maybe, Albert, I can take that one. Yeah. Yeah. So you're right. So we took, obviously, first big steps with emerging from Chapter 11 and restructuring the balance sheet in that process. And then we focused very much on collecting the cash from 48D and using it first pay down of the L1s, but that's just the first step. Then we are very much aware of the situation and opportunity potential in the convert area, which we're deeply looking into at the moment alongside other options that we have. So as I mentioned in the script earlier, we realize there's more work to be done. And over the next period, we will be very actively looking at that. Very concretely, the interest rate will step up around the middle of calendar year 2026. And at that moment, also, some of the make-whole premium stepped down. So in our view, that is definitely a very high cost of capital there and something to be looked at. For the rest, we continue to focus a lot on the strict financial discipline. So you've seen we focus a lot on getting more cash out to working capital. I hope to make some further improvements there as well. And we believe that with the long maturity and the strong cash balance, we do have the time to look into this refinancing topic in a good way. Brian Lee: Appreciate the color. Thank you. Operator: The next question comes from the line of Christopher Rolland with Susquehanna. Christopher, your line is now open. Christopher Rolland: Excellent. Thanks, guys. Appreciate the question. So I also wanted to dig in in some of these other opportunities, particularly AI data center from a power perspective, it's pretty interesting right now. If you guys can talk about kind of what your AI data center revenue consists of today that was up 50% quarter over quarter. And then going forward, kind of your top sockets. Is it gonna be SSTs or in the power supply or we're hearing even potentially for substrates? Would love to know about your competitive position there and how big this thing could be for you guys eventually. Robert Feurle: Yeah. Thanks, Chris. I mean, really, very, very good questions. Let me kind of take them one step at a time. I think so what's happening in the AI data center space, especially on the indirect side, is that today, you're round about the 100 kilowatt-ish per rack, yeah? Kind of moving in two years or so to, like, 600 kilowatt per rack into, like, a mega rack, like, the 2029, 2030 timeframe. This means you have to go figure out how do you power these racks, and how do you get the energy from the energy generation to that rack? And I think this is where exactly Wolfspeed can play to the full advantages coming from the energy generation, which is pretty much really going into the in from the kilowatts as stepping that voltage down. And then as more and more renewables come into the mix, you need also a lot of energy storage systems in between to kind of buffer glitches and these types of things. So that's kind of the next portion that we are focused on. Then, of course, you need to get this energy into the data center with, you know, with transformers. Right? And there is a transition happening from traditional transformers to solid-state transformers. Also, silicon carbide is the perfect solution, I would say. That transition is starting to happen here. So we're really playing in terms of energy generation, energy storage system, solid-state transformers, but then also you look into in the data center, there is the UPS. So the uninterruptible power supply is a big, big application. And then, again, 40% of the energy in the data center is the cooling devices. Another way to say, hey, can you have built these systems more effectively? You see, this is not just one application. These are multiple applications spanning across the whole power range. I think there's something we're very actively working on, and we get multiple excellent customer engagements and partner engagements on that side. We announced a new package just recently, kind of the side cooling package here, really looking new to build specific products for that application. Coming to your questions on the substrate. So what we are seeing is that silicon carbide from a materials perspective has unique properties. And one unique property is thermal conductivity. Right? I mean, it is one of the best materials for thermal conductance and has great optical properties. And I think here, there's clear interest to explore now to see is there a way to use this thermal conductor in some type of improvement for the system architecture. This is why we've also kind of pioneered this space on developing a single crystal 300-millimeter wafer here. And we have very early ongoing discussions with key partners in the industry to say, hey, with us now being able to produce really large-scale single crystal silicon carbide here, kind of what could be a potential for potential solution. I mean, this is something where I cannot give you an exact timeline on revenue coming into the company, but this is something where we, again, have very good interest and various partners in the industry. Christopher Rolland: Excellent. Sounds very exciting. My second question is around just kind of stability moving forward and then, you know, eventually growth. And I think you guys talked about the fiscal first half customer purchases from term transition. Obviously, it sounds like a pull-in of orders. Where are we in digesting those orders and alleviating that overhang? And when do you think you have confidence in the bottom and then building growth on top of that bottom again? How should we think about these different dynamics? Robert Feurle: Yeah. I think, look, there are various topics playing into this. The one is what's clearly the kind of the transition from 150-millimeter devices to 200-millimeter devices. In such a fab transition, you always have customer purchasing more for end-of-life in the parts. Right? I think that end-of-life is done. Right? The 150-millimeter factory is shut down. We took the cost out of the company, also the running cost out of the company. And I believe here with that step, also, we are really the first company in the Western world who's completely only manufacturing the 200-millimeter devices. And then, of course, it comes to this question of demand. Right? And I think we talked about this also in the earnings call. It's a very dynamic environment, especially around the EV side here. And it's really hard to predict in terms of visibility of kind of how that will develop. In the long run, I think, look, the electrification of the drivetrain is continuing. Right? I mean, if you see, I just recently saw a market research forecast. Right? Slightly over 90 million cars getting sold, around about 20% of these cars being, you know, EVs. Yeah? And that portion of EVs is just gonna grow, right, towards the end of the decade. I saw some forecasting around about 50% of the cars being sold at the end of the decade are EVs. Right? And then in these EVs, you have kind of two dominant voltages for the batteries. The one is an 800-volt platform. The other one is a 400-volt platform. And for the 800-volt platform, I mean, the primary solution is to do the traction inverter with silicon carbide. So I think the overall trend long-term of adopting silicon carbide using this in EVs, and also, again, we talked about the AI. There's an opportunity. It's real. Right? Can I tell you exactly kind of short-term what will happen? No. All the macroeconomic factors are playing into this. Christopher Rolland: Excellent. Thank you for that color. Appreciate it. Operator: The next question comes from the line of Jed Dorsheimer with William Blair. Jed Dorsheimer: Hey. Thanks. Thanks for taking my questions, guys. I guess the first one for you, Gregg. Just a follow-up to Brian's previous question. It would seem like, you know, dealing with the L1s in some capacity might be the lowest hanging fruit. So I'm just curious, have you kind of looked at what the potential savings and interest could be? I'm just wondering in terms of, you know, as you explore different options, are you talking about sort of a $50 million to $100 million annual savings? Are you talking $150 million? Like, what is the scope of that? And then I have a follow-up. Gregor Von Isom: Yeah. I think it depends a little bit on how we would execute some portion of the refinancing of the L1. As said, there are several options, and it depends a bit on what is available given the specifics and nature of just emerging from Chapter 11. So we are very actively looking at that. You know our cost of capital is right now very high, and there will be a further step-up. So that is something that we are looking for to address head-on. I think the exact amount of interest reduction really depends on the instrument we will use and the size of the first step we can make. And I think it's a bit premature to indicate exactly how big that would be, but I'm looking for making, let's say, a material first step there, but it's probably not gonna be in a one-go transaction. Jed Dorsheimer: If that helps. Thank you. Jed Dorsheimer: It does. Yeah. I mean, I think you addressed sort of, you know, scope. I guess the second question would be for you, Robert. With respect to Siler City and, you know, just the I know you can't guide or, you know, it's premature to frame around the 300-millimeter for virtual lens opportunities. But that would seemingly be the fastest way to fill that fab. I'm just wondering, is there any framework to think about how to timing of utilization should the AR/VR type opportunity ramp? How should we be thinking about that? Robert Feurle: Look. I mean, at the end of the day, we're always adjusting, you know, kind of the production to the demand. Right? And we're gonna be scaling this up as demand, you know, picks up. And at the end of the day, this is really dependent on customer adoption of the technology. Right? Yeah. And then, of course, we are ready to scale. I mean, the good thing is here with Wolfspeed here, we got really the facilities. We got the CapEx, which was spent here pretty much in both the device step-up in Mohawk Valley and, as you said, on the materials side here, we got, you know, capacity in Durham, but also in Siler City. Yeah. The factories are built. Right? So this means, yeah, at the end of the day, it is really now looking to how do we get customers, how do we get pretty much new applications, yeah, to drive that growth. This is something we completely have in our end? No. Because we need to make the customer need to make an architectural choice. Right? Then, of course, we need to go we get this qualified and ramped. And this is why I think, you know, diversifying here the customer base, the go-to-market, and also how we think about understanding the end application is such an important piece of getting Wolfspeed here into the right position. Jed Dorsheimer: Great. Thanks, guys. Operator: The next question comes from the line of Samik Chatterjee with JPMorgan. You may proceed. Joe Cardoso: Hi. Good afternoon, and thanks for the question. This is Joe Cardoso on for Samik. Maybe for my first, I just wanted to follow-up on the EV comments you made, but maybe less on the market itself and just more curious we should think about Wolfspeed's positioning in the market today. Particularly following a somewhat turbulent twelve months or so, like, how but also kind of on the heels of the recent announcements like the one you mentioned with Toyota. Just curious what you're seeing across customer conversations and dialogues and any incremental color you can provide on that front. And then I have a follow-up. Robert Feurle: Sure. I mean, so look. Again, we've been announced the partnership with Toyota, right, which pretty much showing we're diversifying here also globally. And, clearly, Toyota is a, you know, very well-known brand for quality. So I think, you know, this is also a testament to the great cooperation between the two companies. Yeah. And then, of course, we're really here looking into, yeah, diversifying here globally, but also in terms of within the EV makers. As I said, right, I mean, with the emergence of these 800-volt battery platforms, it's really the perfect fit for, yeah, the silicon carbide in the traction inverter. And this is what we're really, really focused on. A lot of them are valuing our vertical integration. Right? I mean, if you saw also what happened recently around, you know, where else, obviously, still kind of what happened last year also around Gallium. Yeah. And pretty much all of a sudden, certain countries restricted these materials from being exported. Right? A lot of customers are building okay Wolfspeed. You have manufacturing capabilities. You have the capacity. And you have this right here in the United States. Right? I mean, if you see kind of our footprint, it's pretty much first of all, very lean. Yeah? But it's also something which we have under our control. That is pretty much between North Carolina, Mohawk Valley, and our device and module site in Arkansas. Right? I mean, we can really move very fast. We have this all under one roof. So this is really something where a lot of customers like it. And we have, again, here a lot of, you know, sampling ongoing with various key customers here for programs. Operator: That concludes today's Q&A. I would now like to pass the call back for any closing remarks. Robert Feurle: Thanks, everybody, for joining us on the call today here. Thank you. Operator: Thank you for your participation, and enjoy the rest of your day.
Operator: Good day, and welcome to the DHI Group, Inc. Fourth Quarter and Full Year 2025 Financial Results Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Todd Kehrli, Ponder Wilkinson, Investor Relations. Please go ahead. Todd Kehrli: Thank you, operator. Good afternoon, and welcome to DHI Group's Fourth Quarter and Year-End Earnings Conference Call for 2025. Joining me today are DHI's CEO, Art Zeile, and CFO, Greg Schippers. Before I hand the call over to Art, I'd like to address a few quick items. This afternoon, DHI issued a press release announcing its financial results for the fourth quarter and year-end 2025. The release is available on the company's website at dhigroupinc.com. This call is being broadcast live over the Internet for all interested parties, and the webcast will be archived on the Investor Relations page of the company's website. I want to remind everyone that during today's call, management will make forward-looking statements that involve risks and uncertainties. Please note that except for historical information, statements on today's call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements reflect DHI management's current views concerning future events and financial performance and are subject to risks and uncertainties. Actual results may differ materially from the outcomes contained in any forward-looking statements. Factors that could cause these forward-looking statements to differ from actual results include risks and uncertainties discussed in the company's periodic reports on Form 10-Ks and 10-Q, and other filings with the Securities and Exchange Commission. DHI undertakes no obligation to update or revise any forward-looking statements. Lastly, on today's call, management will reference specific financial measures, including adjusted EBITDA, adjusted EBITDA margin, free cash flow, and non-GAAP earnings per share, which are not prepared in accordance with U.S. GAAP. Information regarding these non-GAAP measures and reconciliations to the most directly comparable GAAP measures are available in our earnings release, which again can be found on our website at dhigroupinc.com in the investor relations section. With that, I'll turn the call over to Art Zeile, CEO of DHI Group. Art Zeile: Thank you, Todd. Good afternoon, everyone, and thank you for joining us today. I'm Art Zeile, CEO of DHI Group. And with me is Greg Schippers, our CFO. To start, I want to remind everyone that at DHI, our mission is simple. We help employers find and connect with the technology professionals who drive innovation across the U.S. economy. We do this through our two brands, ClearanceJobs and Dice, both with strong positions in attractive markets. Our model is straightforward. More than 90% of our revenue comes from annual or multiyear subscriptions. Customers who are employers or recruiters use our platforms to search for, engage with, and recruit tech talent. Our exclusive focus on tech occupations, along with our ongoing product innovation, gives us a durable competitive advantage. ClearanceJobs is the leading marketplace for professionals with active U.S. security clearances, serving approximately 1,800 customers, including Lockheed, Booz Allen Hamilton, Leidos, Raytheon, and many others. With 1,900,000 candidates on our platform, we have the largest number of profiles of U.S. cleared professionals, giving CJ a significant competitive advantage as a platform for hiring cleared tech talent for the defense sector. Dice is essentially LinkedIn for tech hiring, built over thirty-five years with 7,700,000 profiles in our database representing the vast majority of technology professionals in the United States. While LinkedIn emphasizes a person's title, we focus on tech skills, of which there are over 100,000 distinct skills in our data model. Tech professionals on Dice actively update their profiles with new skills, making Dice the most relevant platform for recruiters who need to source tech talent. Both businesses generate strong recurring revenue and robust EBITDA margins, particularly at ClearanceJobs, where margins run at or above 40%, and help drive strong free cash flow conversion. Investors often mistake us for a staffing and recruiting firm, but we are an essential software tool used by employers and recruiters to find top tech talent for their open positions. Approximately 6,000 employers and staffing companies subscribe to our two SaaS platforms. Now I would like to provide an overview of our brand performance this quarter and outline the steps we've taken to improve our position moving forward. Starting with ClearanceJobs, we believe the fourth quarter marked an inflection point. Bookings returned to positive year-over-year growth in the quarter following a decline in the third quarter. This improvement reflects both market tailwinds and improved sales execution following leadership changes earlier in the year. The $1 trillion U.S. defense budget for fiscal year 2026 marks an enormous single-year increase over the previous year's budget. Historically, the defense budget has grown roughly in line with GDP growth rates of around 3%, so this is a significant year-over-year increase. Also, NATO countries are boosting defense spending with a target of 5% of their GDPs, which would represent a spending increase of more than $500 billion per year, with U.S. contractors likely to secure a significant portion of this incremental spend. Traditionally, over 60% of EU defense procurement spending goes to U.S. military contractors. These dynamics are promising for ClearanceJobs. With over 10,000 employers of cleared tech professionals and more than 100 government agencies in need of cleared tech professionals, CJ has a significant growth opportunity as government contractors look to staff new projects. We are also excited about the progress that we have made with our Agile ATS acquisition. It has been integrated with ClearanceJobs, and we have doubled its revenue in less than six months. This acquisition is a clear illustration that we can "expand the mission" for ClearanceJobs and leverage the solid relationships we have built with 1,800 military contractors over the past twenty-four years. Looking back, we have almost doubled the revenue of ClearanceJobs in the last five years, and we continue to expect ClearanceJobs to be our primary growth engine in the near and medium term as defense contractors are increasingly ramping up hiring activity in anticipation of funded programs. We also continue to innovate within ClearanceJobs. During the quarter, we piloted a premium candidate subscription, initially marketing it to a very small subset of our database. Early results were encouraging, validating the concept as a new recurring revenue stream. Broader marketing to our full candidate base will occur in stages during 2026, and we expect this to become a more meaningful contributor over time. Turning to Dice, the commercial technology hiring environment remains challenging. Dice's performance in the fourth quarter improved in that the rate of decline narrowed, but both bookings and revenue were still down year-over-year. We believe Dice is well-positioned to benefit as broader commercial tech hiring accelerates, but we are not assuming a return to bookings growth in Dice until the tech hiring market returns to growth. Industry data continues to show that overall tech job postings are largely flat compared with late 2024, neither materially better nor worse. That said, tech staffing trends have improved meaningfully. Staffing Industry Analysts (SIA) now suggests that U.S. tech staffing declined by about 10% in 2023, 6% in 2024, and about 2% in 2025, with growth projected to return in 2026. During the quarter, we continued our rollout of the Dice employer experience, an online self-service platform. The platform serves two strategic purposes. First, it expands our addressable market, particularly among commercial employers who want flexible, lower-commitment access to Dice through monthly subscriptions or individual job postings. Second, it improves operating efficiency by enabling greater self-service in all our customer relationships. Importantly, Dice employer experience is a platform transition, a full-scale rewrite of our Dice code base. Customers will be fully migrated into the new platform by the '1, moving to a modernized interface and workflow, allowing for faster and more efficient new and enhanced product releases. A key long-term demand driver across Dice and the broader tech labor market continues to be AI-related hiring. At the end of 2025, 55% of Dice job postings required AI-related skills, up from 28% a year earlier. Dice differentiates itself through its deep AI skills taxonomy, which covers more than 360 distinct AI-related skills. Rather than treating AI as a single generic category, Dice enables employers to identify and match candidates based on specific validated skill sets, an increasingly critical capability as AI roles become more specialized. We believe this depth of skill intelligence positions Dice as a differentiated platform for AI talent over the long term. Looking ahead, we expect ClearanceJobs to deliver continued growth driven by defense spending, improved execution, and our expanded offerings. ClearanceJobs operates in a specialized, high-barrier market at the intersection of defense, security, and technology, with significant upside from defense budget growth and NATO spending. For Dice, while we believe it is increasingly becoming the go-to for AI talent acquisition, we expect it to continue to be challenged until the commercial tech hiring market returns to growth. Having said that, our subscription model and margin structure give us resilience and allow us to deliver significant free cash flow. We are confident in our ability to deliver strong free cash flow going forward and continue to believe the market doesn't fully reflect the value of each of our distinct brands today, which is why our board authorized a new $10 million buyback program starting this month. Over time, as we execute, grow our customer base, and deliver solid profits and robust free cash flow, we see a clear path to continued meaningful shareholder value creation. With that, I'll turn the call over to Greg to walk you through the financial results and our guidance in more detail. Greg Schippers: Thank you, Art. And good afternoon, everyone. Jumping right in, we reported total revenue of $32.4 million for the fourth quarter, which was down 10% on a year-over-year basis and roughly flat compared to the third quarter. Total bookings for the quarter were $31.2 million, down 5% year-over-year. Our total recurring revenue was down 12% compared to the prior year, and the bookings that drive our recurring revenue were down 6% for the quarter. ClearanceJobs revenue was $13.9 million, up 1% year-over-year and flat sequentially. Bookings for CJ were $14.6 million, up 3% year-over-year. We ended the fourth quarter with 1,775 CJ recruitment package customers, which was down 9% on a year-over-year basis and down 3% on a sequential basis. This reduction continues to be attributable to churn with customers spending less than $15,000 in annual recurring revenue. CJ accounts spending greater than $15,000 annual recurring revenue increased by approximately 60 accounts versus the prior year and includes approximately 25 accounts that upgraded from a lower tier. Our average annual revenue per CJ recruitment package customer was up 8% year-over-year and up 2% sequentially to $27,246. Approximately 90% of CJ revenue is recurring and comes from annual or multiyear contracts. For the quarter, CJ's revenue renewal rate was 90% and CJ's retention rate was 109%. These solid rates demonstrate the continued value CJ delivers in recruitment of cleared professionals. Dice revenue was $17.4 million, which was down 17% year-over-year and down 4% sequentially. Dice bookings were $16.6 million, down 11% year-over-year. We ended the fourth quarter with 4,132 Dice recruitment customers, which is down 3% from last quarter and down 12% year-over-year. Dice revenue renewal rate was 78% for the quarter and its retention rate was 94%. The reduction in customer count from the prior year quarter continues to be attributable to churn with smaller customers spending less than $15,000 per year, which represent approximately 75% of the total churn on count and who are more likely to be impacted by the difficult macro environment and uncertainty. We believe the introduction of our new Dice platform, which offers customers the flexibility of monthly subscriptions, will help reduce future churn among smaller accounts by lowering upfront commitment and improving affordability. Our average annual revenue per Dice recruitment package customer was $15,635, down 5% year-over-year and down 1% sequentially. Approximately 90% of Dice revenue is recurring and comes from annual or multiyear contracts. Both brands continue to onboard notable new clients. In the fourth quarter, ClearanceJobs secured annual contracts with ServiceNow, ForwardEdge AI, and Pennsylvania State University, while Dice landed Ameriprise Financial, Atlas Copco Group, and the Metropolitan Water District of Southern California, demonstrating that employers outside the traditional industry are using our platforms to hire talent to fulfill their tech development needs. Now let's move to operating expenses. For the fourth quarter, our operating expenses decreased $5.3 million to $27.7 million when compared to $33.1 million in the year-ago quarter and includes a $1.4 million impairment of a right-of-use asset as we intend to sublease our New York City office space. Excluding the impairment, our fourth quarter operating expenses declined $6.7 million or 20%. Improvements to our operating efficiency, including the Dice employer experience platform, along with adjusting the business for the difficult market environment over the past few years, we've reduced our annual operating expenses and capitalized development cost by approximately $35 million. For the quarter, we had income tax expense of $800,000 on income before taxes of $2.2 million. Our tax rate for the quarter differed from our approximate statutory rate of 25% due to a nondeductible impairment. Tax law changes allowed for the immediate deduction of R&D costs, helped reduce our 2025 income tax payments by $3.1 million as compared to 2024, and will favorably affect our 2026 cash outlay for income taxes. Moving on to the bottom line, we recorded net income of $1.3 million or 3¢ per diluted share in the fourth quarter. For the prior year quarter, we reported net income of $1 million or 2¢ per diluted share. Net income for the quarter was impacted by the previously mentioned $1.4 million impairment and a $900,000 impairment of an investment. Non-GAAP earnings per share for the quarter was 9¢ per share compared to 7¢ per share for the prior year quarter. Diluted shares outstanding for the quarter were 44.6 million shares, down 1.3 million shares or 3% from the prior year quarter. Adjusted EBITDA for the fourth quarter was $9.4 million, a margin of 30% compared to $9.2 million or a margin of 26% in the fourth quarter a year ago. On a segmented basis, CJ adjusted EBITDA remained strong at $6 million in the fourth quarter, representing a 43% adjusted EBITDA margin as compared to adjusted EBITDA of $6.4 million or a margin of 47% in the prior year period. Dice's adjusted EBITDA increased to $5.2 million, representing a 30% adjusted EBITDA margin compared to $4.3 million and a 20% margin last year. Operating cash flow for the fourth quarter was $7.2 million compared to $4.4 million in the prior year period. Free cash flow, which is operating cash flows less capital expenditures, was $5.7 million for the fourth quarter compared to $1.6 million in the fourth quarter of last year. Our capital expenditures, which consist primarily of capitalized development costs, were $1.4 million in the fourth quarter compared to $2.7 million in the fourth quarter last year, savings of $1.3 million or 47%. Capitalized development costs in the 2025 CJ were $454,000 compared to $524,000 in the 2024 period, while capitalized development costs for Dice were $1 million this quarter as compared to $1.6 million in the 2024 period. We are targeting total capital expenditures in 2026 to range between $6 million and $7 million as compared to $7.3 million last year. For the full year, we generated $13.8 million of free cash flow compared to $7.1 million last year. From a liquidity perspective, at the end of the quarter, we had $2.9 million in cash and our total debt was $30 million under our $100 million revolver, resulting in leverage at 0.85 times our adjusted EBITDA. We continue to target one times leverage for the business. Deferred revenue at the end of the quarter was $39.9 million, down 12% from the fourth quarter of last year. Our total committed contract backlog at the end of the quarter was $99.6 million, which was down 5% for the end of the fourth quarter last year. Short-term backlog was $76.1 million at the end of the fourth quarter, a decrease of $2.6 million or 3% year-over-year. Long-term backlog, that is revenue to be recognized in thirteen or more months, was $23.5 million at the end of the quarter, a decrease of $2.6 million or 10% from the prior year quarter. During the quarter, we repurchased 2.9 million shares for $5.2 million under our stock repurchase program. For the year, we've repurchased a total of 5.5 million shares for $11.4 million, and over the past three years, we've repurchased 9.1 million shares for $26.5 million, all under our stock repurchase programs and from the vesting of share-based awards. Following the close of the fourth quarter, we completed the $5 million plan authorized in November 2025, and last week, our board approved a new $10 million stock repurchase program, which will begin this month and will run through February 2027. Moving on to guidance, we expect ClearanceJobs bookings to grow in 2026. However, we do not anticipate Dice bookings growth resuming until tech hiring improves. As a result, we expect DHI revenue of $118 to $122 million for the full year, and for the first quarter, we expect revenue of $28 million to $30 million. For CJ, we expect revenue of $56 to $58 million for the full year, and for the first quarter, we expect revenue of $13 million to $14 million. At Dice, we expect revenue of $62 million to $64 million for the full year, and for the first quarter, we expect revenue of $15 million to $16 million. We expect the CJ bookings miss that occurred in 2025 to cause a small sequential and year-over-year revenue decline for CJ in the first quarter, but returning to growth in 2026. From a profitability standpoint, we are targeting a full-year adjusted EBITDA margin for DHI of 25%, and margins of 40% for CJ and 22% for Dice. The lower year-over-year margins are driven by bookings challenges in 2025 related to the continued soft tech hiring environment and uncertainty surrounding government defense spending. These bookings challenges in 2025 drive the lower revenue in 2026. Our focus remains on delivering long-term sustainable and profitable revenue growth into strong free cash flow generation, averaging at or above 10% of revenues. To wrap up, although the hiring environment over the past two-plus years has impacted our revenue growth, we remain optimistic about the road ahead. We anticipate the record-breaking defense budget will be a growth driver for CJ and that companies across all industries will steadily increase their investments in technology initiatives, creating a strong growth opportunity for both ClearanceJobs and Dice. We remain focused on strengthening our industry-leading solutions, optimizing our go-to-market strategy, and executing with efficiency, ensuring we are well-positioned to capitalize on the opportunities that lie ahead. And with that, let me turn the call back to Art. Art Zeile: I want to thank all of our employees once again for their outstanding work this quarter. It is a pleasure to be part of such a great team. That said, we are happy to answer your questions. We will now begin the Q&A session. Operator: If at any time your question has been addressed and you would like to withdraw your question, please press star. The first question comes from Zachary Cummins with B. Riley Securities. Please go ahead. Zachary Cummins: Hi. Good afternoon, Art and Greg. Congrats on solid results here in Q4 and nice to see ClearanceJobs moving towards sustained growth here in 2026. Just starting with ClearanceJobs, I'm curious about your assumptions around just the bookings trajectory in business. Obviously, potentially a lot of tailwinds with the strong defense spending environment that we're seeing going into next year. So just curious about your assumptions that you're making on the bookings front with your initial guidance for ClearanceJobs in 2026? Art Zeile: Well, first and foremost, Zachary, that's a great question. I'll tell you that we think that part of the results of last year was due to sales execution and leadership. And we do have a new leader coming on board. We did have our president, who's the previous VP of sales for CJ, drop into the role in late October, and he made an immediate difference. And you can see that obviously swinging from negative 7% year-over-year bookings for Q3 to plus 3% in Q4. I would say we do foundationally believe that the new defense budget that was just passed yesterday is going to be a tailwind for CJ. We could see visibly the larger customers in Q4, despite having the largest government shutdown in the history of the United States, feel very confident in their position and renew at elevated rates. So we think that that's going to be more pervasive in kind of the community as we move forward into 2026, especially in the aftermath of that defense budget being passed and then obviously put into law by President Trump. Zachary Cummins: Understood. And then just shifting over to Dice, obviously, to see some green shoots with the overall staffing side of it potentially returning to growth this year. But as the mix of overall AI-related job postings continues to grow on your platform, how are you thinking about just the overall value for Dice and potentially even kind of outperforming a potential inflection in the broader commercial environment inflection that we're hoping to see there? Art Zeile: That's a great question. The question that is asked by just about everyone, including our Board last week at our quarterly board meeting. I can tell you that there's obviously a mix of opinions, a range of opinions as to how AI affects the coding community, programmers in the United States. I can tell you that we believe that this is the year that that's going to become very visible. We do see signs that there is this one particular philosophy that if you become more efficient in anything that is generated, there's higher demand for it. And we think that that is evidenced by the discussions that are being had by people like Marc Andreessen and Sam Altman saying, no, we think that there's going to be kind of a mini explosion of demand for AI. Now that has played out in terms of the demand for AI professionals on the Dice site. But I think that, you know, commercial activity in general is still subdued, and there's kind of a wait-and-see approach. But I think this is the year that we figure out whether or not AI really is a substitute for development capacity and for the community at large and tech professionals. But we're seeing signs that there is high demand. There's no question about that. Zachary Cummins: Understood. And then just a final question on the margin front for Dice. Is it really just the factors of kind of a lower revenue base that's causing the margins to compress here? Or are there any incremental investments that you're planning on in 2026 for Dice? Greg Schippers: Yes. So Zachary, this is Greg. Yes, the compression on margin is purely related to the revenue. In the end, it's the bookings challenges and then that flowing through to revenue in 2026. So, you know, we are targeting lower OpEx in 2026 versus '25, but it just doesn't quite keep up with the decline in revenue. And as it relates to investments in Dice, you know, we do continue to invest in Dice. I think as Art commented, you know, the platform is much more efficient now. We can do a lot more development and a lot more enhancements faster with fewer people. And so we took those folks out last year. So we intend to continue to invest, but you know, just the runoff of that bookings in 2025 is going to slow revenue in 2026 and cause margin compression in the short term. Zachary Cummins: Understood. That's really helpful. Well, thanks again for taking my questions and best of luck with the rest of the quarter. Art Zeile: Thank you so much, Zachary. Operator: The next question comes from Gary Prestopino with Barrington Research. Please go ahead. Gary Prestopino: Good morning, good afternoon, everyone. Art, could you just elaborate a little bit on the new premier subscription package that you're putting out for CJ? Art Zeile: Yes. I'm happy to do so. So that has been in the works for quite some time since 2025. In many respects, it has the same kind of attributes, same kind of feature set as LinkedIn's premium subscription. And the LinkedIn price point is pretty substantial. It's about $60 per month. We rolled that out to a small user group at the end of Q4 and expanded to about a thousand total candidates that were given the opportunity to buy this subscription. Subsequently, moving into January, we've been kind of advancing that to about 10,000 total candidates. And it has seen a take rate of about 1.5%, and it's growing. So it feels pretty good. We also, at the same time, essentially, randomized pricing. So we offered some candidates a low pricing at $9.95, another set of candidates $12.99, another set of candidates $14.99, another set of candidates $19.99. And it looks like the most promising price point is $12.99. So we are going to go out to the full set of about 1,900,000 candidates and make this offer to them for a premium candidate experience or subscription by the end of Q1, just kind of literally rolling it out in phases, week by week. Gary Prestopino: But could you explain what the premium subscription does? I'm a little bit, I guess, fuzzy on that. What exactly are you offering a candidate? Art Zeile: Absolutely. So as one example, you can see who looked at your profile over the last week, thirty days, sixty days, ninety days. What that is to a candidate is a signal that a recruiter is very interested in your profile. So you can reciprocate by going straight to that recruiter and saying, hey, I know that you looked at my profile. Would you like to engage in a conversation? You also can look at a particular job posting and get a score from zero to 100 as to how close you match the required attributes of that particular job posting. And it will also tell you what the gap is, what you should go out and learn if you really want those kinds of career opportunities in the future. It will also give you a boost towards those jobs that are being searched for. So if a recruiter is searching for a Java developer in Centennial, Colorado, and you have this premium candidate subscription, it will boost your profile a little bit closer to the top so that you're more visible to that recruiter. They take your profile more seriously. Those are just three of the features that are embedded in this. There's probably, like, 10 features, and I could definitely get you a much more comprehensive summary of that, Gary. But it really is promoting a candidate's ability to essentially use the platform with more sophistication and have more engagement with recruiters because it's always about the engagement with recruiters and giving them more signals as to what they need to do with their career. Gary Prestopino: Okay. And you also mentioned, you know, besides the fact you've cut expenses, you've got new products rolling out, did some personnel changes on the sales side or ahead of sales. Could you just talk a little bit about that? Art Zeile: Yes. I will tell you that at the beginning of last year, January 2025, we essentially separated the brands, and we designated presidents. Alex Schulte is the president of ClearanceJobs, and he used to be the VP of sales of ClearanceJobs. He was promoted from VP of sales to president. And we had to find a replacement for him. Unfortunately, I think that we found a person that didn't really scale to the full size of the CJ sales team, which consists of about 50 people. It's a pretty meaningful-sized team to manage. And we saw bookings decay in Q1, Q2, Q3. We thought that that was part of the macro environment or at least partially due to the macro environment, but then we convinced ourselves that we really needed to find a new leader. At the time that we decided that in October, Alex dropped into his old role. He became the acting VP of sales for CJ at the same time that he was the president. And so, you know, he was doing double duty, but we saw an immediate remarkable improvement in bookings. Like, literally, we went from negative 7% or a decline of 7% in bookings Q3 year-over-year to positive 3% in Q4. And, you know, I think that that trend will continue over the course of 2026. So we think that there is a it does make a difference having the right person in the role. We convinced ourselves of that. We do believe that the macro environment did, to a certain degree, hold us back. But now the macro environment feels a lot different, a lot better, and especially in light of the defense budget that was passed into law yesterday. Gary Prestopino: Okay. And then this individual, do you think he can continue to have double responsibility as president and then head of sales too? Art Zeile: No. We are actually bringing on board and announcing a new VP of Sales in the next few weeks. And so we've been hard at it through a hydrogen struggles-led search to find the new VP of sales for ClearanceJobs. And I personally think the candidate, the person that is going to become our new VP of sales, is spectacular. So, again, don't want to announce it too early, but it will be announced within a few weeks. Gary Prestopino: Okay. And then just lastly, I mean, you could cite maybe three or four encouraging signs that you're seeing. I mean, obviously, the ClearanceJobs bookings were up. But what else is happening on a macro environment plane? You know, we know about the fact that you've cut costs, and that's great and all that. But what's giving you some encouragement here? Art Zeile: I personally think that the context of the defense budget is going to help us a lot. Most of our roles are very heavily technical and weighted towards software development on the ClearanceJobs platform. And programs like the Golden Dome are all about software. I think that the fact that we are moving to a much more technology-rich defense budget will help us, and we're already seeing that, obviously. The other really big macro effect for us is the Dice dependency on staffing recruiting agencies. So we have been in a tech staffing recession since 2023, and that's clearly evidenced by the staffing industry analyst kind of figures that I pronounced in my side of the script. We're coming out of that. You can go to staffing industry analysts. They have a new tech staffing bullhorn indicator, and it shows the revenue growth in the tech staffing industry month over month previous period. And it shows that we are going towards growth in 2026. The staffing industry analyst pulse report that comes out after every sixty days showed that the median tech staffing firm in December, the median grew 10%. The seventy-fifth percentile tech staffing firm in the United States grew 32%. So we're seeing kind of a surge in tech staffing demand. Now, obviously, I'm not trying to overplay that. It's an uncertain world that we live in today, but you could definitely see the trend lines if you go to staffing industry analysts and look at these indicators. And, again, we've been in a recession, so it's a cyclical business. We're hopefully coming out of the cycle. Gary Prestopino: Happens to be a Thank you so much. Thank you very much. Todd Kehrli: Appreciate it, Gary. Operator: The next question comes from Max Michaelis with Lake Street Capital Markets. Please go ahead. Max Michaelis: Hey guys, great quarter. Few questions from me. I kind of want to stick with ClearanceJobs here. It's good to see bookings up 3% in Q4 and then your guidance for ClearanceJobs at 4%. Going back to your comments earlier in the call about bookings growth expected to continue in ClearanceJobs, should we expect acceleration from this 3%? I know quarterly volatility is a thing, but should we expect ClearanceJobs bookings growth to kind of creep up into the mid-single-digit range? Anything else, sir? Greg Schippers: Yeah. This is Greg. And, Max, yeah, you should expect that to trip up through the year. So we expect it to get a little more legs under it, you know, as this new defense budget kind of gets moving and stuff. There should be a little bit of lag with everyone, you know, getting their contracts in order, but we definitely expect that to happen through the year. Max Michaelis: Okay. Thank you. And then for ClearanceJobs margins, I think adjusted EBITDA margin was 43% in 2025, and then your guidance calls for around 40%. Is there any reason for that step down in 2026 investment or help me out with that? Greg Schippers: Yeah. No. That's a good question. And it's really it is a result of the rather flat bookings through 2025, and in particular, the decline in the third quarter of 7%. In six months or so, that can move over to revenue. And we have a pretty consistent OpEx base, if not increasing a little bit at CJ, expected through 2026 as we continue to invest, you know, in that business. So that's going to compress that margin a little bit. But, again, you know, we're still in that 40% range with CJ, but the revenues will be just a bit more challenged because of the lag in that bookings mess. Max Michaelis: Okay. And then shifting over to Dice, my last question. Going back to an earlier question talking about the green shoots and staffing, can you remind me what the percentage of revenue is between staffing and commercial accounts at Dice? Art Zeile: Approximately 80% is really dependent upon tech staffing firms in the United States. Yep. So we have some of the very largest tech staffing firms in the United States and the world. Adecco is the largest customer for us. Robert Half is number two. We have Randstad, Kforce, Jobbot, and then there is a very, very long tail of tech staffing firms in the United States. There are approximately 18,000 tech staffing firms. So, you know, the bottom line is that we have traditionally been very dependent on them because for them, the Dice platform is the equivalent of salesforce.com to a salesperson. It's up on their laptop or their screen every single day, every hour of the day as they're searching for candidates. They have a lot of urgency in getting people in the seat, so to speak, because they can only bill their customers when they actually do land in the position. So, again, we're kind of a go-to platform for many of the tech staffing firms in the United States. Max Michaelis: I knew it was high. Just couldn't remember the exact number. But thanks for taking my questions, guys. Art Zeile: Thank you, Max. Well, thank you. Have a great day. Operator: The next question comes from Kevin Liu with K Liu and Company. Please go ahead. Kevin Liu: Congrats on a solid finish to the year. Maybe if I could just continue on that line of questioning, the staffing and recruiting piece of Dice. Can you talk a little bit about the trends you've seen within the business with those companies? And as they start to see their own businesses stabilize, is it possible that you'll see growth there which is just being kind of offset by the commercial side of your business? Art Zeile: That's a great question, Kevin, as always. I would have to say that as we looked at, you know, this SIA pulse report over the course of the year, it bumped along, you know, not really meaningfully changing as an indicator the first half of the year. I personally think that that's because of the macro environment, tariffs, announcements, and just uncertainty in general. Coming into a new administration. Then in the second half of the year, you can see a distinct trend. The seventy-fifth percentile was always doing extremely well. The twenty-fifth percentile was still, you know, in tough shape where there were revenue declines. So I used to tell the sales team, it feels like it's a tale of two cities, and we have to go after those staffing firms that have requisitions that are doing extremely well. So when you ask, you know, will we see increases? We are already seeing it with certain companies that are doing well, kind of exiting 2025. We always look at the median as an illustration of, you know, the average firm is doing or what their performance looks like. And the average firm up until this last Pulse report was, you know, like, zero to one to 2%. It looks pretty good moving into 2026 based on how we exited the year. And I'd also say the interesting thing about it is that December is a tough month. Generally speaking, our industry in general, whether it's staffing or it's hiring people commercially, is always down in the month of December. Generally just because, I mean, it's the holiday season, so people aren't hiring that with velocity. Now I could also tell you that our book of business in terms of renewals has a peak around December and January just because people have liked to line up their contracts with their calendar year or fiscal year. Kevin Liu: Yep. And just on that note, I wanted to ask a little bit about kind of the renewal trends you've been seeing of late. Obviously, Q4 looked like a nice bounce back from Q3 levels. Can you talk about just kind of how easy or difficult it was to kind of get your larger customers, especially to renew during that period and what you've seen kind of into the new year? And then as we look out for '26, just wondering if you would expect to see continued improvement in overall renewal rates. Art Zeile: Yeah, I would say, well, speaking to each brand individually, ClearanceJobs actually had a very nice bounce back, as we've been talking about. Great revenue renewal rate for Q4. The larger customers felt very bullish about their prospects moving into 2026 because they knew that they were going to see a larger defense budget. As you probably heard, President Trump has even promoted the idea of a $1.5 trillion defense budget for fiscal year 2027, which starts obviously, October of this year. So it feels like we've turned the corner with CJ. And this is, again, in the kind of overshadowing event of the government shutdown, you know, lasted longer than any other shutdown in history. That mostly kind of affected the confidence of the small and medium firms because they obviously have a different balance sheet profile than the large ones. Turning over to Dice, I would say, again, we had a bounce back in terms of revenue renewal rate. Our bigger customers felt better, kind of in line with that idea that there are certain tech staffing firms that are doing a lot better than they did at the beginning of 2025. And we were the beneficiaries of that during the renewal season. So that's just generally how I'd describe it. Kevin Liu: Alright. Great. And then just on CJ as well, it was kind of interesting to hear that, you know, the Agile ATS revenue base has kind of doubled already. I know it's off a small base, but how do you think about how Agile can contribute to growth on the CJ side this year? Art Zeile: Well, I think it's going to be still growing steadily. I think that it really does fit a great market need. It's generally for smaller and midsized companies, so that's what we're, you know, doing is we're pitching for those types of customers. I would say that because of the early success that we saw with Agile ATS bookings and revenue, we're actually adding to the sales team specifically to essentially promote Agile ATS moving into 2026. We felt enough confidence in what we had seen that we wanted to expand on that success. And so we're adding resources, and we think that it is going to be a bigger growth driver for us in the year ahead. Kevin Liu: Sounds great. Thanks for taking the questions and good luck here. Art Zeile: Thank you. We appreciate it, Kevin. Operator: This concludes our question and answer session. I would like to turn the conference back over to Art Zeile for closing remarks. Please go ahead. Art Zeile: Thank you, operator, and thank you all for joining us today. As always, if you have any questions about our company or would like to speak with the management team, please reach out to Todd Kehrli, and he will assist in arranging a meeting. Thank you for your interest in DHI Group, and have a wonderful day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Massimo Reynaudo: Hello, everyone. Welcome to UPM's Quarter 4 Results Webcast. I am Massimo Reynaudo, I'm the CEO of UPM. Here with me is Tapio Korpeinen, the CFO of UPM. The year 2025 has been characterized by escalating geopolitical and trade tensions with multiple impacts and also on our business environment. During the year and in response to the situation, we intensified our actions to both sharpen our competitiveness and to execute our portfolio strategy. This resulted in the fourth quarter in a visible improvement of our performance in most of our businesses. Compared to the previous quarter, our cash flow resulted very strong, too. Our quarter 4 EBIT was EUR 355 million compared to EUR 418 million 1 year ago or 1 year earlier. The quarter 4 EBIT margin was nearly unchanged at 15.3% versus 15.9% in the previous year. The operating cash flow in quarter 4, as I said, was strong at EUR 720 million. And our net debt decreased while we also paid out the second installment of the dividends. During 2025, we launched a significant strategic initiatives that continue to transform the company. In February, we acquired Metamark to accelerate the growth in Adhesive Materials. In May, we sharpened the focus in our Biofuel business and discontinued the Rotterdam biorefinery development. When it comes to biofuels, during the year, we made good progress with our turnaround plan and the business go back to profitability in the second part of the year. In September, we started the strategic review of our Plywood business. And in December, we announced the plan to establish a graphic paper joint venture that would encompass the UPM Communication Paper business and Sappi graphic and paper operations in Europe. While doing all of this, we took decisive actions to improve performance and competitiveness across all our businesses. Just as an example, in the fiber business, we mitigated the pulp and wood market challenges in Finland with production curtailments in the fall. And we entered into a long-term strategic partnership with Versowood that strengthened our position in the wood market. I'll tell you some more about this later. In the Adhesive Materials business, we restructured our production footprint globally and we reduced capacity in Europe and in the Communication Papers business. Measures were taken also in all other businesses and functions. Finally, we intensified our actions to improve the working capital efficiency, which resulted in the cash flow I talked about earlier. I will go now into some more detail for each of the business segments. Let's start with the Decarbonization Solutions. Here, the various end markets developed positively during the 2025. In Energy, the electricity demand in Finland grew by 3% during the year -- during the 2025. The growth was driven particularly by the electrification of [ heating ]. But in the coming years, this growth is expected to be complemented by growth in data centers currently under construction and by the green transition. Over the 5 coming years, we see the annual market growth rate to accelerate in a range between 4% and 7% in line with several other predictions on the same matter. We are in a strong position to capture the value this situation creates. In fact, there is a strong demand for 3 things. Sites with easy access to high voltage grid connections were to establish new operations. There is a demand for CO2-free energy -- electricity and there is demand for baseload power, and we have the 3 of them. In the meantime, we are well set to maximize the value creation in the current volatile and weather-dependent market. For example, in 2025, we achieved EUR 10 per megawatt hour higher sales prices compared to the average market prices. In quarter 4, the Energy business achieved a comparable EBIT of EUR 54 million, marking the best quarter in 2025. But if we move to biofuels, there as well, market prices for advanced renewable fuels increased during the second part of 2025. Our business improved its performance each quarter throughout the year and is back in profit. Going forward, the implementation of the RED III regulation, renewable energy directive regulation will support a positive market outlook. In Biochemicals, the business has now initiated the commercial phase with the first customer deliveries of industrial sugars taking place in quarter 4. We will continue to introduce further products to the market during the first half of this year, the next step being the renewable functional fillers. We reconfirm that the demand and interest for our biochemical products is robust. You may also have seen from the release this morning that we plan to start reporting UPM next-generation renewables, which consists of Biofuels and Biochemicals as a separate reporting segment starting from January 2027. With this, there will be the opportunity to have enhanced visibility into the performance as well as the potential of this high-growth segment. We turn the page and look now into the Advanced Materials. Well, here, the label materials market development in 2025 was relatively stable with growth rates remaining modest. To put it in numbers, in Europe, the demand grew by 2% compared to 2024. In North America, the growth was on a similar, which means about 2% level in the first 3 quarters of the year, but it slowed down and ended up with a minus 1% in quarter 4. In this context, 2025 has been quite a transformational year for our Adhesive Materials business. Here, we took significant actions to sharpen competitiveness and to secure the future growth. The business streamlined its organization and closed 3 production lines in Germany, France and in the U.S., relocating production to lower cost sites in Europe and in the U.S. This will improve its fixed and variable costs and competitiveness in general going forward. In parallel, it started focused growth investments in the U.S., in Malaysia, in Vietnam and in India to accelerate the growth in high potential or high-margin areas. Finally, it acquired Metamark in the U.K. and then work to integrate it with the previously acquired sites in the graphics space to build a platform for the development of this higher-margin segment. As a result of all of this, the business was able to grow clearly faster than the market, and it is in a good position entering 2026. However, the slow growth environment due to that, we were not able to simultaneously improve margins. Significant part of the profitability improvement actions and the benefits from the acquisitions is still to materialize and will be more visible in 2026. The Specialty Materials business delivered robust results in terms of profits and margin despite all the market turbulences. Gradually, the demand for label, release and packaging materials normalized in quarter 4. This, combined with our efficiency measures and declining variable costs resulted in a good quarter 4 EBIT improvement, up EUR 20 million year-on-year.The Specialty Materials business entered 2026 in a good position to supply a growing market demand and with low investment needs. Moving ahead to Fibers. Fibers experienced a volatile 2025, impacted by trade uncertainties, currency fluctuations and low prices. However, to put things in the right perspective, if we look at the whole year 2025 and despite the fluctuations, the pulp demand was robust. Global shipments continue to grow at a healthy rate at around 3%. Hardwood pulp shipments grew significantly more than that, whereas softwood pulp shipments decreased moderately. Fibers South, our platform in Uruguay continued to strengthen its position as a world-class low-cost business platform. Our cost during 2025 decreased by about USD 25 per ton, in line with our plans and what we communicated earlier. And the cost decrease is expected to continue still into this year and into the next year as optimizations continue. To give you some examples of these optimizations, our plantations are increasingly reaching harvesting maturity that improved wood sourcing costs. Besides that or linked to that, we will improve our inbound logistics costs further. On top of this all, we're working to identify debottlenecking opportunities both in Paso de los Toros and Fray Bentos. Or in general, during the second part of 2025, the hardwood pulp market prices in China increased gradually, but they are -- but significantly from the very low levels that they touched during quarter 2. The Fibers South performance in quarter 4 reached an EBIT of EUR 78 million or 21% of sales, an improvement versus quarter 3 despite the maintenance shut in Fray Bentos in quarter 4. On the other hand, when we talk about Fibers North or our platform in Finland, it continued to experience low softwood pulp prices and high wood cost. Its EBIT remained at EUR 11 million negative in quarter 4, albeit EBITDA positive. On the positive side, the pulpwood market prices in Finland have decreased significantly and roughly 30% from the peak and at the end of the year. But due to the length of the supply chain, the benefits of this cost reduction come typically and progressively with a delay, and therefore, they will be visible in 2026. Another relevant fact is here that we have entered a strategic partnership with Versowood, the largest private sawmill in Finland, and that will help to structurally improve our position in the Finnish wood market. Before we move ahead, I just want to recall your attention to the fact that the UPM Forest business will be included in the Fibers North business from January 2026 onward. We will then start to provide additional financial information on the 2 parts of the UPM Fibers reporting segment, meaning Fibers South and Fibers North starting from quarter 1, 2026. Now when it comes to Communication Papers and Plywood, both had a solid end of the year in terms of EBIT performance. The graphic paper markets were challenging in 2025, impacted by tariffs and the related uncertainty. The European graphic paper demand decreased by 8%, although the decrease moderated slightly in quarter 4 at 5%. The North American demand development was weaker and demand decline increased slightly in quarter 4. In markets that are oversupplied, we closed production at the Kaukas and Ettringen paper mills in quarter 4 reducing our capacity by 13% and our fixed cost by EUR 70 million annually. In quarter 4, we also sold the earlier closed Plattling paper mill in Germany. Communication Papers quarter 4 performance has been relatively strong with EBIT totaling EUR 110 million and boosted by the annual energy refunds. Once again, the business generated a very strong free cash flow that was up to EUR 362 million in 2025, despite the challenging market conditions I've just described. When it comes to Plywood, the dynamics were different in the different markets it serves. In the LNG shipping segment, demand continued to be strong. In the industrial end segments, it continued to improve. And in the Construction segment, it was stable, albeit on a relatively low level. In this environment, Plywood reported a robust quarter 4 EBIT of EUR 16 million or 15% of sales, which made quarter 4 the best quarter of the year. When talking about plywood, as you may remember, we announced the strategic review of the UPM Plywood business in September. We see plywood as a very good business with strong positions in the mid- to high-end market segments in Europe and globally in the LNG segment. The business has strong customer partnerships, operational and commercial excellence and a diversified portfolio of distinctive products. It has shown over time that it is able to provide good profitability and cash flow in different economic cycles. On the other hand, despite it has the scale of a midsized company in Finland, so relevant per se, absolutely relevant per se, it is the smallest of the UPM businesses. With this strategic review, we want to assess whether acting as a separate entity or as a part of a different entity, it could create even further value. The strategic review contemplates different possible future outcomes, including maintaining the status quo, a divestment, a partial demerger or an initial public offering. At this point in time, all options are in play and the review is expected to be concluded by the end of 2026. We closed 2025 with an announcement in December, an announcement about the fact we signed a letter of intent with Sappi that shall lead to the creation of a joint venture in the graphic paper market. As a reminder, we are planning an independent graphic paper company owned 50% for each of the 2 parts, UPM and Sappi, 50-50, which would include what is within the perimeter of the UPM Communication Papers business in Europe and in the U.S. and Sappi's graphic paper business in Europe. The transaction would create a more efficient, adaptable and sustainable graphic paper business. It will also create structurally competitive cost base and ensure supply security for the European and global customers. For UPM, the transaction would have a positive impact on profit margins, balance sheet and leverage. The numbers are here -- the key numbers are here represented in this slide. With the successful execution of this initiative, UPM would no longer have direct sales exposure to the declining European and North American graphic paper markets. The definitive agreement is expected to be signed during H1 during this first part of 2026, and the closing of the deal is expected to take place by the end of 2026. So by closing with this part, with this portfolio initiatives, the ones that I mentioned now about Plywood and Communication Papers, but also the other activities and investment, Decarbonization Solutions, Advanced Materials and then the Fiber business, we aim to change the profile of the company, increasing its focus on growth and improved margins and leverage. The future UPM would have an attractive portfolio made by Decarbonization Solutions, Advanced Materials and Renewable Fibers. In fact, all these businesses operate in growing markets and UPM has shown a strong track record of realized growth already above GDP in the past years in this perimeter. Focused innovation and investments targeted to combine sustainable renewable feedstock and CO2-free energy into high-margin products for customers all around the world will be the catalyst for an accelerated profitable growth ahead. But I'll pause here, and I'll hand it over to Tapio for some further analysis on our quarter 4 results. Tapio Korpeinen: All right. Thank you, Massimo. So here, you can see our EBIT and cash flow by the quarter for last year and '24. And from this, you can see that our fourth quarter EBIT increased significantly from the previous quarter, third quarter in '25, but decreased 15% from the last quarter of the previous year. And as Massimo already mentioned, the EBIT margin as such for the fourth quarter was at the same level as it was 1 year ago. Most of our businesses improved their performance from the previous quarter. As we have guided earlier, we booked the annual energy refunds in Communication Papers in the fourth quarter. And then also in the fourth quarter, we booked the increase in the fair value of our Forest in Finland, which was EUR 72 million. We had the same items benefiting the fourth quarter result in '24 as well. Only this year this year in the fourth quarter, they were slightly smaller. Operating cash flow was very strong in the fourth quarter, totaling EUR 720 million. This includes a working capital release of EUR 460 million for the quarter. Part of that release is seasonal by nature, which you can sort of see if you look at the previous years, but a large share is structural, thanks to our intensified efforts and measures that we have taken during the year to improve working capital efficiency permanently. Net debt then continued to decrease from the previous quarter. Net debt to EBITDA was 2.29x at the end of the year. And we will continue our efforts to increase cash flow and strengthen the balance sheet during this year. And here on the left-hand side, you can see our fourth quarter EBIT as it developed compared with the fourth quarter last year. Sales prices continue to be the biggest negative driver impacting particularly Fibers, but also Communication Papers and Specialty Materials. Variable costs decreased significantly year-on-year as well, but their positive impact was still smaller at the UPM level than the negative impact from lower sales prices. Perhaps worth mentioning is that for the yearly comparison in Finland, wood cost still was on the increase, so year-on-year, still increasing. Delivery volumes were slightly lower and fixed cost broadly stable in the fourth quarter. Changes in the exchange rates had a EUR 20 million negative impact on the fourth quarter EBIT as compared to last year's fourth quarter after hedging results. On the right-hand side, you can see the sequential comparison to the third quarter of '25. Sales prices decreased also in this comparison, but variable cost decreased then more. In this slide, this bar showing the lower variable cost includes also the benefit of energy refunds in the Communication Papers that were booked in the fourth quarter. However, if you exclude them, variable costs in other areas -- in other inputs decreased more than sales prices. Delivery volumes were broadly stable, while fixed costs were up seasonally. In this quarter, by the way, we had also the maintenance shutdown in Fray Bentos, which went according to plan and somewhat lower cost than what we had guided earlier, about EUR 22 million impact on the quarter. Then the other bar on the right-hand side, that includes the fair value increase of Forest assets, which was EUR 75 million higher in the comparison to the third quarter. This page summarizes UPM's currency exposures. As many of you know, most important currency in terms of our exposure is the U.S. dollar. We look at the impact on the 2025 result as compared to the previous year. Changes in currencies reduced UPM's comparable EBIT by about EUR 50 million after the impact of hedges. And here is the outlook for the first half of 2026. We expect our comparable EBIT in the first half of the year to be approximately in the range of EUR 325 million to EUR 525 million. In the first half of 2025, by comparison, our EBIT totaled EUR 413 million and the second half EBIT in '25 was EUR 508 million. In the first half of this year, '26 compared to the second half of '25, UPM's performance is expected to benefit from moderately higher sales prices and delivery volumes and moderately lower fixed costs. Performance is expected to be held back by continued weak Communication Papers markets and also by increased costs during the early phase of the production ramp-up at the UPM Leuna refinery. Currencies started the year at similar levels compared to the second half of 2025. In the second half of 2025, comparable EBIT benefited from the timing of energy refunds and increased fair value of Forest assets. So as I mentioned earlier, those were booked during the second half of last year, and these items are not expected to take place during the first half of 2026 in similar quantities. Then looking year-on-year in the first half '26 compared to first half '25, UPM's performance is expected to benefit from lower variable costs and moderately higher delivery volumes. Maintenance activity is expected to be lower than in the comparison period. Performance is expected to be held back by continued weak Communication Paper markets and also the increased costs during the production ramp-up of UPM Leuna biochemicals refinery. In the beginning of the year, currencies are negative in terms of their impact on comparable EBIT when comparing to the first half of 2025. Then the fourth quarter now was the second quarter that we were able to decrease net debt and that while we also paid out the second dividend installment during the fourth quarter -- second dividend installment for the 2024 dividend. And as I said, we aim to lower our leverage and bring the net debt to EBITDA back to below 2x in a timely manner. Our CapEx estimate for this year is EUR 300 million. the cycle of large investments in Paso de los Toros and Leuna is behind us and our maintenance investment needs are consistently below EUR 200 million per annum looking forward. And finally, the Board of Directors has today proposed an unchanged dividend of EUR 1.50 per share for the year 2025. The dividend represents 113% of UPM's comparable earnings per share for '25 and is equaling a dividend yield of about 6%. And now I'll hand it back over to Massimo for the summary and some final remarks. Massimo Reynaudo: Thank you, Tapio, and this is just going to be a brief recap of the main aspects we have seen so far. So we ended a complex year 2025 with improving performance in most businesses, strong cash flow and decreasing net debt. 2025 has been a transformational year. Across all our businesses, we launched a number of important initiatives aimed to ensure competitiveness and continued performance in the short term, while preparing to change the company profile for continued success in the long run. The future UPM will have a portfolio of innovative and sustainable materials and solutions. It will be focused on growth, improved margins, robust balance sheet and disciplined capital allocation. All of this as a base to support solid returns. Our Board is confident on the UPM's ability to create value and has proposed an unchanged dividend of EUR 1.5 per share for the year 2025. And this ends the prepared part of our presentation. And I think with Tapio, we are ready to take your questions. Operator: [Operator Instructions] The next question comes from Linus Larsson from SEB. Linus Larsson: I'd like to start off, if I may, with Fibres South. You did give some comment, but if you could provide some additional comment on your EBITDA performance as it is right now and where we are in terms of cost per tonne. You said there is still some improvement ahead in 2026 and 2027, but how much, please? Massimo Reynaudo: Yes. When it comes to the, let's say, the cost improvement potential, we have indicated earlier on, I believe it was in October, we estimate that potential across the next couple of years in the scale of EUR 15 per tonne. And that's -- yes, that's about that metric. Then when it comes to the EBITDA performance in quarter 4, I'll leave to Tapio to provide some more color. Tapio Korpeinen: Well, let's say, we give the EBIT at this point, as said, we will give some further lines on the performance then when we start reporting during this year. But I would sort of remind you of the fact that we had the maintenance shutdown in Fray Bentos during the quarter. So that had that sort of EUR 22 million impact. And even with that, we had an EBIT of EUR 78 million or 21% of sales. So if you look at the EBITDA margin, which we will get some more transparency on then later on, that obviously is at a healthy level as it is. And as I said, then we will work on the cost side more. Linus Larsson: Sure. And the cost improvement that you're seeing, is that a linear, gradual improvement over a 2-year period? Or is it more of a step change on an earlier time horizon? Massimo Reynaudo: Well, as I've commented earlier on, this comes from improvement, for example, in maturity of the plantation, wood supply, wood cost, logistic improvement. So we are talking more of a gradual and progressive improvement, no big step change. Those have been realized, implemented and materialized already in 2025 or before. Linus Larsson: Great. And then if I may shoot a second question, please, regarding energy in these volatile markets, if you could please update us on your hedging. How much of your volume in your Energy division is hedged in the first quarter and for the full year 2026, please? Massimo Reynaudo: Well, look, I will leverage the fact that Tapio leads also the Energy business and he is the most knowledgeable person in this room to talk about energy and transfer the question to him. Tapio Korpeinen: Yes. So well, like we have said before, we don't sort of disclose the hedging rate directly or percentage to our business. But maybe what I'll sort of rather point out to you is that if you look at our result, which is in Massimo's notes already that he told you, we achieved EUR 10 better average sales price during last year for the full year than what the average spot was. So that is coming from 2 sources. One, us being able to create value on the output that we can regulate primarily then, meaning hydro and then also from the hedging results. So we have been able to sort of create value on both ends. And let's say, coming into this year, we are looking to sort of perform in a similar manner. The sort of volatility in the market continues and the year has started with a real winter, which obviously you can see in the spot prices at the moment and in the fact that the hydro balance is dropping quite quickly now in the Nordic area. So in that sense, weather, obviously difficult to forecast any longer term, but the year has started in that manner. Linus Larsson: Right. But are you then suggesting that the premium that you just mentioned, is that what you expect to achieve in the first quarter as well? Tapio Korpeinen: That we will see. Operator: The next question comes from Charlie Muir-Sands from BNP Paribas. Charlie Muir-Sands: Just in terms of the evolution into the first half of 2026, I know you qualitatively called out a number of the moving parts. But just in terms of the -- a few of the discrete components, am I correct to read that your energy rebate was around EUR 100 million in the fourth quarter? Can you give us any indication on what losses you would expect from Leuna? Should we expect those to be even greater than they were in the second half of '25? And any kind of indication on the path to profitability of that operation? And I think you talked about fixed cost savings of about EUR 70 million from some of your communication paper closures. I just wanted to confirm, should we be thinking about that as a run rate immediately for Q1 versus Q4? Tapio Korpeinen: Yes, if I'll take that. So in round figures, it was -- the rebate impact was similar to last year. And well, this EUR 100 million that you mentioned is in the sort of right ballpark. Then in terms of the impact of the Leuna refinery, if we now had EUR 49 million negative EBIT in the second half of last year, we still -- as the production is ramping up, kind of in advance of significant sales will have additional costs, so a headwind from the sort of operating cost side, plus then we will have also depreciation kicking in now during the first half of the year. So in that sense, there will be a kind of larger negative impact still during the first half compared to the second half of last year. I would say, for the whole year, this kind of additional headwind will be, let's say, in the scale of some ten millions -- tens of millions. And then maybe on the fixed cost comment, yes, we -- as announced then towards the end of the year, production stopped both at -- or had stopped both at Ettringen mill and Kaukas. So this EUR 70 million fixed cost as a run rate will then benefit us during the first half of the year in the Communication Papers. Charlie Muir-Sands: If I could just ask a follow-up on Communication Papers. Regarding the joint venture, can you give us an update on the status with the major antitrust authorities? Have you filed with them yet? Have you received any feedback from them yet at all? Massimo Reynaudo: Yes. All what we can say at this point in time is that we have engaged with them in a dialogue, in a constructive dialogue and work is ongoing on building the necessary, let's say, information and so on, but there is not more than this to share at this point in time. Operator: The next question comes from Robin Santavirta from DNB Carnegie. Robin Santavirta: First question I have is related to the H1 EBIT guidance you provide. Now we started the year with higher hardwood pulp prices compared to last year. And I guess you expect somewhat higher volumes in H1 and also lower input costs, plus we have quite significantly less mill maintenance cost in H1 this year versus last year. Still the midpoint of the guidance range is close to last year's outcome. What are the key negatives we should expect in H1? Tapio Korpeinen: Well, if I comment, of course, one thing you have to remember that last year, we started with the U.S. exchange rate of 1.04. And obviously, that sort of exchange rate impact is mostly felt by -- in the Fibres business. So that obviously is a headwind in that sort of year-on-year comparison. Then we have, as pointed out in the forecast or in the outlook commentary Communication Papers where, let's say, despite our measures to cut and save on fixed cost, then reality is that we have a sort of a declining paper market to work in. We had also -- even if we have said earlier that the direct impact of tariffs has been still small in the sort of low tens of millions of euros for the full year last year. That, in a sense, impact we did not have in the beginning of the year last year. And then perhaps also as a significant sort of point that we just discussed a minute ago that we have the additional headwind even if we do see improvement on the biofuel side, we have additional headwind in the biochemicals. So those are the factors that are then included in the range that we have given. Robin Santavirta: That is very clear. Second and last question I have is related to the wood cost in Finland. We have seen quite significant declines. I can also see from data that the Finnish forest industry's procurement of wood raw material has been very low since last summer, many months, almost 50% lower procurement of wood compared to historical averages. How should we now look when we go into the high season of wood procurement in spring? Is the expectation now that pulpwood and even log prices could start to come up towards or to higher levels in the spring and early summer? Or how do you sort of -- what do you bake in, in your assumptions related to Finnish wood cost? And also added to that, the Finnish pulp mills, your former Chairman expects a big pulp mill to close in Finland. You now generate EBIT losses, not EBITDA losses, but still EBIT losses. Are you looking at sort of even terminal closures of any of your pulp mills in Finland? Massimo Reynaudo: Yes. Let me pick the second question. I'll leave the first one to Tapio. But well, when you assess the profitability of an asset, you don't do it on a base of a quarter. You do it on a long-term perspective. And if we look for a longer-term perspective, and our assets have been profit positive. Our assets in Finland have been profit positive. And they are well maintained. They are of a scale to grant sufficient competitiveness. And we are continuing to work to enhance that competitiveness, the deal with Versowood, what we are operating to in terms of internal improvement and so on. Last but not least, your first question was about declining wood cost. So first, a decision about closing an asset is not something you speculate about or you forecast for. And second, this is not part of our current considerations. Tapio Korpeinen: Maybe if I comment on the, let's say, questions that you had on cost and harvest and so on. So obviously, why the harvest levels have been low in Finland is that like we have said already, a while ago, a good while ago that the wood prices in Finland have been on unsustainable levels. So that's why wood has not been purchased. That's why also we have seen some moderation on the wood market prices in Finland. Having said that, good to remember that the wood prices more or less doubled in Finland. So if they have come down by 30%, it doesn't mean that they are low. And I would expect that, that will also, in a sense, be something that kind of will calibrate any sort of kind of market dynamics then going forward as well. Operator: The next question comes from Ioannis Masvoulas from Morgan Stanley. Ioannis Masvoulas: Just 2 questions from my side. The first, when we look at the EBIT bridge '24 to '25, what sort of fibre cost increase have you seen in your business? Because you talked about pulpwood prices doubling, but you didn't necessarily bought at the peak. So some clarity on that would be very useful. And then the second point, I think in October, you were talking about a $25 to $30 per tonne improvement in Fibres South. Today, I think you're talking about a EUR 15 per tonne improvement. Could you just reconcile the 2 figures? And what shall we be baking in on a 2-year view? Massimo Reynaudo: Yes. Well, let's put the currency apart. If I mentioned euros, that was, let's say, a mistake. We always talk dollars over there. And then, yes, let me correct it. I think we talked at the time I'm checking in $25 to $30 in 2 years. So I restated that, not $15, but $25 to $30 in 2 years, dollars. And then there was the other question about... Tapio Korpeinen: So wood cost. So basically, again, point being that when it comes to Finland and wood cost during last year, as we do have a delay of, let's say, at least 6 months from when we buy wood to when we actually consume it at our mills, then we did still see during the last year '25, as said, even in the fourth quarter, a negative impact from wood cost compared to the previous year. Then any kind of benefit from the fact that from summer on, we have seen a movement downwards in the wood market price in Finland, that benefit then will start coming into the bottom line only during this year. And I would say, let's say, more meaningfully from the second quarter on. Ioannis Masvoulas: Okay. That's very helpful. But if I were to push you a bit, could you perhaps provide a quantum of cost tailwind you've seen realized through your P&L in 2025? Tapio Korpeinen: No, we don't disclose that. Operator: The next question comes from Andres Castanos from Berenberg. Andres Castanos-Mollor: Two questions on the Versowood deal, please. Can you please describe the efficiencies that you will unlock by partnering with Versowood? Meaning why and how partnering with them will make the cost of the pulpwood you need cheaper versus spot prices? And I guess also the complement to this question is, how much of your wood needs in the Northern platform are now covered either by the Versowood agreement and by the forest that you own in Finland? Massimo Reynaudo: Okay. Let me cover the question about the deal and the logic behind the deal. Basically, Versowood being, as I said, the biggest sawmill in Finland and was in, let's say, -- had an interest for locks to feed is capacity and for a sawmill that is what we could put in this deal and what we did put in this deal. On the other hand, what we are getting through this deal is availability of pulpwood and chips, which is what is important for us, for our pulp production. So this is the, call it, industrial logic behind the deal. I do not have at hand numbers to share when it comes to, let's say, percentages of wood needs covered either way. Let me see, Tapio, do you have anything? Tapio Korpeinen: Well, let's say one can say in terms of our own forest, obviously, that varies in a sense a little bit depending on the market situation, but round figures, one can say that from our forest we can get -- which is about 0.5 million hectares in Finland, we can get around 10% of what we need. So still majority has to come from -- vast majority from sort of outside sources and don't have a number to disclose in a sense how much this Versowood deal will impact that, but obviously, will be a sort of meaningful increase in our sort of secured wood supply from the synergies that this partnership will give us. Andres Castanos-Mollor: Okay. Another question, please, if I may, would be on the biodiesel market, good improvement this quarter. And I was wondering if this outcome was sustainable or we are seeing one-off effects because of maybe from buying ahead of the implementation of the new RED III regulations. Do you think this performance is sustainable going forward? And yes, what dynamics are you seeing there in the biodiesel market? Massimo Reynaudo: Yes. I would say that to answer your question, we need to do -- to go behind what is -- sorry to go and talk about what's behind this performance or this performance improvement. So some elements are linked to, I would say, improved market dynamics and improved prices on the market. But there is also a part which is meaningful that is down to own actions in terms of improved operational efficiency and output out of the Lappeenranta refinery and improved sourcing of crude tall oil and improved cost of crude tall oil, which is the feedstock that we are utilizing for this business. So if we look -- so the market considerations, we leave it to everybody because we can guess about that the same that everybody else can guess, if not acknowledging the improvement that has been visible in the last couple of quarters. But then when it comes to our actions, they are there and they will be continuing to yield results. Now also if we -- in this area, I want to take the opportunity of this question to broader the angle a bit beyond one or a couple of quarters. And because there have been some significant changes in this space with the issuing of the so-called RED, Renewable Energy Directive #3 in Europe. And on the base of that directive, if and when implemented and implementation is going to be driven by the different countries, that is going to be increasing according to a number of sources, the demand for biofuels and sustainable aviation fuels from 6 million to 20 million tonnes in Europe by 2030. So it is a significant step up. And this is going to be coming from elements like increased minimum targets, minimum greenhouse gas reduction targets in transportation. A minimum target needs to be achieved of 14.5% for all transformation modes. Then when it comes to aviation, there is a target to increase the use of sustainable aviation fuel from 2% in 2025 to 6% in 2030. Besides that, by 2030 as well, let's say, first-generation biofuels made, for example, out of palm oil or palm oil waste will have to be phased out. And Germany, for example, talking about implementation of the directive in the different countries, Germany has made the decision to phase it out latest by 2027. So basically, and without going into further detail, there are the implementation of this directive is going to be changing and changing in a very positive way the general market situation in this space. Okay. With this, I'm mindful of time and that we have used the time that was available. So thank you all for your participation and for the questions that we are being able to answer. Thank you very much. Have a nice day. Bye. Bye-bye.
Operator: Good day, and thank you for standing by. Welcome to the Sappi First Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steve Binnie, CEO. Please go ahead. Stephen Binnie: Thank you very much, and good day to everybody. Thank you for joining us. I will move through our investor presentation and as always, call out the page numbers as I go. And just starting on Page 2, I draw attention to the disclosure on forward-looking statements for you. Moving to Slide 3 and looking at the overall numbers for our Q1, it's fair to say that these were challenging market conditions with a number of headwinds, which had an adverse impact on our earnings. And just highlighting a few of these, which have the most material impact. Firstly, dissolving pulp prices down $160 compared to a year ago, a very material impact. And then we've seen this shift in exchange rates linked to a stronger dollar -- sorry, a stronger rand or maybe even more relevant is a weaker dollar, which once again has a major impact on our earnings. On top of that, we've seen -- as we've gone live with our Somerset Mill PM2 project, we have come to market at a time when paperboard markets are weak in North America, which has meant that our ramp-up has been a bit slower than anticipated. We did have some production issues in North America. These were once-off events, mainly linked to our utilities and they caused the mills -- the 2 mills to go down at different points in time during the quarter. We did have the scheduled maintenance shut in Somerset. That, as guided, was about $17 million. That went very well, and we were pleased with the outcome. Offsetting these significant headwinds, we continue to focus on what we can control, and there were a number of cost-saving initiatives across the group. And on top of that, we did get some energy refunds in Europe, which offset the higher energy costs that you do occur during the year. Moving to Slide 4, which is the earnings bridge, comparing last year quarter 1 to this year, obviously, this year, we had $90 million EBITDA, which is lower than we would like it to be as a result of the headwinds that I mentioned. And if you reflect on this page overall, you can see that pricing is the main story. It's across all segments, but in particular, DWP. It's had a major impact. The volumes actually held up pretty well, and we'll talk about that in a little bit more detail. We did get savings on costs, variable costs. And that's in spite of the -- what's included in that is the exchange rate impact on higher costs coming through. A number of our costs, as you know, are denominated in euros and rand. And when you convert that to dollars, it does have a negative impact. We had -- under fixed costs, we did have the Somerset shut in the quarter coming through. And then you have your annual increases as well on labor. So all in all, a substantially lower level than last year due to the headwinds that I described. Moving to Slide 5, specifically on the major variable costs, the main categories. I'm not going to talk to all quarters, but in more recent times, you can see that energy and wood costs have been rising. Chemical relatively stable and low and pulp prices, as you know, low. So that has helped us a little bit. But unfortunately, because of the translation of these costs from foreign currencies into dollars, it does have an adverse impact on the overall cost of the group, and that's reflected inside these numbers. Turning to Slide 6, our net debt to adjusted EBITDA development. Because of the lower earnings and the impact of the currencies on our euro debt, it has meant that our ratio has increased to 5x, in absolute terms, our net debt is at $1,951 million. You can see in spite of the difficult quarters that we're currently experiencing, you can see that we have managed to keep our net debt levels relatively stable over the last 2 quarters. Moving to Slide 7, the maturity profile of our debt. And just to call out a few key elements. Firstly, under short-term debt, you can see we've got EUR 183 million reflected there in euro. And I'm very pleased to say that after quarter end, we did finalize and sign and ultimately, the cash has flowed a new EUR 200 million 5-year term loan to replace that. We're very pleased with that, and we got the support of the banks. We did swap that to dollars. And obviously, with the dollar weakness at the moment, we felt it was appropriate to swap that into dollars. So we've done that. And another milestone at the same time has been the renegotiation of our RCF facility. Our drawings on that is reflected here under the 2027 box, the EUR 117 million. As I say, pleased to say that, that has -- we signed a new facility increased from EUR 515 million to EUR 550, we've got 2 additional banks part of our syndicate, very pleased with that. And I think it reflects strong support from our banking partners as we move forward. We did negotiate higher covenants with that, and that maintains our flexibility as we move through these challenging times. Moving to Slide 8. The cash flow and CapEx. Well, firstly, on the cash flow, and it's really reiterating the point that I made earlier that in spite of all the challenges, our net cash utilization was only $3 million despite what we've faced. And then on CapEx, we've taken a very close look at all our CapEx expenditure as part of our Back to Basics initiative, we've removed any expansionary CapEx and fully focused on what is required for maintenance and regulatory purposes, and we brought our estimate down for 2026 to $260 million. Moving to Slide 9, and I've touched on a number of these themes. But just to reiterate a few points. as you know, we have a covenant linked to our leverage ratio. It's -- the math on that is slightly different to the published balance sheet numbers that you have. So overall, the ratio came in at 4.9x for the quarter. As I say, that's within the revised covenants that we've negotiated. From a liquidity perspective, very pleased to say that we do have $143 million on hand. We've got RCF facilities that are undrawn of $680 million (sic) [ $608 million]. So we believe that gives us adequate liquidity. And as always, and I think that's emphasized by our achievement to negotiate with the banks. We have very good relationships with our banks. They are long-standing. They understand our business. They know the cyclicality. They know where we are with the current macro challenges. And we stay close to them. We ensure that we've got maximum flexibility during this difficult period. The middle block here is what I've already talked about. So I don't intend repeating that. On the right-hand side, you see a strong focus on Back to Basics, evidenced by a reduction in CapEx that I've talked about, substantially lower than it was last year, obviously and we've removed any nonessential CapEx. At the same time, we've got a number of cost-saving initiatives across the group, and we're targeting $120 million for the year. A lot of that's in Europe, but it is across each of the regions. Moving to Slide 10. I don't intend going through this is our 5 strategy. The pillars are still relevant, and we continue to work across all of them, but it's fair to say that at this point in time, we're laser-focused on Back to Basics and getting through these difficult market conditions and ultimately resuming our reduction in debt, and there's a strong focus to reducing debt in the years ahead. Slide 11 is a slide that we did include last quarter, just some of the strategic initiatives in Europe to rationalize the business and cut costs. Those initiatives are on track. Specifically, the consultation processes are now complete where labor has been impacted. At Alfeld, we have completed PM1 and PM4 closure and similarly at Kirkniemi PM2. Those have been completed now, and the benefits from those will start flowing from Q2 onwards. Slide 12 has the joint venture with UPM. Back in December, we did announce this. I don't intend repeating everything I said on the results call that we had for this other than just to reemphasize that we're very excited by this transaction. We think it represents a tremendous opportunity and ultimately will lead to reducing our exposure to graphic paper in Europe. We think there are substantial synergy opportunities, and it will help reduce debt. So things are on track, and that probably leads into Slide 13. Things are ongoing. And ultimately, we're working through finalizing agreement, definitive agreements. We're targeting to do that in the first half of '26, secure and finalize the financing. And thereafter, we will take that to shareholders. There will be a circular and we'll vote on that. But generally, everything on track. The transaction is obviously subject to a number of suspensive conditions, the biggest one being the approval from competition authorities. We've been engaging with them. It's progressing as expected so far. It's early days, but we have teams working on that, and we'll update you when we do have progress. We are targeting completing the transaction by the end of 2026. Moving to the segmental. And firstly, on pulp, underlying volumes and demand for Sappi's Verve DWP continued to be good and solid. I'm pleased to say that stability in South Africa's production has been good. Production at Saiccor has been -- since we completed that expansion project a number of years ago. Operations are stable, and we're very pleased with that as all the work that's been done there. Similarly, North America volumes up. The big challenge, and I'm repeating what I've said earlier, it's the lower DP prices, which is driven by overall pulp markets globally being at relatively low levels. You can see it's $160 lower than it was a year ago DWP and then the exchange rates coming through. So those had a major impact, which impacted on the volumes. Packaging on Slide 16. Volumes generally okay, albeit that North America, the ramp-up on PM2 is a little bit slower than we would like it to be. But generally, volumes is not the issue. Global packaging markets are under pressure, which has affected selling prices in each of our businesses. And that's the main issue at the moment. Specifically in North America, we had the shut so that would impact on profitability in the quarter. And as I said earlier, there was a couple of once-off utility power-related incidents in -- at the 2 mills in the U.S., which impacted on our efficiencies and our usage of raw materials in the mills. Moving to Slide 17, Graphics. I don't think there was any surprises in terms of the market declines in graphics. It was about 8% in both Europe and North America, and that was expected. Specifically to our North American business, we obviously converted PM2, so that took our capacity out, and we had some production issues that I referred to earlier. So that meant that overall, it did have an impact on margins in the North American region. The Europe volumes as expected, but pricing in that market has been under pressure linked to the excess capacity. I should have mentioned earlier that pricing in North America has been healthy with the tight market conditions following our conversion. And moving to Slide 18. I don't -- there's a lot of numbers on this page, just very briefly just talking about each of the regions. Europe, as I said earlier, volumes holding up reasonably okay. It's a pricing issue linked to the excess capacity across both Graphics and Packaging. In North America, we had the shut in the quarter, which impacted on volumes coming out of and those once-off events referred to coming through which overall impacted profitability. Selling prices down, that's not a Graphics, that's both in pulp and the packaging grade. And then in South Africa, very good volumes, but DWP selling prices towards performance. And you can see that selling prices overall 12% down on a year ago. On Slide 19, just some of our ESG issues. A few to call out. Firstly, on the CDP, very pleased with our scores. We've seen an improvement on climate change, an improvement on forest. We're very proud of that. And also very proud of the awards that we -- or the recognition that we received from Forbes in terms of being one of the -- globally one of the world's best employers and top companies to work for women. The annual report and the sustainability reports have all been completed, and they're all online for you to have a look at. Moving to the outlook on Page 11. Just to repeat, DWP volumes are okay and robust. So demand is good, but it's a pricing challenge that we currently face. We're doing a lot of work on costs to take costs out of the business to help mitigate some of that impact. And then moving across to Slide 22, strong focus on efficiencies in our Back to Basics and optimizing working capital and with a longer-term focus, obviously, of reducing debt. So taking everything into account, our guidance for 2026, with the exchange rates where they're at, at the moment and the DWP prices, one thing I should have called out, DWP prices have increased in the last couple of weeks a little bit, but it is moving in the right direction. I do think exchange rates is playing a major role in that because obviously, DWP prices are priced in dollars. So I think the fact that the dollar is weaker should help us as well. But taking all of that into account, we anticipate that the adjusted EBITDA for the second quarter will be lower than what we just reported for the first quarter. So operator, I've gone through the presentation. I'm going to now hand it back to you for questions. Operator: [Operator Instructions] And now we're going to take our first question, and it comes from the line of Sean Ungerer from Chronux Research. Sean Ungerer: Steve, just in terms of a couple of points around guidance, if you don't mind. So obviously, there's a $120 million cost savings program flagged, I think, with $60 million in Europe roughly. Can you just give a little bit of color on the split for the balance? And then I guess, just in terms of cadence across the regions, how we should think about that for the rest of the year? I'll start off with that. Stephen Binnie: Sorry, your second question, what across the regions? Sean Ungerer: So $120 million cost saving programs at a group level. I think you flagged $60 million for Europe specifically already. I'm just trying to get a bit more color on the balance sort of how maybe across North America and SA. I know, for example, headcount was down in SA in Q4, fixed cost down about 4%, and then just obviously, in addition to the split, just to understand like the rollout of those fixed cost savings, how we should sort of think about it maybe quarter-by-quarter for the rest of the year? Stephen Binnie: Yes. Thanks, Sean. I'll let Glen give you the split approximately across the regions. In terms of the split across the year, there was about $30 million in Q1, Glen, right? And the balance for the rest of the year is roughly even. Even over the remaining 3 quarters. Yes. But maybe the first question, you can talk about the regional split. Glen Pearce: In terms of the regional so as you rightly pointed out, Sean, the bulk of that is in Europe. It's about a 60-40 split, 60%, 40% split as far as fixed to variable. And as I say, the bulk of that is coming out of Europe. There are variable cost usage variances or improvements in both North America and in South Africa, but that would be the split. Stephen Binnie: Yes. But the split between -- it's more -- more of it is North America than South Africa. Glen Pearce: So it's about the balance. Sean Ungerer: And then just to bring you on to the next question. just to understand sort of the defensiveness of the SA business if the bulk of those cost savings are sort of more Europe and North America. I'm just trying to get a better feel of how SA business, I think around 60% of volumes or capacity is dissolving wood pulp, right? And sort of we're sitting at $805 for DP, $16 for the rand. I understand you obviously had quite a bit of volume ramp-up in Q1. I think volumes are up about 37,000 tonnes year-on-year, which is great. I mean, you've obviously got some maintenance still coming up for 2 more quarters for the rest of the year. Is the volume -- incremental volume going to be enough to offset that? I mean, how should we be thinking about that? Stephen Binnie: Yes. Look, Sean, I guess I'm repeating what I said earlier. Clearly, at these exchange rates and these dissolving pulp prices, our South African profits are under pressure. We are targeting savings and costs, and Glen has quoted the numbers. On top of that, we do have initiatives underway, which are not in those numbers to look for further opportunities, which may help us further. So in summary, yes, the pressure will be on our South African business, our margins at these levels. That's fair to say. Graeme, I don't know if there's anything you want to add. Graeme Wild: Yes. Obviously, proportionately, we have a very big exposure on both exchange rate and the DP price. The combination puts it under enormous pressure. I think the biggest opportunity for us is in the operational efficiencies side. We have had -- we have been steadily improving our productivity, but I think there's still more that can be done there. And that doesn't only give us additional volumes to sell, but I think can substantially reduce our variable cost per tonne. And that's what we're working on, and that has the most significant leverage. But in the short term, very hard to offset that big move in the rand. Sean Ungerer: And then I've got quite a few more, but I'll just ask one relating to, I guess, Europe and the JV. Face value, I mean we've seen that the industry is going to sort of sits and waits until hopefully the JV closes out, which I'm assuming means there's sort of limited pricing pressure on maybe a 6- to 12-month view. I don't know if you sort of agree with that. And then I guess, secondly, linked to that, I mean, obviously, best case scenario is that the deal does go ahead. But if it doesn't go ahead, I guess the question is what sort of gearing levels is -- are you happy to have on the balance sheet? And I guess, what would be the solution around reducing gearing if the JV doesn't go ahead? Stephen Binnie: Yes. Yes. Look, on pricing in Europe, as you know, the selling prices have come under pressure in recent quarters. Yes, I mean, our focus is obviously to protect those prices and ultimately look for price increases as we move forward. And that's something we are trying to evaluate on an ongoing basis. Marco, anything you want to add on that? Marco Eikelenboom: No. This is now a period of time that has been last for 18 months. So I think what we're trying to do is besides the cost reduction Steve spoke about, the capacity reduction or readjustment towards growing areas is to maintain our margins. You're right, Steve. And whether that's through further reduction of variable cost and pressure on some of our cost categories or price improvement through bottom slicing, plain price increases or optimization of our portfolio, that is all part of the game. But it's certainly currently not to be expected that it comes from a dramatically better market situation than what we're seeing right now and for the coming quarter. Stephen Binnie: Thanks, Marco. To your second question, if Europe doesn't happen -- sorry, if our project with UPM doesn't happen, we need to look at all options. There's 2 aspects to your question. Firstly, on Europe itself, we would need to look at options to reduce our exposure to graphics in time, and we would need to look at our asset base. We would need to see if there was other alternatives for exiting some of that capacity. More specifically to your question on gearing, yes, again, once again, those options that I'm referring to, we would -- we'd have to consider ones where we could monetize and try to look at alternatives that can generate cash for us to reduce our debt. So that would be our focus. What I would say is you're assuming it wouldn't happen at all. Clearly, there are scenarios in the middle that you want an outright approval, but there could be scenarios where there's approval with conditions. And those would be more likely than an outright rejection, and we would need to evaluate that at that point in time. Operator: And now we're going to take our next question. And the question comes from the line of Brian Morgan from RMB Morgan Stanley. Brian Morgan: If I can just ask a question about balance sheet and stress testing and all of that sort of stuff. If we're in a scenario where in 12 months' time, the rand is still at $16 and DWP still at $805, how does your liquidity situation look? Maybe, Glen, would we need a capital raise at that stage? Stephen Binnie: Yes. I'll start, and then I'll let Glen come in. Once again, I'll point you towards the increased covenant levels that we've negotiated with the banks and the flexibility around that and the strong relationships that we have. So that gives us significant flexibility as we move through this. Specifically to the capital raising. So Brian, we've got long-term relationships with our banks. And we -- you've highlighted an issue there in terms of how volatile it is at the moment. And what we're doing is we've got an open dialogue with them. We're keeping them abreast of what our forecasts are, and we're discussing with them how -- what the progress is. So it's just an ongoing dialogue, and we're constantly updating it. Glen Pearce: Yes. So Brian, what we're really saying is that we're not contemplating any capital raising at this point in time. Brian Morgan: Okay. And asset sales, are they possible? I mean you've spoken about the JV, but any additional asset sales outside of that? Stephen Binnie: Yes, it's not something we're looking at immediately. But I guess you're talking worst-case scenarios. Obviously, we would have options there, but it's not something that we are looking at the moment. We're focused on improving what we can control internally and working closely with our banks to ensure we've got maximum flexibility as we move through these challenging times. Brian Morgan: Last question, if I may. About $1.9 billion of gross debt. I'm trying to unpack from the numbers, but I'm struggling to do so, just how much of that is subject to covenants. Could you give us a ballpark? Glen Pearce: Brian, our RCF is pari passu with our bonds. So it's all linked to the covenants. Brian Morgan: Sorry, what does that do? Glen Pearce: It's -- our RCF is pari passu with our bonds and our bonds are all linked to the long-term loans you referred to. So the covenants are linked to the full amount. Stephen Binnie: So the RCF is with the banks -- the banks are pari passu with the bonds, we're hopeful, Brian. But that's normal. That's standard stuff. Operator: And the question comes from the line of James Twyman from Prescient. James Twyman: So I've got 2 follow-ups and then one of my own. In terms of the covenants that we've got here, could you just talk around what the new covenant levels are with the banks and how long they are before the covenants go back to maybe the 4x net debt to EBITDA that you're originally on? And then on the cost savings, so you've talked quite a bit about the $60 million of cost savings that you're getting from these big 5 projects you're doing in Europe. But I think it's a big positive surprise that there's another $60 million that you're now talking about that's coming from elsewhere. It would be great to get some more color on what projects these are because it's another very, very big number. And then the third question, if I may, is these energy credits you're getting in Europe are becoming increasingly important. How much visibility do you have on where this goes in future years? I mean is there a clear method that the EU uses to calculate them? And -- yes, how much confidence do we have that this is something that is sustainable because it's obviously risen quite substantially. Stephen Binnie: Yes. On the covenant level, we don't give the specific number. But in terms of the levels, it's -- there is quite a bit of headroom above where our current debt levels are at. And we've negotiated in terms of the new covenant -- once again, we don't give the specific levels, but we've elevated it for a significant period of time. It's not just a couple of quarters. It's for a significant period of time. Glen, do you want to take the cost savings in the other two regions for the remaining 60%? Glen Pearce: Yes. Sorry, in terms of the 60% on... Stephen Binnie: The $60 million other savings on cost savings that are part of the $120 million. Glen Pearce: It's all linked to your variable cost on your fixed costs. So as I said, I'll split that between the 60% variable costs and 40% -- 60% fixed costs and 40% variable costs. The bulk of that is in Europe. And then going into the bulk of that 60% on the fixed cost comes out of the capacity reductions that we have in Europe. Stephen Binnie: The portion that's not Europe is -- there are fixed cost savings there. So there are headcount reductions and there's operational efficiency improvement. We've had some negative usage variances. And then on the procurement side, we've been able to target some new initiatives to save on raw material costs. And that's -- when Glen talks about the 60-40, the fixed cost is obviously predominantly headcount and the variable cost is on the usage and the raw material costs. And your third question, the energy credit, look, it's a good question. It's not just Sappi, a number of industry players have been getting these credits. And really what they're for is you incur higher energy costs during the year and the various countries in Europe recognize that and they give you refunds. It's been ongoing for some time and by all accounts, is expected to increase -- sorry, to continue. So we believe it will be there in the years ahead. And there's no signal otherwise, James. Operator: [Operator Instructions] And now we're going to take our next question, and it comes from the line of Brent Madel from ABSA. Brent Madel: If I could maybe just ask a question around the UPM or the proposed UPM transaction. Are you able to give us an update as to where we are in the process with regards to the JV sourcing funding to complete the transaction? Are you able to give us an update on that? Stephen Binnie: There's nothing new to say other than it's an ongoing process. It's working in parallel. Ultimately, we've appointed lead banks, and we've got strong commitment letter -- we've got strong letters of support from them. And we're busy finalizing the agreements with UPM. And as part of that, sharing our numbers with them and they're doing their assessment. So it's progressing as planned, and it's something that we expect to finalize at the time of signing the agreements with UPM. Operator: And the question comes from the line of Detlef Winckelmann from JPMorgan. Detlef Winckelmann: Just a very quick one on Consumer Board. Obviously, you're trying to ramp up Somerset into what is quite a weak and oversupplied market right now. And I did pick up that you're looking to -- or that you ramped up a bit slower than what you expected. Seemingly, it doesn't look like the oversupply is correcting in any way. So I'm just trying to work out, I suppose, one, how you envisage that ramp-up going in the next, say, I don't know, 1 year, 1.5 years while this oversupply persists? And then secondly, we have seen some price cuts more recently on SBS. I understand that SBS pricing is a little bit more closer to some of the other substitutable grades. But are we seeing any price pressure in those substitutable grades yet that kind of erodes that benefit for SBS? Stephen Binnie: Thanks. Yes, in terms of the ramp-up on PM2, there's a number of dimensions, which we can talk about. And I'll hand over to Mike just now. But just firstly, we are ramping upwards. Interestingly, we did have a couple of existing customers that had their own challenges. And they actually had less volumes in the quarter. In terms of signing up new customers, we are seeing positive progress, not quite at the levels that we originally anticipated, but it's better than the underlying overall volumes appear because those other 2 existing customers had some challenges. As we look forward to the -- for the year, there's a lot of good positive news coming out in terms of signing up customers and the volumes increasing. It's not at the levels that we originally anticipated, but we are anticipating substantial improvement. Mike? Michael Haws: The only thing that I'd kind of add to that is some of the new products have taken a bit longer with qualifications at the customers' plants. And that's specifically when it's some of the smaller customers. We are not seeing erosion in some of the competitive products as of yet. You asked that question. The other thing that we have been doing is expanding geographies, and that has been working pretty well for us. So there's a number of new opportunities. And it's been a qualification along with the kind of bit of a challenging demand. We also are making graphic grades on PM1 is that, that machine can swing. So as that market can absorb volume, we're also using that tool. Detlef Winckelmann: And then if I can do one more follow-up. I mean, obviously, with your ramp-up still ongoing, you mentioned maybe some qualification delays, but not necessarily bad demand for your products. I'm curious as to whether the pricing discipline has been maintained or whether you managed to get these new contracts just by undercutting the market. Just curious on that. Michael Haws: I'll offer what I can. You're asking me a specific pricing question, but that's not something we typically get into the detail on. The price decline in the market happened before PM2 even became at a commercial product to offer. And that has been a bit of a challenge. So the other thing that I'd offer is that there has been some dynamics around imports as imports make up about 500,000 tonnes in the SBS or board grades into the U.S. And that's been kind of a bit of an on again, off again kind of thing based on tariffs and other things that are happening. So there's been other price pressures. And I think that's the best I can offer you there. Operator: And the next question comes from the line of Andrew Jones from UBS. Andrew Jones: I think that last -- beat me to that question, but I'd just like to just dig on that a little bit more. Can you just give us some numbers around like your utilization on the mill and how it evolves through the 2025 period at Somerset? And can you give us some numbers around your expectations for the speed of ramp going forward? And also just a bit of a follow-up. I mean the sort of customers that you're selling into, I mean, I guess, are they buying from European suppliers? Have you seen any impact from tariffs, currency move, et cetera, in terms of those suppliers being pushed out or any change in the import there that you could talk to? Stephen Binnie: Yes. I think let me take the second part of your question first. There's no doubt that the tariffs that have been placed on the European importers into the U.S. has helped. So although overall market conditions are generally difficult, the fact that those have been introduced is creating opportunity with potential customers for us. That is a support for us. In terms of the ramp-up, as you know, we talked earlier -- on earlier calls like this that by the time we got to the end of Q4 next year, we will be close to full on the machine. It's fair to say because of what we've described, we're tracking behind those levels. I can't give you a specific number, but the machine is still -- by the time we get to Q4 is going to be significantly fuller than it is currently. It might not be 100, but it will be at substantially higher levels than current levels. Glen Pearce: Steve, the only thing I'd add to that is when you're starting up a new machine, there's an expected ramp rate that's less than full capacity. And the ramp in our CapEx was expected to take over 3 years. The OMEs of the machine are moving forward really well and the quality of the machine is moving forward really well. Part of our offering into the market is more of a long game with relationships and product attributes that because of the equipment we have, we can bring consistency and other attributes that aren't necessarily engineered into the other competitors' assets. So lots of work going on. I'd say that tariffs at time have opened doors for us. That was the other question that you asked. Operator: Now we're going to take our next question, and it comes from the line of Shubham Agrawal from BlackRock. Shubham Agrawal: Yes. So I have a couple of questions. So to start with first on RCF, can you help us remind, is the RCF availability full? Or do you have some leverage covenant on that? Stephen Binnie: Sorry, was that the RCF? Shubham Agrawal: Yes. Stephen Binnie: Yes. I think you're asking how much have we utilized? I think it was about $100 million... Glen Pearce: That's right. It's just over $130 million... Stephen Binnie: Yes. And we have available $608 million at the end of the quarter. I think that's what you... Shubham Agrawal: Is the RCF fully available? Or do you have any leverage going? Glen Pearce: It's fully available. Shubham Agrawal: Do you have any restriction. Glen Pearce: It's fully available. Shubham Agrawal: Okay. And the second question that I have on the unplanned disruption that you have seen in the quarter. Can you give us some additional detail on that? I understand you have already said on that, but yes, any additional color would be really helpful. Stephen Binnie: I'm sorry. Disruptions in -- more color. Okay. I'll let Mike -- we don't want to go into too much detail, but we had 2 specific once-off incidents, which impacted on our utilities. As I said, we -- they're behind us. But Mike, do you want to share a little bit more on that? Michael Haws: Certainly. So the 2 big mills, Somerset and Cloquet, each of the mills ended up with the utilities event. In Somerset, it was a steam supply issue that ended up running close to 2 weeks that impacted machine performance and costs while we were repairing that. In Cloquet, we had a disruption of the power supply into the mill, right at the Christmas time, where we ended up with over a week of downtime there as we were bringing the utilities back online and getting everything back up and running. That whole event was exacerbated by really cold temperatures. Everything is back up now, and we put corrective actions in place to prevent reoccurrence. Operator: Now we're going to take our next question. And the question comes from the line of Saul Casadio from M&G plc. Saul Casadio: I just have a couple of really brief ones. Can you give us the spot price of GWP? I don't have the price data anymore. So I was wondering whether you can provide that. Stephen Binnie: Yes. Today, as we speak, it's $805 a tonne. Saul Casadio: Okay. And the other question is just a clarification because you said the RCF is pursue with the bonds, which is normally, it is seniors versus the bonds. So I was wondering whether there's something specific in the structure whereby the RCF is part with the bond. So try to better understand this, if you can clarify this point. Glen Pearce: Just to clarify that, there are actually cross-default provisions on that. So the covenants themselves only apply to the RCF and OB loan. But in the event that there is a default, then the bonds then share in pursue on any default, if that clarifies it. Saul Casadio: And why is that the case? Because normally banks would try and get a super senior position with the RCF. Why not in this case? Stephen Binnie: Sorry, is that -- could you just repeat that, please? Saul Casadio: I mean what I'm saying is that it is a bit unusual. Normally, the RCF is senior has a priority in case of, let's say, default that gets repaid first. but this doesn't seem to be the case in your capital structure. I wasn't aware of this. And yes, I'm just trying to clarify. Normally, the banks can take security ahead of the bonds that they normally do that. Glen Pearce: No, as I described it. Stephen Binnie: Yes. And I guess if there's more clarification, we can take that offline. Operator: Now we are going to take our next question, and the next question comes from the line of [ Andre Pettus ] from... Unknown Analyst: Just a few. First one, you've had a bit of working capital releases the last 2 quarters. Just your expectations for the rest of the year in terms of absorbing or releasing from here? And then just secondly, in terms of those once-off events in the U.S., you quantified the hit in terms of the, call it, the maintenance closure you had. Can you maybe take just the order of magnitude step in terms of what the potential once-off hit was there in EBITDA terms? Glen Pearce: All right. In terms of the working capital, you're right, there was a release in the current quarter. And for the year, we anticipate a release as well for the full year. Stephen Binnie: Yes. On the second one, a lot of the impact, as I mentioned when I was going through the deck is aside from the lost production, you have inefficiencies and negative usage on the mills. The approximate impact of these is about $10 million. Operator: And now we're going to take our final question for today. And it comes from the line of [indiscernible] Unknown Analyst: So a couple of questions from me. The first one, I just want to understand, so you lowered your CapEx guidance from $290 million to $260 million for the full year 2026. I wanted to know to what extent it could be lowered to -- what are your main CapEx and what is like the level you could not go lower for this year? And the second question is for the DWP prices. It seems that for a certain time in 2023, I think that the prices were also around the $700, $800 and then rebounded. I wanted to know if we should see the $700, $800 prices for DWP as a low level that can only maybe go up. And the last one is I want to understand what changed because you -- so basically, your guidance was for Q1 for the plantation fair value adjustment to be positive. In the end, it was negative. So I think that it means that there was a much higher decline in wood prices in South Africa than what you expected and just maybe what you're seeing about that? Stephen Binnie: Yes. All right. Firstly, on CapEx, yes, we've taken a very close look at our CapEx levels. And as I say, we've eliminated anything that we regard as nonessential. You're asking, can it go down further? I don't think so. I think that's our best estimate of what the CapEx will be for the year, the $260 million. The DWP, you are right. Back a couple of years ago, the dissolving pulp price was at those lower levels, but there's very different other macro factors. The dollar was worth a lot more than it is today. And a lot of the producers with the currency shifts, it put them under more pressure. So all of us have a desire to increase selling prices. And I think that's what's given a little bit of traction in the last couple of weeks. The conversations, and I'll let Marco and Mohamed chat a little bit about it. But all the pricing discussions are around currencies and its impact on currencies. And that's the focus of attention in China at the moment. Mohamed, maybe you want to elaborate further. Mohamed Mansoor: Steve, just on the currencies, you mentioned that supply side currencies in terms of the Riyal, the Chilean peso and of course, the rand has all strengthened. So there's a desire across the board to get the dollar price up. But on the buying side as well, we've seen a strong appreciation in the renminbi. So that makes affordability by the buyers for higher U.S. dollar prices easier. And if you just look at where the renminbi price of dissolving wood pulp has moved over the last year, it's gone from about RMB 7,500 early last year to today around RMB 5,500 just purely because of exchange rates. So that is definitely, I think, providing support and incentive for higher U.S. dollar price. Stephen Binnie: Yes. And then I think your last question, you were asking about the plantation fair value adjustment. There was a further negative impact in the quarter. And as we move forward for the rest of the year... Glen Pearce: We're anticipating for the rest of the year, it's going to be -- there's going to be further negative adjustments, and that's because we have -- it's a rolling 4-quarter valuation, and you still got the lower pricing coming through in our fair value adjustment. So you should see further adjustments -- negative adjustments coming through. Operator: There are no further questions for today. I would now like to hand the conference over to your speaker, Steve Binnie, for any closing remarks. Stephen Binnie: Once again, I'd just like to say thank you to everybody for joining us, and we look forward to discussing our results with you in 3 months' time. Thank you very much. Operator: This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.