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Operator: Hello, and welcome, everyone, to the SkyWest, Inc. Fourth Quarter and Full Year 2025 Results Call. Today's conference 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. Followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. At this time, I would like to turn the conference over to Rob Simmons, Chief Financial Officer. Please go ahead. Rob Simmons: Thanks, Audra, and thanks, everyone, for joining us on the call today. As the operator indicated, this is Rob Simmons, SkyWest's Chief Financial Officer. On the call with me today are Chip Childs, President and Chief Executive Officer, Wade Steele, Chief Commercial Officer, and Eric Woodward, Chief Accounting Officer. I'd like to start today by asking Eric to read the safe harbor. Then I will turn the time over to Chip for some comments. Following Chip, I will take us through the financial results, then Wade will discuss the fleet and related flying arrangements. Following Wade, we'll have the customary Q&A session with our sell-side analysts. Eric? Eric Woodward: Today's discussion contains forward-looking statements that represent our current beliefs, expectations, and assumptions regarding future events and are subject to risks and uncertainties. We assume no obligation to update any forward-looking statement whether as a result of new information, future events, or otherwise. Actual results will likely vary and may vary materially from those anticipated, estimated, or projected for a number of reasons. Of the factors that may cause such differences are included in our most recent Form 10-K and other reports and filings with the Securities and Exchange Commission. And now I'll turn the call over to Chip. Chip Childs: Thank you, Rob and Eric. Good afternoon, everyone, and thank you for joining us on the call today. Today, SkyWest reported net income of $91 million or $2.21 per diluted share for the 2025 fourth quarter and full year net income of $428 million or $10.35 per diluted share. These results reflect the challenges of the fourth quarter as well as the overall improved production in 2025 compared to the previous year. For the 2025 year, our model converted a growth of 15% in production to a 31% increase in pretax income, reflecting the strong operating leverage within our model. We're also pleased to announce extensions on key flying agreements, 40 E175s with United and 13 E175s with Delta. These agreements continue to strengthen our partnerships and demonstrate the ongoing long-term demand for our product. Our fleet flexibility has never been more important. And while our E175 flying agreements are further solidified, we continue to leverage our extensive CRJ assets. Our ongoing investments in and the diversity of our fleet ensure we're well-positioned to adapt to future market demands. I'm humbled and honored that SkyWest was named a Fortune World's Most Admired Companies for 2026. A distinction our people helped us earn for the third time now. SkyWest was named in the top 10, the only regional airline on the list. This is an outstanding accomplishment, and I'm so proud of our exceptional team. Throughout 2025, SkyWest Airlines achieved more than 250 days of 100% controllable completion, a solid team accomplishment during the year, we regularly reached over 2,500 daily scheduled departures. The fourth quarter was unusually challenging starting out with the government shutdown, and mandatory flight reductions and leading right into the peak holiday season travel. I want to thank our team of over 15,000 aviation professionals for their continued teamwork and dedication to excellence. As expected, we were disproportionately affected with more canceled flights than our major partners during the mandatory flight reductions, and we experienced a modest impact from the shutdown. Rob will talk more about that in a minute. We continue executing to derisk our model. The contract extensions we announced today with United and Delta deliver ongoing revenue stability. With all of our dual-class fleet, both CRJ and ERJ now under contract, we have no major E175 contract expirations until late 2028. Additionally, over the past three years, we've reduced our debt by $1 billion. All this work continues to place us in a solid position of long-term strength. The investments we're making today set us up well for 2027 and beyond. SkyWest continues to lead our segment of the industry in service and in value of our diverse assets. Remain disciplined and steady. As we execute on our growth opportunities by delivering on significant pro rate demand investing and fully utilize our existing fleet and preparing to receive our deliveries in the coming years for a total of nearly 300 E175s by 2028. We spent years strengthening our balance sheet and fleet flexibility. As well as reinvesting in our future growth. Continue to play the long game and invest in our fleet and our future to ensure we're in the best possible position to respond to market demands in a way that no one else can. Rob will now take us through the financial data. Rob Simmons: Today, we reported a fourth quarter GAAP net income of $91 million or $2.21 earnings per share. Q4 pretax income was $125 million. Our weighted average share count for Q4 was 41.3 million, and our effective tax rate was 27%. Let's start today with revenue. Total Q4 revenue of $1 billion is down seasonally from $1.1 billion in Q3 2025, and up 8% from $944 million in Q4 2024. Q4 revenue includes contract of $803 million, down from $844 million in Q3 2025 and up from $786 million in Q4 2024. Pro rate and charter revenue was $167 million in Q4, flat with Q3 2025 and up from $126 million in Q4 2024. Leasing and other revenue was $54 million in Q4, up from $39 million in Q3 and up from $32 million in Q3 2024, driven by discrete maintenance services provided to third parties. For comparability purposes, the mandated flight cancellations from the government shutdown in November negatively impacted our Q4 2025 results by $7 million or $0.13 in earnings per share. Additionally, these Q4 GAAP results include the effect of recognizing $5 million of previously deferred revenue this quarter, down from the $17 million recognized in Q3 2025. And $20 million recognized in Q4 2024. As of the end of Q4, we have $265 million of cumulative deferred revenue, that will be recognized in future periods. As we close out 2025, here are a few financial highlights to recap our 2025 year. Our pretax income in 2025 of $506 million was up 31% from 2024 on a 15% increase in block hours reflecting the strong operating leverage in our model. Our EBITDA for 2025 was $982 million, up over $100 million from 2024. Our free cash flow for 2025 was over $400 million, providing the liquidity to invest in our long-term CRJ fleet initiatives and other accretive capital deployment opportunities. We've repaid $492 million of debt in 2025 part of a 10% reduction to our debt balance since 2024, including the effect from seven new E175s we financed in 2025. We ended Q4 with debt of $2.4 billion down from $2.7 billion as of 12/31/2024. We used $85 million in 2025 for share repurchase doubling our investment from 2024. We bought nearly 850,000 shares in 2025, up 50% from the shares bought in 2024. Now let's discuss the balance sheet. We ended the quarter with cash of $707 million down from $753 million last quarter and down from $802 million at Q4 2024. The ending cash balance for the quarter included the effects from repaying $155 million in debt investing $214 million in CapEx, including the purchase of five E175s and buying back 268,000 shares of SkyWest stock in Q4 for $27 million. As of December 31, we had $213 million remaining under our current share repurchase authorization. Cash flow is obviously an important driver of our capital deployment strategy. Over the last two years, we generated nearly $1 billion in free cash flow and deployed it primarily to delever and derisk the balance sheet to the benefit of our partners, our employees, and our shareholders. Our balance sheet and liquidity are powerful tools as we pursue a variety of growth and capital opportunities for 2026 and beyond, including acquiring and financing 29 additional E175s, by 2028 and continuing to pay down our debt. As we remain focused on improving our return on invested capital, we'd like to highlight the following. Both our debt net of cash and leverage ratios continue at favorable levels and are at their lowest point in over a decade. Our total debt level is $1 billion lower today than it was at the end of 2022 in spite of acquiring and debt financing 14 E175s. During that time. The total 2025 capital funding our growth initiatives was approximately $580 million, including the purchase of seven new E175s. CRJ 900 airframes, and aircraft and engines supporting our CRJ 550 opportunity. We expect to take nine new E175s during 2026. And we anticipate approximately $600 to $625 million in total CapEx in 2026 approximately flat with 2025, except for two incremental 175 deliveries. Consistent with our practice, we're not giving any specific EPS guidance today. Let me update you on some commentary on 2026. We gave last quarter. For 2026, we now expect to see mid single digit percentage growth in block hours over 2025, moderately up from the color we provided last quarter. We also now anticipate our earnings per share for 2026 will be in the mid $11 area up modestly from our expectation last quarter. In addition to this full year EPS color, we would expect sharper quarterly seasonality a bit more like pre-COVID patterns with our Q1 2026 EPS being flat to down from Q4 2025 GAAP EPS and with Q2 and Q3 being the strongest quarters of the year. For modeling purposes, we anticipate our maintenance activity in 2026 will continue approximately at current rates as we invest in bringing more aircraft back into service. We also anticipate our effective tax rate will be approximately 24% for 2026, similar to 2025, including a lower expected rate in Q1 than the remaining quarters. We are optimistic about our growth possibilities going into 2026, including the following three focus areas. First, growth in our ability to increase service to underserved communities driven partially by the redeployment of approximately 20 parked dual-class CRJ aircraft and strong utilization of the existing fleet. Second, good demand for our pro rate product. And third, placing nine new E175s into service for United and Alaska by the end of 2026 and six new E175s for Delta in 2027 and 2028. We believe that we are positioned to drive long-term total shareholder returns by deploying our strong balance sheet and free cash flow generation against a variety of accretive opportunities. Wade? Wade Steele: Thank you, Rob. Today, we announced a multiyear extension of 40 E175s with United and 13 with Delta. These extensions continue to solidify our flying agreements with United and Delta through the end of this decade. We now have no contract expirations on E175 until 2028. During the quarter, we took delivery of five new E175s for United. We currently have 69 E175s on firm order with Embraer, including 16 for Delta, eight for United, and one for Alaska. We expect delivery of nine new E175s this year. Let me talk a little more about our firm order of 69 aircraft. Of the 69, 25 aircraft are allocated to our major partners. And 44 are not yet assigned. Our long-term fleet plan has positioned us well and continues to be an important part of that strategy. This order locks in delivery slots starting in 2027 through 2032. However, the order is structured with good flexibility to defer or terminate the aircraft in the event we don't arrange for a partner to take them. After we finish the Delta deliveries expected in 2028, our E175 fleet will be nearly 300. Continuing to enhance SkyWest's position as the biggest E175 operator in the world. Last quarter, we announced an agreement with United to extend up to 40 CRJ200s into the 2030s. These aircraft were set to expire at the end of 2025, and we're pleased with the continued strength of our United agreement. As we previously announced, we have a multiyear flying agreement for a total of 50 CRJ 550s with United. As of December 31, we had 27 CRJ 550s in service and expect the last 23 entering service later this year. We have begun a prorate agreement with American. We are currently operating four aircraft under this agreement. With up to nine aircraft expected by the end of 2026. We are excited to expand our relationship with American. Let me review our production. For the full year 2025, we increased block hours by 15% compared to 2024. We anticipate that our 2026 block hours will be up mid single digit percentage compared to 2025. For 2026, we delivery of nine new E175s, placing 23 CRJ 550s into service capitalizing on strong prorate demand, and anticipating an increase in fleet utilization. These increases are offset by the return of 19 Delta owned CRJ900s over the next couple of years to Delta. We anticipate the return of these aircraft will be at a slower cadence than we originally anticipated. Our revenue seasonality has returned to the model as utilization improves during the strong summer months. We still have approximately 20 parked dual-class CRJ aircraft that will be returned to service. Many of these aircraft are currently under flying agreements and will begin operating in 2026. We also have over 40 parked CRJ200s further enhancing our overall fleet flexibility. Also during the quarter, we canceled approximately 2,000 flights and 3,000 block hours due to the government shutdown. These cancellations decreased our results by approximately $7 million. This is net of any reimbursements from our major partners. As we shared during the year, we continue experiencing challenges in our third-party MRO network. Including labor and parts challenges. We expect our 2026 maintenance expense to be consistent with our 2025 levels. As we continue to bring aircraft out of long-term storage and service the current fleet as production continues to increase. As you would expect, the maintenance expense will before the aircraft goes back into service. As far as our prorate business, demand remains extremely strong. With great community support, we are seeing opportunities to return SkyWest service to several communities. And we will continue to work with airports we serve on the best way to expand our service. As we discussed last quarter, the increase in our prorate business results in an increasingly seasonal model consistent with the typical industry seasonality, we expect Q1 production will be flat to down from Q4. We feel good about our ongoing efforts to reduce risk and enhance fleet flexibility and remain committed to continuing our work with each of our major partners to provide strong, innovative solutions to the continued demand for our products. Rob Simmons: Okay, operator. We're ready for our Q and A now. Operator: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. We'll take our first question from Savi Syth at Raymond James. Savanthi Syth: Hey. Good morning. Hey. Good afternoon, everyone. Just on the FAA cuts in the last quarter, I was kinda curious on how that was handled in. I know usually when there are weather events, that know, there's a lot more coverage of of the coffee incurred. So I was wondering if you can expand a little bit more on on, you know, why there was that level of impact. Chip Childs: Savi, this is Chip. I think I think you're thinking about weather is kind of consistent with the government shutdown. Obviously, as we said on our script. You know, we had a fairly strong cancellation relative to what happened in the industry. And honestly, we're okay with that. We have, you know, various provisions in our contract to help mitigate that. But in the partnership spirit that we have with these partners, know, we're gonna do things together to get through some of these challenges. And extensive as the last one was, certainly, it had an impact on us. But, you know, again, this is something that you work with your partners with and make sure that you do what you need to to take care customers and crews and partners and everything. And so it worked out well. And we don't wanna do it again, obviously, but but from that perspective, the way you're thinking about it being like a a a weather and IROP event was extensively longer, but consistent within the contract. Savanthi Syth: Understood. I wonder if I can on the extensions that that are happening this year, I'm guessing a lot of those are aircraft that are coming you know, fully paid in the next year or two. Wondering if you could provide kind of a update on your on unencumbered assets and kinda where they are today and and, you know, where you see them kinda going by maybe the end of this year and and next year? Rob Simmons: Yes. Savi, this is Rob. In terms of unencumbered assets, we have a very strong portfolio of those. That can be converted into debt, obviously, very easily. But we have know, somewhere in the neighborhood of $1.5 billion of unencumbered, equipment at this point. Savanthi Syth: And does that step up quite a bit? This year, next year, or is it just a kind of a maybe a steady increase? How should we think about as those E175s start coming off contract. Chip Childs: Yeah. I think, Savi, that you're you're exactly right. It's certainly increases as more of them become paid off. We're in a great position today with our unencumbered assets. And as we discussed and as Rob discussed about the debt repayments and stuff that those obviously, the or number of assets unencumbered continues to increase relatively aggressively. Over the next several years as E175s become paid for. Savanthi Syth: Awesome. Thank you. Operator: We'll move next to Duane Pfennigwerth at Evercore ISI. Duane Pfennigwerth: Hey. Thank you. With respect to your order book, and I think you have capacity out to 2028, maybe some availability 2027. Can you speak to how discussions are evolving around placement of the next kind of slug of new aircraft you can take delivery of? Wade Steele: Yeah, Duane. This is Wade. So, yeah, we have an order of 69 aircraft currently on order with Embraer. 24 of those are under contract with our major partners, 16 for Delta, eight for United, and one for for Alaska. So we we're always talking to them about, the order book. So our orders the the deliveries that are coming in '27 are all spoken for. The majority of them in '28 are spoken for. So after that, it's really twenty nine, thirty, 31. And beyond that we're still working with our major partners. But those conversations are ongoing, and we're very optimistic about continuing to to work with them and place them. Duane Pfennigwerth: Thanks. And then, I'm sure there was noise around shutdown and maybe some weather, but can you speak to the underlying trend in utilization and kind of what your target is? And where you're at relative to that target in terms of utilization recovery? Thanks for taking the questions. Wade Steele: Duane. That's a that's a great question. So, yeah, we've seen positive trends in in aircraft utilization for sure. And as we are looking at our schedules going into the '26, those trends are continuing to, be be extremely positive for us, honestly. And so we will get better utilization out of our assets. We are seeing that. It's it's slightly higher than what we had anticipated last quarter. That's why the guidance on block hours did go up. That's one of the reasons. And so yeah, we're we're optimistic about the increased utilization on our fleet and where and where it's going. Duane Pfennigwerth: Thank you. Operator: We'll move next to Catherine O'Brien at Goldman Sachs. Catherine O'Brien: Hey. Good afternoon, everyone. Thanks for the time. Just one more on the E175 renewals. It's really helpful to know your next renewal isn't until the 2028. Could you provide any color on on how the terms of these renewals compared to the prior purchase CPAs that they were on. You know? Was there any impact in the rate discussions to the fact that, you know, you guys don't there's no already debt associated or or or that didn't factor in and and the terms look pretty similar. Thanks. Chip Childs: Yeah. Katie, this is Chip. I I would I would basically say that the contracts, as you continue to go through the maturity of the life of the aircraft, certainly evolve. Certainly, certain things, contracts, because this is such a dynamic industry change. Various things that we thought were important five years ago have changed to other things are more important today. So I won't I will I will certainly underline that there's a lot of evolution that takes place mostly due to market conditions. In large, I think you're mostly asking about, you know, economics and that type of stuff with the renewals. I would only say that everything is roughly economically very similar to what we've you know, experienced in the past. Although there's some things embedded within the contract that evolve for, you know, just changing market conditions that help both of us as partners. The dynamics of the conversation is good because of the outstanding demand that's in the marketplace right now. So in all honesty, we try to be very transparent very present with our partners all the time, and the conversations you know, are very, very good. Particularly, as you know, this is a tough industry to be in, and you have to be in that mode with your partners all the time to be dynamic and and being able to evolve. And I don't know of anybody in the industry that can evolve as as well as we can. So that's kind of the kinda how the contract conversations go, and we're gonna continue to prepare for future ones to to make it even easier. So Catherine O'Brien: That's great. Maybe just one quick follow-up if you allow just to make sure. I don't wanna put words in your mouth. But on the economics, under the terms of the agreement, that looks pretty similar to, okay, this is now you know, thirteen year old aircraft versus a brand new aircraft. Like, the if there were I don't and I actually don't know if there's a step down usually when you move from the first contract to a contract under a CPA agreement. But, like, whatever that normal step between contract one and contract two, that's what it looks like here for these. Is that right? The the the rate economics are very Wade Steele: consistent with where they were before. So we we will see a a very consistent level of revenue continuing on with these airplanes in the future. Catherine O'Brien: Oh, that's great. Then just for my second question, you know, maintenance elevated here you know, around the industry, we're seeing that. Not not surprised. Rates, slots are tight. Can you walk us through how much of the maintenance is on aircraft under contract? And what is for aircraft that are, you know, currently parked not on contract? And on that second group of air of aircraft, like, how like, you know, you're you're putting in the work now. You talked about being flexible. That's a competitive advantage. Are you pretty advanced in conversations around some of these aircraft you're working on now that you might have an MRO slot for, or or this is really just, like, if a partner calls, you could answer. Just trying to understand, you know, much you're investing and and what you think the prospects are for return on that investment. Thanks. Wade Steele: No. That that's a great question. So as as I talked about a little bit in my script, we have 20 aircraft that are currently parked or have been parked that are in heavy maintenance. That are going to be done very shortly that are going into contracts that are the contracts are signed. They're ready to go. They're just waiting for the airplane to be done with its maintenance cycles. And so, obviously, the maintenance come comes in advance of the airplane being returned to service. And so there are 20 airplanes that will be going through that that return of maintenance right now. That's the 20 dual class airplanes. We also have some CRJ200s. That I said we have 40 of those parked, and we are returning some of those to service. And we do believe you know, we we know very good opportunities in the marketplace for those. And, we're very optimistic that we will find a very good revenue model for those. Catherine O'Brien: Thanks so much. Operator: We'll go next to Mike Linenberg at Deutsche. Mike Linenberg: Yeah. Hey. Yeah. Talking about a very good revenue model. I mean, I we're sort of watching the build out of Chicago and it does seem like a lot of the growth at least at that hub over the next several months is going to be driven by regional flying. Are you able to capitalize on both of your relationships with those carriers to to grow into that market or is it one-sided? Wade Steele: Yeah. Mike, that's a that's a great question. We work with each of our major partners. As as you know, under these capacity purchase agreements, they dictate the schedule. They dictate where these aircraft fly. They tell us where to go. And so we are working with each of our major partners on the deployment of where they would like these airplanes, and we will operate these at the extreme highest levels of reliability. That that that are out there. And so we will work with each of our major partners where they wish to deploy those, and we will and that's how the CPAs work. Mike Linenberg: Okay. And then just, my second question, Rob, on the the revenue piece, you know, the revenue recognized in excess of fixed cash payments. Obviously, that came down quarter over quarter. How is that trending? Are we back to sort of $5 million a quarter as we march through 2026? Or is there, like, how should we think about that with respect to modeling? Thanks for taking my question. Rob Simmons: Yeah. Sure, Mike. No. I I think, you know, Q4 was a little down as we extended some of the contracts and pushed out some of the recognition of deferred revenue. But in 2026, for modeling purposes, you know, I would suggest, you know, you're probably in the 20 to $25 million quarter, area for you know, recognizing the you know, deferred revenue that remains. And, again, there's $265 million of deferred revenue that remains to be recognized. Mike Linenberg: So Rob, to clarify, the the extension was you know, the and what was announced today, right, I guess, maybe that drove part of it, right, to extend the E175 flying with both Delta and United? That's right. Yeah. Those those contract extensions, you know, all Rob Simmons: push out the timing of the recognition of the deferred revenue. Mike Linenberg: Alright. That's what I thought. And then just lastly, one other piece. I when and it may have been Chip or you know, or you who talked about this seasonality where earnings will be down March over Q4, obviously, because, you know, now we're getting back more normal seasonality with respect to your pro rate business. When we think about down, are we thinking down on the reported Q4 number? Or should we think down from a Q4 number that would not be impacted by government shutdown? I'm just again, this is modeling. Rob Simmons: Just to make it easy, I mean, it's just the gap number that we reported You know, we do expect that it'll be flat to down. In Q1, again, because of the sharper seasonality in the model. Mike Linenberg: Okay. Makes sense. Alright. Thanks for taking my question. Wade Steele: Mike. Operator: We'll move next to John Godden at Citi. John Godden: Hey, guys. Thank you for taking my question. I wanted to to sensitize and and brainstorm a bit about the eleven fifty. You guys mentioned operating leverage a few times in the prepared remarks. We're seeing that in the numbers. If in a couple quarters, eleven fifty is becoming 12, you know, What happened? Just help us kinda sensitize that a bit and and and I'd love to just kind of you know, hear your thoughts. Rob Simmons: Yeah, John. And, again, welcome. The, you know, the the guidance for the for next year, the mid 11 guidance, I think, is something that we always look at there being a possibility of of, you know, coming in either ahead of that or or behind it. But as as Wade mentioned, you know, in his in his script, you know, we see strong demand in various areas of our of our model right now, in know, including prorate and contract. And so, you know, as things play out, we'll continue to you know, update the street on on how we're seeing the year evolving. But, you know, right now, we were you know, bringing up both our expectation around production and our expectation around earnings for the year compared to what we were seeing a quarter ago. John Godden: Mhmm. Do you think that prorate would be the biggest swing factor? Wade Steele: So the there's three or four things, you know, that will affect our block hours. Pro rate being one of them. I would say the the more meaningful one is probably the increase in utilization that we are anticipating and and seeing from from each of our major partners. Then also just the return to service of some of our airplane of the that have been parked over the for a while. So those those are really the three drivers that that will help us increase production, which in in turn increases the profitability. John Godden: Got it. And and if I could ask about the balance sheet. Certainly moving in the right direction. For for some time. I think you guys mentioned no contract extensions for for a bit. It it seems like we may be know, in a window here where we can potentially deploy the balance sheet more more offensively, more strategically. I'm curious if that's how you think about it. Could there be a change to the attitude toward buybacks? Or maybe there's other calls for cash that you think are even more exciting. Rob Simmons: Yeah, John. I I think, you know, when it comes to the sort of topic of capital allocation or the balance sheet, You know, I think we're comfortable enough and confident in our free cash flow generation going forward that feel like we're in sort of an all of the above position where know, we can continue to invest in the fleet like we have been, which we love doing. We can continue to delever and derisk you know, the model and the balance sheet as, you know, as we talked about you know, we've been paying down our debt you you know, with a good cadence over time. And finally, you know, as we've proven, you know, we've you know, we're strong believers in the value creation possibilities of share repurchase. And so I think we're in a position with the balance sheet that's got the liquidity and the strength and the leverage that will allow us to do all of the above. John Godden: Got it. Thanks, guys. Appreciate it. Operator: We'll go next to Tom Fitzgerald at TD Cowen. Tom Fitzgerald: Hi, everyone. Thanks so much for the time. Was a pretty big jump in lease airport services and other revenue this quarter, and I was just kind of curious what drove that. Was that maybe third party engine overhaul work or or something else? Rob Simmons: That's right. I mean, and it you know, there's a piece of it on the revenue side and another piece in maintenance. So yeah, it was it was a engine deal with the third party. Tom Fitzgerald: Okay. Great. That's that's really helpful. And then just as any any updates on the charter business as as you look out into 2020 And I don't know if that could be a driver of incremental positivity for the year, maybe around the World Cup or this summer or maybe not, just given that else is going be utilized in the core business? Thanks again for the time. Chip Childs: Yeah. Tom, this is Chip. Yeah. It's real quick. It's a great question about SkyWest Charter. You know, we've got a lot of leeway and permission to do a lot of very cool things with that. Certainly, we're seeing as of right now significant demand with sports teams and everything. In fact, it's demand that we can meet honestly, because of aircraft availability. We're we're seeing certainly a very strong demand for SkyWest Airlines aircraft at this time that we're we're trying to fulfill with our major partners. As you know, that's that's the core of what our business is is try to take care of these four customers of ours. So it does put, some of our initial objectives with SkyWest Charter on the back burner. We're not saying that it's never gonna happen. We mentioned on the call several times, we have a lot of CRJ 200 aircraft available. And there's a lot of and we've also talked about MRO. Availability and getting these aircraft available to us. So I would not say that 2026 is going to be a, you know, historically huge year for Charter because of the backlog of supply chain issues we have with certain MROs and the fleet that we have. But we still have the same long-term objectives that we've always had with that the demand and the things that we can do with that enterprise are still extraordinarily promising. But I think you can get a tone on the call. There's just a lot of demand, and we're trying to get as much you know, aircraft resources in place to meet that demand for 2026. So hopefully, we can do some other things, in '27 or '28 with that with that enterprise. Operator: Next, we'll take a follow-up from Savi Syth at Raymond James. Savanthi Syth: Hey. Thanks for the follow-up. Just wondering you know, operationally, you've been kinda executing really well and and know, as your partners need extra lift, I think you've been able to step in from time to time. Was curious, and I think the industry as a whole, the operational execution has kinda taken a leg up maybe versus kinda ten, fifteen years ago. Curious how you stack up compared to some of these kinda internal partners at at your, you know, mainline like the internal regional airlines, how how do you stack up in terms of performance and execution? Wade Steele: Hey, Savi. This is Wade. That's that's a great question. Question. You know, SkyWest, you you can look at some of the DOT data. SkyWest is always a very high performer on on our a 14, our completion percentages. So you know, that is one thing that we emphasize around highly is just our execution to our mainline partners and then also ultimately their customers. And so know, we we put a lot of emphasis around that, and we are typically the one of the top tier performers. So yes. Chip Childs: I I I would add just one thing also, Savi. I think I think you have to have the utmost respect to our people and certainly our management team because we're one of the only airlines in the world that has four customers that strategically, at times, operate for completely different ways, yet we have to consolidate that operation into exceptional overall performance in our own way. So we're we're we're used to this challenge. We've been doing it for decades. And to that end, our our people are fantastic at making sure that they meet our objectives and what we wanna do and also meet the needs of our partners. But I can tell you, the level of effort and talent that it takes to go as many days as we indicated with, you know, zero with a 100% controllable completion over 250 days this last year is exceptional. And to that end, you know, we're doing it in a in a way which we're trying to to make four partners happy along way, which we do a pretty good job of, which is why they keep giving us contract extensions and more flying. So, from that perspective, on a micro level and a macro level, we're pretty proud of the efforts that our people put forth in those endeavors. Savanthi Syth: That's helpful. And if I might just follow-up on John's question about use of you know, the how you're thinking about the use of cash. Any are there any kind of liquidity targets or leverage targets that you want to stay within? Rob Simmons: So, Savi, you know, as we've said in the past, we really have a a bright line number But, again, you know, we wanna be careful that we have the liquidity in the balance sheet. Capacity to make sure we can monetize all the opportunities that are in front of us. And, again, those opportunities are numerous right now in terms of you know, investing in this in the the the fleet and and other other ways that we can deploy the balance sheet. So I think as you see the progress that we've made over the past few years, we're in a great place from a balance sheet leverage standpoint. We haven't been in a lower leverage position in a decade. We're in a great position in terms of liquidity. We've got plenty of you know, unpledged collateral if we were to need it. And so, you know, again, I think that that that provides the for us to to look at all of our accretive opportunities and and monetize them. Savanthi Syth: Got it. Thank you. Operator: And we'll take a follow-up from Catherine O'Brien at Goldman Sachs. Catherine O'Brien: Hey again. I just I was thinking about your answer to that question on the CRJ opportunities. And so a follow-up there. You know, on those 40 CRJs you're investing in, you noted that you know of good opportunities for those. Are any of those slated to come out of the shop this year? And and if they did and you execute on one of the opportunities you noted, would that be incremental to your current mid single digit block hour growth rate? Thanks. Wade Steele: That's a great question. A lot of that is baked into our our operating plans already. Obviously, if we do have ups upside especially for the summertime, a lot of that, we know what's front of us. We know the opportunities right there. And so if we do get the air out quicker, then there could be sooner opportunities for us. We are looking at opportunities in the fall, and we are looking at, those opportunities right now. And so potentially, you know, eight, nine months from now, for sure, there could be some additional opportunities that that we're looking at. But things that are know, for the summer, six months in advance of us, that's all pretty much in our operating plans right now. Catherine O'Brien: Great. Thanks for the extra time. Operator: And that concludes our Q&A session. I will now turn the conference back over to Chip Childs for closing remarks. Chip Childs: Thank you, Audra. Again, thank you all so much for your interest in SkyWest. We are very proud of what's happened in 2025, but mostly we're very focused and, grateful for the opportunities which we have and put ourselves in a good position with our people in '26 and beyond. And we look forward to giving the first quarter update in three months from now. So thanks for your interest. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to the MaxLinear Fourth Quarter 2025 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to our host, Leslie Green, Investor Relations. Thank you. You may begin. Leslie Green: Thank you, Diego. Good afternoon, everyone, and thank you for joining us on today's conference call to discuss MaxLinear's fourth quarter 2025 financial results. Today's call is being hosted by Dr. Kishore Seendripu, CEO; and Steve Litchfield, Chief Financial Officer and Chief Corporate Strategy Officer. After our prepared comments, we will take your questions. Our comments today include forward-looking statements within the meaning of applicable securities laws, including statements relating to our guidance for the first quarter of 2026, including revenue, GAAP and non-GAAP gross margin, GAAP and non-GAAP operating expenses, GAAP and non-GAAP interest and other expense, GAAP and non-GAAP income taxes and basic and diluted share count. In addition, we will make forward-looking statements relating to trends, opportunities, execution of our business plan and potential growth and uncertainties in various product and geographic markets, including, without limitation, statements concerning future financial and operating results, opportunities for revenue and market share across our target markets, new products, including the timing of production and launches of such products, demand for and adoption of certain technologies and our total addressable market. These forward-looking statements involve substantial risks and uncertainties, including risks outlined in our Risk Factors section of our recent SEC filings, including our Form 10-K for the year ended December 31, 2025, which we filed today. Any forward-looking statements are made as of today, and MaxLinear has no obligation to update or revise any forward-looking statements. The fourth quarter 2025 earnings release is available in the Investor Relations section of our website at maxlinear.com. In addition, we report certain historical financial metrics, including, but not limited to, gross margin, income or loss from operations, operating expenses, interest and other expense and income tax on both a GAAP and non-GAAP basis. We encourage investors to review the detailed reconciliation of our GAAP and non-GAAP presentations in the press release available on our website. We do not provide a reconciliation of non-GAAP guidance for future periods because of the inherent uncertainty associated with our ability to project certain future changes, including stock-based compensation and its related tax effects as well as potential impairments. Non-GAAP financial measures discussed today are not meant to be considered in isolation or as a substitute for comparable GAAP financial measures. We are providing this information because management believes it is useful to investors as it reflects how management measures our business. Lastly, this call is also being webcast, and the replay will be available on our website for 2 weeks. And now let me turn the call over to Dr. Kishore Seendripu, CEO of MaxLinear. Kishore? Kishore Seendripu: Thank you, Leslie, and wishing you all a very happy New Year and good afternoon. For MaxLinear, 2025 marked a clear inflection year with resurgent growth. We delivered 30% revenue growth year-over-year, driven by strong execution and accelerating adoption of our newest products across multiple high-growth end markets. We delivered profitability and positive cash flow ahead of plan. During the fourth quarter, we repurchased $20 million worth of our common stock, reflecting our confidence in our sustained growth expectations and market momentum. Bookings remain robust, visibility continues to improve, and we are entering '26 with strong momentum across our portfolio. We are executing against a focused strategy that is working and will drive sustained strong growth in '26 and '27, investing in high-value multiyear growth markets where performance, power efficiency and integration matter most. These include data center connectivity, wireless infrastructure, storage acceleration, PON broadband access, Wi-Fi 7 and Ethernet end markets. Our infrastructure business is scaling rapidly. Revenue grew 30% for the full year and 76% in Q4 year-on-year, driven by strong growth in data center optical interconnects, wireless infrastructure and early but meaningful contributions from storage accelerators. Importantly, multiple new design wins are now entering production, positioning us to grow faster in '26 than we did in '25. In 2026, we expect to achieve a significant and exciting milestone. Our infrastructure category should emerge as the single largest contributor to our overall revenues. In high-speed data center optical interconnects, our Keystone PAM4 DSP family is now ramping at major hyperscale data centers in both the U.S. and Asia, supporting 400-gig and 800-gig deployments, both for scale-up and scale-out applications. Additional customer ramps are expected throughout the year. Based on this improved visibility, we expect Keystone to generate about $100 million to $130 million in revenue in '26 with potential upside along with a further step function increase in run rate as we move into 2027. Power efficiency has been a defining competitive advantage for MaxLinear, and we are extending that leadership with Rushmore, our next-generation family of PAM4 TIAs and 200-gig per lane DSPs targeting 1.6 terabit interconnects. Rushmore is foundational for next wave of data center optical architectures, including LRO, electrical retimers, AECs, LPOs and co-packaged optics. With Keystone validating our execution performance leadership, customer engagement for Rushmore is accelerating faster than expected. We expect Rushmore production revenue ramp starting at the end of 2026. We expect a strong showing at OFC in March this year. Also, cloud data centers are now deploying 10-gigabit XGS-PON as a robust dedicated fail-proof control plane conduit for managing high-speed data traffic between data centers. In Q4, we secured our first PON data center design win addressing this application with a major Tier 1 U.S. OEM provider to Tier 1 data centers in this next-generation design. Recently, we also won analog serial transceiver and bridge interface designs for rack management in AI servers at two major U.S. data centers. This is further evidence of how MaxLinear's broad and deep technology portfolio comprising optical interconnect storage accelerators, PON and analog offerings is growing inside the AI data center. Within infrastructure, our Panther hardware storage accelerator SoC family continues to gain design win traction with Tier 1 network appliance and cloud service providers. Ongoing storage and hybrid memory constraints for AI scale-up and compute are reinforcing the value of Panther's hardware-based compression, high throughput and ultra-low latency memory data access. In Q3, Q4, we started sampling Panther 5 to leading customers and our partners, including Advanced Micro Devices or AMD. Panther 5 delivers unprecedented ultra-low latency at 450 gigabits per second throughput and PCIe Gen 5 connectivity. Based on our engagements, we expect strong accelerator revenue to at least double in 2026 versus 2025 and potentially again in 2027. In wireless infrastructure, increasing carrier CapEx spending is expected to drive sustained demand through 2026 and beyond as the need for cloud and edge AI functionality continues to grow. Additionally, our Sierra 5G wireless access single-chip radio SoC and our millimeter wave and microwave backhaul transceivers and modems are seeing robust OEM customer design-in activity and deployments in multiple Tier 1 carriers are going as per plan. Moving to broadband and connectivity. We delivered another strong revenue quarter across fiber PON, cable DOCSIS and Wi-Fi, driven by the early increases in service provider CapEx spend and continued booking strength and incremental demand. In Q4, we began the large-scale deployment of our single-chip fiber PON and 10-gigabit processor gateway SoC plus tri-band Wi-Fi 7 solution with a second major Tier 1 North American carrier. This was a significant competitive win that expands content per box, fiber PON revenue and market share in 2026. In cable broadband, after a strong 2025, we expect a seasonally soft first half and cable revenue to be down in '26 as the industry transitions and pending a multiyear DOCSIS 4 upgrade cycle starting at the end of 2026. Additionally, in the stand-alone Ethernet market, we expect 2026 to be strong as our 2.5 gigabit Ethernet switch and PHY portfolio expands into commercial, enterprise and industrial applications. In summary, we entered 2026 with multiple growth engines ramping simultaneously, driven by expanding customer adoption and secular market trends moving in our favor. Our investments over the past several years have uniquely positioned MaxLinear to deliver sustained growth, operating leverage and long-term shareholder value. We are excited about the opportunities ahead and confident in our ability to execute. With that, let me now turn the call over to Steve Litchfield, our Chief Financial Officer and Chief Corporate Strategy Officer. Steve? Steven Litchfield: Thanks, Kishore. Total revenue for the fourth quarter was $136.4 million, up 8% from $126.5 million in the previous quarter and up 48% from $92.2 million in the fourth quarter of 2024. Infrastructure revenue for the fourth quarter was approximately $47 million. Broadband revenue was approximately $58 million, connectivity revenue was approximately $18 million and industrial multimarket revenue was approximately $14 million. GAAP and non-GAAP gross margins for the fourth quarter increased to approximately 57.6% and 59.6% of revenue. The delta between GAAP and non-GAAP gross margin in the fourth quarter was primarily driven by $2.6 million of acquisition-related intangible asset amortization. Fourth quarter GAAP operating expenses were $93.5 million and non-GAAP operating expenses were $59.2 million. The delta between GAAP and non-GAAP operating expenses was primarily due to stock-based compensation and performance-based equity accruals of $28.1 million combined and acquisition-related costs of $6 million. GAAP loss from operations for Q4 2025 was 11% and non-GAAP income from operations in Q4 was 16% of net revenue. GAAP and non-GAAP interest and other expense during the quarter was $2.9 million and $2.8 million. In Q4, net cash flow from operating activities was approximately $10.4 million. As Kishore mentioned, we were active in our buyback program in Q4, repurchasing approximately $20 million of our common stock. As such, we exited Q4 of 2025 with approximately $101.4 million in cash, cash equivalents and restricted cash ahead of our 2025 plan. Our days sales outstanding was down in Q4 to approximately 31 days. Our inventory was down by approximately $8 million versus the previous quarter with days of inventory improving to approximately 130. This concludes the discussion of our Q4 financial results. With that, let's turn to our guidance for Q1 of 2026. We currently expect revenue in the first quarter of 2026 to be between $130 million and $140 million. Looking at Q1 by end market, we expect to see growth from infrastructure, but some seasonal declines in broadband connectivity and industrial multi-market. We expect first quarter GAAP gross margin to be approximately 56% to 59% and non-GAAP gross margin to be in the range of 58% and 61% of revenue. We expect Q1 2026 GAAP operating expenses to be in the range of $85 million to $90 million. We expect Q1 2026 non-GAAP operating expenses to be in the range of $58 million to $64 million. We expect our Q1 GAAP interest and other expense to be in the range of approximately $2.1 million to $2.7 million. We expect our Q1 non-GAAP interest and other expense to be in the range of approximately $2 million to $2.6 million, with FX volatility being the primary risk. We expect a $4 million tax provision on a GAAP basis and a non-GAAP tax provision of approximately $0.8 million. We expect our Q1 basic and diluted share count to be approximately 88 million and 91 million, respectively. In closing, with strong bookings and improving visibility, we expect to see solid growth in 2026, driven by new design wins and expanding content opportunities across our product portfolio. We believe we are well positioned, well in large and growing markets that will be transformative to our business as well as continue to innovate on high-value solutions for our customers that solve next-generation challenges. We will continue to focus on our investment in areas of strategic importance and confident that we will build a solid foundation to deliver sustainable growth and profitability in 2026 and beyond. With that, I'd like to open up the call for questions. Operator? Operator: [Operator Instructions] And your first question comes from Tore Svanberg with Stifel. Tore Svanberg: Congrats on the results here. Kishore, I was hoping you could talk a little bit more about the PAM4 DSP business. So there's obviously a lot of headlines and things out there on LPO and CPO, but you seem to be seeing more and more traction, more and more design wins. It sounds like Rushmore is getting pulled in somewhat. So can you just walk through some of those dynamics because obviously, that will give us better confidence about the continuous growth of PAM4 in '26 and '27. Kishore Seendripu: So thank you, Ross -- sorry, thank you, Tore, for the question. Obviously, this is a pretty significantly confidence boosting growth that we are seeing. We were guiding to $110 million to $130 million. That's a very positive statement about our traction. And we are in the initial phases of the ramp of our 800-gig product solution and need to really pick up more steam and energy in the second half. The market as a whole is still a pluggable market, which is growing very, very fast. And the LPO deployments as such are very nichey right now. And I really look at the LPOs per se as a very small fraction of the market and not long term. The LROs, for example, I think they have got some traction, but there'll be a market that is substantially pluggables, and there'll be a fraction of the market in LROs, and LPOs will be sort of in a very, very controlled environment, limited deployments potentially in 800 gig, but less so on 1.6 terabits. So that's our view of the marketplace. Obviously, there's a market that's also beyond that, which is the -- as the scale-up continues, there will be electrical retimers, and that's going to be a huge volume on -- in the scale-up world as well. Talking of CPOs, people are doing CPOs today as sort of your feet in the market, but it still is early innings for CPO. And in the long term, there will be a market that is going to be more varietal than just pure CPOs, the O in the CPO being many number of ways of doing it. Obviously, there's a silicon play within the CPO market as well. That is what I call a wide IF fast throughput through the optical, and we expect ourselves to be a player as the market evolves. As MaxLinear, we're going to be very focused and disciplined and PAM4 is a huge growing market. We are developing a strong foothold, though we are not the incumbents. But I think today in the world, we are the -- we can safely claim with the top 3 deployers of PAM4 DSP. And as the market strengthens, we hope to branch out and diversify our offerings of what you all know is a very, very robust technology portfolio. I hope that gives you some sense of our technology positioning. From a growth point of view, this year, we expect that there could even be upside depending on how the ramps proceed beyond the one that we feel fairly confident on the visibility and the outlook we have based on the bookings so far in 2026. I hope that answers your question. Tore Svanberg: Yes. No, that's great color. And as my follow-up, I had a question on the broadband business. And how should we think about the trajectory there as we move throughout the year? You did mention you expect it to be down year-over-year because of the sort of transition to DOCSIS 4.0 or the industry waiting for 4.0. What type of decline are we talking about? I know you guided to be down seasonally in Q1, but will it sort of decline every quarter this year? Is it going to be more of a modest decline? Any more color there would be very helpful. Steven Litchfield: Maybe, Tore, I'll take that one. So we did mention that the seasonality certainly plays a role. We're also seeing the upgrade cycle, right, in DOCSIS 4.0. That probably starts the latter half of the year. And so it will come down in the first half of the year and then probably start to build in the second half. So overall, for the year, I do expect it to be down. We did talk a lot about the PON business, right, and the win that we have there. So we are excited about that. But even with that, it's still early days in it. And so that's why we do expect to see the broadband business down for the year. Kishore Seendripu: Yes. I think the PON is a substantial opportunity, the new Tier 1 that's ramping. And based on the ramp itself, there is potential for not to see a downturn, so to speak. And PON is going very nicely, and we're grabbing market share. And we have many number of designs that we did not have before that will really kick steam in '27 as well. Operator: And your next question comes from David Williams with Benchmark Company. David Williams: Congrats on the solid execution. I guess maybe first, just around the data center opportunity. Obviously, the DSP is doing really well, but you've got other components that are going into that segment as well. Can you help us kind of understand maybe what the magnitude of opportunity within the data center is and where you're playing and kind of how you think that plays out through the year in addition to the DSP? Kishore Seendripu: So David, this is early innings for us, right? I mean we have to say that. And the big entree is right now with the PAM4 transceivers. And this year, we could do anywhere between 4 million to 6 million units of PAM4 transceivers, right? So -- but the other hand, the data center is not just a PAM4 world. There are compute tracks. There are communications between data centers. And that market itself will grow as the data center clusters increase and the number of data centers increase as well. So we talked about this exciting design win with the Tier 1 OEM who is supplying to Tier 1 data centers and of using PON as a control play layer, not where the data itself is going through between data centers. And there, we are clearly the leaders in the PON silicon offering. And so we should be very well positioned. So that could be a few -- that market size, some of these OEMs have talked about hundreds of millions of dollars of value for the silicon play. So that's one opportunity. So it won't happen in 1 year. It will roll out over the next 2 years. Hopefully, we'll start seeing in '27 and then it grows beyond that. And then there's the other thing where these racks have become really -- these compute racks and server racks have become very, very, very sophisticated. They have their own telemetrics. Even the racks are being controlled with microcontrollers and so on and so forth. So you need industrial quality sort of transceivers, serial bridges and so on and so forth and even smart power management and stuff and then overall control in the rack. So the rack itself is a huge beast by itself. So we are beginning to start getting design wins in that, and that could be a pretty huge play per rack, if you will. So at this point, I am not very what I call -- I don't want to provide market sizing at a level that we need to ascertain. But that market is very, very huge. There are a number of players, but we have the portfolio depth to participate in all the big spend that is happening as data centers are being built out. David Williams: And then maybe just secondly, for you, Steve. Just looking at the share repurchase authorization, that clearly signals some confidence, I think, in the growth trajectory, but also on the potential arbitration there. So maybe if you could just kind of speak around the share repurchase authorization and how we should be thinking about that and what you're telegraphing to the Street. Steven Litchfield: Yes, David, absolutely. No, I think the Board took some actions last quarter, authorizing $75 million of buyback, took action on it in the quarter, felt the stock was a good place that we wanted to act on it. But frankly, I think the Board really wanted to just convey the confidence in the balance sheet. The cash flow improvement, we've talked about it running ahead of plan. It has run ahead of plan now for 3 quarters in a row. Revenue stability and the outlook that we have from the business continues to improve. And so I think our actions kind of follow that and including the mention of the arbitration as well. Operator: Your next question comes from Ross Seymore with Deutsche Bank. Ross Seymore: Congrats on the strong end to the year and beginning of this one. Kishore, on the optical side, a couple of different questions have already been asked. But the competitive landscape, how are you envisioning that going from Keystone to Rushmore? Do you think your positioning gets even stronger? Are there -- the different technologies coming in create more competitive pressure? Just how do you think MaxLinear is positioned as we look forward? Kishore Seendripu: Thank you, Ross. I won't call it Tore, but just joking here. Very, very good question. Both of you are complimented. So the strengthening is absolutely a word I love on the next-generation 1.6 terabit, our position is strengthening. We're gaining some ground and strengthening versus the competition. And I really feel that we are actually now speeding up a bit relative to where we were. And we are now -- we feel that we will really start pulling our weight as 1.6 terabit rolls out. And beyond that, what we call our big [ Sky ] product, 4 gig, 400 gigabit per lane, I think we show our capabilities, our strong low-power implementation capabilities, integration and very, very well-developed RF mixed signal skills. I think we will strengthen our position, and we are strengthening in certain geographies and 800 gig, we are -- we have strengthened our relative position. Within the U.S., just the timing of our product offerings, we got late as the #3. And from there, fighting to get to the #1 or #2 takes a little bit of a taller order and incumbency has incredible value. So I hope that puts things in perspective. Ross Seymore: It does. And I guess pivoting over to Steve, just on the margin front, it sounds like you guys have a strong growth year, especially on the infrastructure side coming in 2026. How should we think about both gross margin trajectory just directionally and OpEx? Steven Litchfield: Yes. I mean, look, on the gross margin side, I mean, we've been talking about the improvement. We've been demonstrating that over the last 4 quarters. So we're seeing some upticks there. As you're aware, the product mix is kind of moving in our favor as infrastructure products typically drive a higher gross margins. I remain confident that we can exit the year at kind of starting with a 6% versus a 5%. We did guide to the 59.5% at the midpoint of our guidance. I mean you've got some headwinds with cost increases that are out there. But that being said, I think the mix longer term throughout the year will move in our favor, and we'll see some nice improvements. With regard to the OpEx question, look, I don't want to necessarily guide for the whole year. But I mean, I think you've heard from us in the past, typically, we want to grow OpEx about half the rate of the top line. That being said, I don't think we necessarily -- we've been really dialing things back a little bit. We're seeing some nice improvements in efficiency for lots of reasons. And so I actually think we'll see a little bit lower than that. So maybe it's in the 4% to 5% increase this year. Operator: And your next question comes from Tim Savageaux with Northland Capital Markets. Timothy Savageaux: Congrats on the numbers. And first question was where did we end up '25 in terms of optical DSP revenue? I think you were guiding $60 million to $70 million. And can you give us any color there? Steven Litchfield: Yes. So Tim, I think -- so as you know, we don't break out these numbers. I think what we're consistent with what we've delivered over the last 2 to 3 years, I think the guidance that Kishore shared earlier is kind of evidence of what you've seen over the last 3 years of this doubling that we saw. I mean, keep in mind, 3 years ago, we were doing less than $20 million of revenue. And so I think we're really pleased with the progress we've made and very excited about where we're at. I would probably maybe take the opportunity to -- I mean, some of the background of where we exited the year, where we're entering this year. I mean we mentioned in the prepared remarks about the visibility that we have, the backlog that we have. It's in a much better position. I mean, just across all of our businesses, but particularly in the optical side. As you know, we've got 28-week lead times. And really confident in this kind of first half of the year where you've already got backlog, we're pushing to get some upsides in here, and we've already seen a lot of success on that front. Timothy Savageaux: Okay. Great. I think we might have talked a little about this last quarter, but just based on the comments early in the call, I just want to make sure I'm hearing this right. So do you guys think you can grow faster than 30% overall in '26? Was that the comment? Because I think the comment was grow faster in '26 than '25? Or is there some more nuance or detail around that? Steven Litchfield: So Tim, I mean, look, as you know, we don't guide the whole year, and we're not going to do it here. We're not going to start today, I guess, I would say. But clearly, you see from the -- mainly the infrastructure growth, but we're seeing a lot of good traction on the PON side. We're seeing industrial multi-market really see a nice recovery this year. So I'm confident that we can outgrow the industry in 2026. Operator: And your next question comes from Karl Ackerman with BNP Paribas Asset Management. Samuel Feldman: This is Sam Feldman on for Karl Ackerman. On optical DSP, do you expect the ramp to be linear throughout the year? And the reason for the $30 million range? Steven Litchfield: Sam, so I mean, actually, just to kind of follow on what I was just speaking about. I do think it will grow throughout the year as we have new programs that will come on, and we have share gains that will continue to gain traction throughout the year. But I would also say that it will be very strong right out of the gate in Q1 and Q2 because we do have really good visibility, and we have a few customers that are ramping right now. Samuel Feldman: Got it. And a follow-up. Can you discuss the timing and growth within broadband for the second major Tier 1 North American carrier in calendar '26? Steven Litchfield: Yes. So it will -- look, we've already started shipping some products. We mentioned that we had even started in Q4. It will be still pretty minor in Q1 and start more in earnest in Q2 and Q3. Kishore Seendripu: Obviously, we have good visibility based on the lead times of the supply chain and the bookings that we have in place. Operator: And your next question comes from Christopher Rolland with Susquehanna International Group. Christopher Rolland: So in your press release and also in your prepared remarks, you talked about gaining market share. I think it was a general comment across your product set. But I was wondering if there are some specific kind of needle-moving opportunities like in broadband? Are you gaining share versus Broadcom? Like what were you specifically trying to highlight there as actual revenue moving opportunities? Kishore Seendripu: Chris, that's a very good question. It's a very broad statement. I think it's broadly true as well across the various categories, honestly. I mean if you look at optical transceivers, our revenue forecast reflects that we are gaining share, right, in some form. If you just go by the units, I mentioned 4 million to 6 million units of transceiver opportunities. Then you see that on the PON side, it's a very, very large Tier 1 player is beginning to ramp. And we -- in that particular category, we are gaining share versus our competition. On cable as well, we're beginning to gain share that many years ago was ours. We're gaining share against the competition. And then when you go to storage accelerators is a completely new market that we are paving the path forward with hardware acceleration compression. So that we have established incumbency has and that market itself is poised to grow both on the cloud side and the appliance side. And then what else? I mean it's broadly a correct statement, but actually, now that you asked the question, I think about it and say, you know what, damn right. So that would be my response to you. Christopher Rolland: Excellent. And then back to DSP, we track the transceiver market pretty closely, and we underestimated growth in the market there. It's, I think, growing faster than anyone expected, at least in terms of expectations for '26. You did suggest that there could be upside to your optical number, but why don't you even have more confidence there just given the upside in demand? And then maybe paired with that, are there any supply chain constraints that you're seeing out there that would lower your outlook? Steven Litchfield: Chris, so look, I mean, I think we're very excited about the ramps that are underway, right, that have already started and we're picking up traction. I mean Kishore spoke about the share gains, I mean, where we've won against the competition. So we're seeing that in the beginning of the year. So really excited about those. Great visibility into future ramps that are coming with some of the new customers, new wins. You mentioned supply chain. Yes, certainly, there's supply chain tightness out there. We're not concerned about that. I mean we're working with our suppliers. We've seen improvements thus far. So we haven't had any trouble. As you also know, even outside of the optical world, 80-plus percent of our business is really not exposed to that tightness. So that's good. Optical side certainly is. But we've had a lot of success there, and we're very confident in the outlook for this year. Operator: Your next question comes from Quinn Bolton with Needham & Company. Quinn Bolton: I'll offer my congratulations as well. I guess, Kishore, I just wanted to ask, I think in the past, you guys have sort of said your DSP wins were more for front-end networks. As you start to ramp the 800-gig products here, are you starting to see some of those designs moving into the scale-out networks? Or do you think we need to wait for the Rushmore 1.6T product before you start moving into scale out? Kishore Seendripu: It's very, very hard to parse usually what is scale up and scale out. They are broad categories, right? There are short reaches and long reaches and mid-reaches. And usually, the short reaches are in what you would call the scale-up network and the longer ones are usually on the scale-out side. So that's happening on the 800 gig side. So yes, we are shipping in the scale-up side now. But I still feel that most of it is still in the scale-out network -- the traditional scale-out network. Quinn Bolton: Sorry, just so we're clear, you're shipping in, I guess, what I would call front-end networks that the sort of the storage networks driven off the GPU? Or are you starting to ship in the GPU to GPU scale-out? Kishore Seendripu: That's a more detailed question, but I would just say -- I'll leave it here. It's -- just leave it as scale-up networks and it is a smaller portion of the revenue that's starting and most of it is scale-out networks. Quinn Bolton: Okay. And then I guess, Kishore, you gave us some numbers, both revenue forecast for '26 for optical DSP and you said that could equate to 4 million to 6 million units. If I just do the math, it seems like it could imply an ASP sub-$25, which seems pretty aggressive. Can you just talk about the pricing environment? Do you guys feel like you're pricing below some of the other peers in the market? Is that helping you to gain share? Do you think you're pricing in line with others in the market? Kishore Seendripu: I mean that's -- I think your conclusions are what you're going is absolutely not true. We try to be very competitive in the marketplace, and we try to ride the product competitiveness of our product, right? So I don't think in this market, you win by pricing, you win -- your performance is a must. And if there's such an exciting worldwide great phenomenon that's going on, pricing is the last thing that they would make decisions on, especially in a very, very sophisticated technology. So I think anybody says they're winning on pricing, they really are not looking in the right market. Operator: Your next question comes from Alek Valero with Loop Capital Markets. Alek Valero: I wanted to ask, what do you see as being the biggest opportunities for gaining market share in 2026? Kishore Seendripu: I think it's very, very clear, right? We started with optical transceivers as a category that is very meaningful. We have talked about our gains in the storage accelerators for the infrastructure market. We've talked about -- I'm listing the sequence of the value, right? Then what -- where the growth is coming in the PON market share -- market revenues increases. And the fourth part is the wireless infrastructure growth. I mean I'm exactly laying down the sequence of where the big growth in absolute dollars are coming. And I think they'll roughly track the percentages as well. Alek Valero: Got it. Super helpful on that. And just a quick follow-up. You sparked my curiosity on scale-up. I know you mentioned it's small for now, but I wanted to ask you if you can maybe provide some more color on the opportunity there for scale-up. Kishore Seendripu: Look, it's a very, very concentrated market from a scale-up point of view, right, if you really look at it. However, it's a huge opportunity inside the rack, if you will, right, the compute systems. And the scale-up opportunity will span not just PAM4 interconnects, but there are PAM4 Ethernet retimers and so on, on those things, so -- which we have not hit upon. At the OFC, we will be announcing our electrical retimers for the Ethernet product category. And then there is the CPU opportunities as well, right? So it's a whole play for us. It's very, very early innings. And right now, let's stay focused and it's a heavy growth engine for us, and we are very excited about it. Operator: Your next question comes from Tore Svanberg with Stifel. Tore Svanberg: Just two quick follow-ups. And yes, this is Tore, not Ross, and I'm a big Ross fan. So first of all, the connectivity segment, how should we think about the puts and takes there this year? Because obviously, part of connectivity is tied to cable or broadband, yet you also have the Ethernet business, obviously, that's doing quite well. So should we think of connectivity as also being down this year? Or does it have other subsegments growing fast enough to actually make it a growth segment in '26? Steven Litchfield: Tore, yes, connectivity certainly grows this year. Wi-Fi will grow this year as we -- as WiFi-7 starts to ramp. And then a lot of our Ethernet products that are transitioning 2.5 gig certainly grow this year as well. So both of those. Tore Svanberg: Very good. And my last question is... Kishore Seendripu: I just want to remind that the -- sorry, Tore, I want to let you know that cable is a huge part of the market that we have revenues that is not paired with Wi-Fi. So they are like the sort of the dissociation and the association. So it depends on how that trends as well. Tore Svanberg: Understood. And my last question is sort of going back to the opportunities beyond DSPs. So you've talked about having products for AECs. Obviously, you have the high-speed analog products to go after LPO, LRO and so on and so forth. But you continue to call those out as very niche markets. So I guess my question is, if you do see those segments getting more traction, how long would it take for you to become a more material player in some of those areas? Kishore Seendripu: Very good question, Tore. So I just want to lay the landscape of the sort of what I call the derivative product road map, right? You start with the PAM4 DSP products. And I know LRO is not an analog product. It is a DSP product. So the LRO is a natural derivative. It doesn't take us long to get there, and we will be pursuing that opportunity. And in a short while, we'll have something to show as well. And I think there is some traction because in the marketplace for LROs because it has legs beyond just one particular speed node, if you will, like. So with the LPOs have limited niche nature to it because the amount of reach that the LPOs can reach is quite constrained and has to be very structured and controlled. So I do believe that, that is a sequence in which it works out for us, at least. And I think that the market revenues in LROs grows much stronger as the speeds increase and the power benefits that LROs will deliver. And I think there are some data center people who are beginning to try them out and then there'll be a follow-through on that. So for us, the next 12 months is a place where we will start taking advantage of the product offerings and do these derivative product offerings. Operator: And we have reached the end of the question-and-answer session. I'll now turn the floor back to Leslie Green for closing remarks. Leslie Green: Thank you, Diego, and thank you all for joining us. This quarter, we will be presenting at a number of financial and industry conferences. Details will be posted to our Investor Relations site, and we look forward to speaking with you again soon. Operator: This concludes today's call. All parties may disconnect.
Operator: Good afternoon, and welcome to PennyMac Financial Services, Inc.'s Fourth Quarter and Full Year 2025 Earnings Call. Additional earnings materials, including presentation slides that will be referred to in this call are available on PennyMac Financial's website at pfsi.pennymac.com. Before we begin, let me remind you that this call may contain forward-looking statements that are subject to certain risks identified on Slide 2 of the earnings presentation that could cause the company's actual results to differ materially as well as non-GAAP measures that have been reconciled to their GAAP equivalent in the earnings materials. Now I'd like to introduce David Spector, PennyMac Financial's Chairman and Chief Executive Officer; and Dan Perotti, PennyMac Financial's Chief Financial Officer. David Spector: Thank you, operator. Good afternoon, and thank you to everyone for participating in our fourth quarter and full year 2025 earnings call. As shown on Slide 3, PFSI finished the year with a solid fourth quarter, generating net income of $107 million or $1.97 per share. To refresh, in the third quarter, we capitalized on higher lock volumes driven by an initial decline in interest rates to generate an 18% annualized return on equity. While our previous guidance was for annualized operating ROEs in the high teens to low 20s, the sustained rally continued into the fourth quarter and drove market prepayment speeds significantly higher than what both we and the market expected. This activity resulted in a meaningful increase in realization of MSR cash flows and accelerated runoff of our servicing asset. While we generally expect production income to act as a natural hedge to this runoff, the benefit in the fourth quarter was impacted by competitive dynamics. Many industry participants have also added significant capacity in anticipation of lower rates, and this excess capacity has created a more competitive origination market, limiting expected production margin increases and revenues typically associated with an interest rate rally. As a result, the growth in our production segment income did not fully offset the higher level of runoff in our MSR portfolio, leading us to generate a 10% annualized return on equity in the fourth quarter. I will speak to the strategic actions we are taking to improve overall production income later in my presentation. Turning to Slide 4. You can see that for the full year 2025, our results were very strong. Pretax income was up 38% and net income was up 61% from their respective 2024 levels. We generated a 12% return on equity and grew book value per share by 11%. These results highlight our ability to consistently deliver stockholder value through disciplined execution, driven primarily by the strong operational performance of both segments, which you can see on the right side of the slide. In our Production segment, total volumes increased 25%, driving a 19% increase in pretax income. Similarly, in our Servicing segment, we grew the total unpaid principal balance of our portfolio by 10%, which, along with improved MSR hedging results helped drive a 58% increase in pretax income from the prior year. Turning to Slide 6. You can see the financial impacts of the dynamics I described earlier. While production segment income was approximately double the levels reported in the first two quarters of this year, the growth from the third quarter to the fourth quarter did not offset the runoff of the portfolio's prepayment speeds increase. However, we've taken strategic and targeted actions to drive improvements over the course of this year. By accelerating the deployment of new technologies such as Vesta, quickly ramping our capacity and continuing to enhance efficiencies, we are positioning ourselves to better capture the significant opportunities presented by lower mortgage rates and further increase production income in comparison to MSR runoff. In January, total volumes have been consistent with those reported in the fourth quarter, but with a mix shift towards the higher-margin direct lending channels. This is driving our expectations for production segment income in the first quarter to be higher. Channel margins remain at similar levels. On Slide 7, we highlight the significant opportunity for our consumer direct channel as mortgage rates decline. As of year-end, we serviced a combined $312 billion in UPB of loans with note rates above 5%, of which $209 billion in UPB of loans had a note rate above 6%. As rates decline, these borrowers tend to benefit financially by refinancing their loans. While our recapture rates have improved, we see significant upside potential from current levels. To that end, we are making targeted investments in AI and other technologies to drive these recapture rates higher and ensure we capture the value embedded in our portfolio. The cornerstone of our technological investment is shown on Slide 8. We previously discussed the early stages of our transition to Vesta, the modern and next-generation loan origination system we invested in to improve and grow our consumer direct lending operations. We are on track to have Vesta fully implemented across our consumer direct channel in the fourth quarter and completing this migration on time -- excuse me, in the first quarter. And completing this migration on time is a key driver of our 2026 outlook, ensuring that for the bulk of the year, we are operating on our most efficient AI-enabled platform in order to capture the production income improvements we expect. We are already seeing the power of this technology transform our workflow. By deploying AI-driven automation for tasks that were previously performed manually, we are experiencing an immediate impact, unlocking efficiency gains of approximately 50% for our loan officers. Walking a loan with a borrower on the phone, which took over an hour on our legacy system has been cut to just 30 minutes with Vesta. The impact also extends to our fulfillment operations, where intelligent workflows are streamlining the loan manufacturing process. We are seeing a reduction in the average end-to-end loan processing time by approximately 25%. When multiplying the sales and fulfillment time savings across the number of loans originated on our consumer direct channel in 2025, it represents approximately 240,000 hours of time saved. This operational velocity has a direct financial impact with a corresponding 25% decrease in our operational cost to originate, creating another lever in our pricing strategy and giving us the flexibility to be even more competitive in the market. It represents a transformative shift in our unit economics, increases our capacity without substantially increasing operational costs and unlocks new levels of scalability. This enhanced operational scale will be a huge benefit in an interest rate rally. If we see a continuation of the rate decline and volume increase, this AI forward infrastructure will allow us to rapidly scale in order to absorb an increase in recapture volume. Looking ahead, this modern architecture allows for rapid iteration and integration of new AI processes and technologies to deliver meaningful improvements in the customer experience while unlocking significantly more efficiency gains throughout 2026 and beyond. Finally, on Slide 9, you can see how Vesta fits into our broader customer retention strategy. Our customer relationships are our most important asset, and we are driving strategies to retain those customers for life. A faster and more efficient origination and processing workflow is just a part of our synchronized effort. We are beginning to utilize artificial intelligence to drive greater customer service and using deeper servicing integrations to anticipate borrower needs with real-time data. By combining this technology with our growing brand presence, we are transforming single transactions into lifetime partnerships. We believe these investments will allow us to achieve greater efficiencies and drive recapture to new heights. And we expect PFSI's operating return on equity to move into the mid- to high teens later in the year. As we look ahead, PennyMac is uniquely positioned to continue leading the mortgage industry. Our balanced business model and cutting-edge technology provide a powerful foundation for our continued growth, and we remain focused on the continued advancement of our strategies to drive sustained long-term value for our stockholders. I will now turn it over to Dan, who will review the drivers of PFSI's fourth quarter financial performance. Daniel Perotti: Thank you, David. PFSI reported net income of $107 million in the fourth quarter or $1.97 in earnings per share for an annualized ROE of 10%. These results included $1 million of fair value gains on MSRs net of hedges and costs, and the contribution from these items to diluted earnings per share was $0.01. PFSI's Board of Directors declared a fourth quarter common share dividend of $0.30 per share. On Slides 11 through 13, beginning with our production segment, pretax income was $127 million, up slightly from $123 million in the prior quarter. Total acquisition and origination volumes were $42 billion in unpaid principal balance, up 16% from the prior quarter. Of this, $38 billion was for PFSI's own account and $4 billion was fee-based fulfillment activity for PMT. Total lock volumes were $47 billion in UPB, up 8% from the prior quarter. PennyMac maintained its dominant position in correspondent lending with total acquisitions of over $30 billion in the fourth quarter, up 10% from the prior quarter. Correspondent channel margins were 25 basis points, down from 30 basis points in the third quarter due to increased levels of competition. Under its fulfillment agreement, PMT retains the right to purchase all nongovernment correspondent loan production from PFSI. In the fourth quarter, PMT purchased 17% of total conventional conforming correspondent production and 100% of non-agency eligible correspondent production, both percentages unchanged from the prior quarter. In the first quarter of 2026, we expect PMT to purchase 15% to 25% of total conventional conforming correspondent production and 100% of non-agency eligible correspondent production, consistent with levels in the recent quarters. In broker direct, we continue to see momentum as we position PennyMac as a strong alternative to channel leaders. Originations were up 16% from the prior quarter. However, locks were down 5% as we maintained our pricing discipline in highly competitive segments of the channel. The number of brokers approved to do business with us continues to grow, reaching nearly 5,300 at year-end, up 17% from year-end 2024, reflecting the growing number of brokers who are increasingly recognizing and leveraging our distinct value proposition. The revenue contribution from Broker Direct was essentially unchanged from the prior quarter as the impact from lower fallout adjusted lock volume was offset by higher margins. Consumer direct volumes were up with originations up 68% and locks up 25% from the prior quarter. However, the contribution from higher volumes in the channel was largely offset by lower margins from increased competition as well as a higher percentage of first lien versus closed-end second lien loans and a more focused effort on recapture of higher balance, lower-margin conventional loans. We also benefited from a strong secondary market execution relative to initial pricing, which contributed $34 million to PFSI's account revenues during the quarter. Production expenses net of loan origination expense increased 3% from the prior quarter due to higher volumes. Turning to Servicing on Slides 14 and 15. Our Servicing portfolio continued to grow, ending the quarter at $734 billion in unpaid principal balance. $470 billion was owned servicing, $227 billion was subserviced for PMT and $12 billion was subserviced for other non-affiliates. $24 billion was interim subservicing related to an MSR sale, which has since been transferred to a third party. The Servicing segment recorded pretax income of $37 million. Excluding valuation-related changes, pretax income was $48 million or 2.6 basis points of average servicing portfolio UPB, down from $162 million or 9.1 basis points in the prior quarter. Loan servicing fees were roughly flat to the prior quarter due to MSR sales, which offset owned portfolio growth from production. Earnings from custodial balances were unchanged from the prior quarter as lower earnings rates offset the benefit of higher average balances. Custodial funds managed for PFSI's own portfolio averaged $9.1 billion in the fourth quarter, up from $8.5 billion in the third quarter. Realization of MSR cash flows was up 32% from the prior quarter, consistent with the increase in prepayment speeds for our owned portfolio as lower mortgage rates drove higher prepayment activity. Operating expenses were $82 million for the quarter or 4.5 basis points of average servicing portfolio UPB, down from the prior quarter. EBO revenue decreased as the reintroduction of FHA's trial payment plans extended modification time lines and delayed redeliveries into future quarters. Similar to the prior quarter, we saw the operating and GAAP ROEs converge as gains from changes in fair value inputs on MSRs were offset by hedging declines in costs. The fair value of PFSI's MSR increased by $40 million. $35 million was due to changes in market interest rates and $5 million was due to other assumption and performance-related impacts. Excluding costs, hedge fair value losses were $38 million and hedge costs were $2 million. As previously stated, we expect hedge costs to remain contained and that we will more consistently realize results in line with our targeted hedge ratio going forward. Our hedge ratio is currently near 100%, up from 85% to 90% last quarter. Corporate and other items contributed a pretax loss of $30 million, down from $44 million in the prior quarter, primarily driven by reduced expenses related to technology initiatives and performance-based incentive compensation. PFSI recorded a provision for tax expense of $28 million, resulting in an effective tax rate of 20.5%. The provision for tax expense included a $4 million benefit -- tax benefit consisting of a repricing of deferred tax liabilities and an adjustment to the 2025 tax accrual. PFSI's tax provision rate in future periods is expected to be 25.1%, down slightly from 25.2% in recent quarters. As noted earlier, we sold approximately $24 billion in UPB of low note rate government MSRs to a third party on a servicing release basis. This sale represented an opportunistic rotation of capital. By monetizing these lower-yielding assets at a strong valuation, we are unlocking capital to strategically reinvest into the continued growth of our servicing portfolio with new originations at current market rates and significantly higher recapture potential while maintaining prudent levels of leverage on our balance sheet. Total debt to equity at year-end was 3.6x and nonfunding debt to equity at the end of the quarter was 1.5x, both within our targeted levels. Finally, we ended the quarter with $4.6 billion of total liquidity, which includes cash and amounts available to draw on facilities where we have collateral pledged, giving us significant liquidity resources to be able to deploy opportunistically or in adverse market circumstances. We'll now open it up for questions. Operator? Operator: I would like to remind everyone, we will only take questions related to PennyMac Financial Services, Inc. or PFSI. [Operator Instructions]. Your first question comes from the line of Terry Ma with Barclays. Terry Ma: So, I guess to start, so you guys have kind of talked about increasing capacity in consumer direct all year long. You guys have kind of talked about holding excess origination capacity, kind of stacked your servicing book with more current coupon. It seems like almost obviously to plan for kind of like a moment like this. So maybe kind of just talk about like what went wrong? And then on a go-forward basis, like maybe just talk about what you're doing to kind of address the issue and your level of confidence. David Spector: Yes. So, thanks for the question. So, coming out of Q3, we felt very good about our ability to attack the portfolio and be able to participate in the recapture opportunity afforded to us by the decrease in rates. But then as Q4 got underway and throughout the quarter, we saw increasing amounts of amortization that indicated to us that not only perhaps we thought we are adding capacity, but I think two things took place. First, that the rest of the market had to add capacity in place also. And so where you would typically in a declining rate environment, see increasing margins, those also did not come into play. And so the competitive environment for refinances was quite frankly, stronger than what I've seen historically in an interest rate decline. And so we pivoted throughout the quarter and rather quickly to do a few things. One, we're accelerating our move on to Vesta, which will give us additional capacity, as I point out. Two, we are adding even more capacity to not just -- there's a -- we were -- we had capacity in place and we were continuing to build capacity, but these rallies are these flash rallies are so robust that we have to have capacity in place to deal with a 50 to 75 basis point rally in less than a week. And so we're just continuing to add more capacity. We also changed some strategies to really help improve recapture, and we saw some of those strategies pay off nicely throughout the quarter and into January. And so I think that the -- I have a lot of confidence in the team that we're going to continue to accelerate our recapture and accelerate our growth in consumer direct. I think that this is one of the reasons why we expect to get to mid- to high mid-teen ROEs by the middle of the year. And I just think that you're going to continue to see us move into that direction. Terry Ma: Got it. That's helpful. Maybe just a little bit more on the ROE guide of low double digits to kind of mid- to high teens. Like any more color on kind of what's contemplated in that expansion? Like maybe just some more color on that, please. David Spector: Yes. So, look, I think we're -- remember, these forecasts that we give are based on a point in time. And so first of all, we expect an origination market to grow between $2.3 trillion and $2.4 trillion in the year. Rates -- obviously, if rates go up, that will change. We expect to grow production in consumer to grow production and recapture in consumer direct and grow share in volumes and TPO. Correspondent, we are maintaining at generally current flat levels, market share levels. A lot of that is coming out of increased competition we're seeing primarily on the conventional side through the cash windows of the two GSEs as they're looking to proceed on their path to buy more mortgages. We expect margins to remain at levels to those we saw in the fourth quarter. And so this is -- there could be some -- in the fourth quarter, we did see a little margin compression in brokers, the top two participants were very aggressive in a race to be the #1 loan producer. But I think we're going to stay disciplined. But I think what we're not factoring in this, which is what we -- as I said, we've historically seen is margin expansion. And should that margin expansion take place, obviously, there'll be upside from there. We expect the realization of cash flows to remain similar as a percentage of MSR values versus what we saw in the fourth quarter. And I expect that to pretty much be the story. There are some continued efficiency gains in servicing with pretax income grinding higher as a result. There will definitely be some scale benefits that we see coming out of the deployment of the Vesta technology as well as the growth in share in TPO. And there are some additional leverage outside of this that could drive it higher. But I generally believe that we've mapped out and I have the confidence that we can get back to the mid- to high operating ROEs. It's just -- it's not going to be at the pace that perhaps we all would love. Operator: Your next question comes from Mark DeVries of Deutsche Bank. Mark DeVries: David, I think you indicated that the prepayments you saw in your servicing book were even faster than you would have thought. Any insight as to kind of what happened there? Or is it just how rapidly the market responded to rate incentives you kind of alluded to in prior comments? David Spector: I'm sorry for interrupting. Did you want to continue? Mark DeVries: And then just a follow-up. Did I hear you right? Do you expect realization of cash flows, at least in the guidance you kind of provided or at least the high-level guidance to be consistent with what you saw in 4Q? David Spector: In the fourth quarter, yes. Mark DeVries: Yes. David Spector: So let me just point out that the market generally has been surprised by the increased prepayment speeds. They were forecasted, but not to the level that we've seen. And so I think that, that's something that we've heard it throughout the Street in speaking to them, and this is something that has been, I think, kind of -- you've seen it throughout the market. I think that in terms of where we're seeing it, I generally will tell you everywhere. There is probably a little bit more -- it's a little bit more competitive on the higher balance loans, obviously, because there's just -- that's generally where we see brokers focusing on as well as some of our correspondents. Prepayment speeds on lower balance loans, while fast are a little bit slower versus the comparable high balance. On the VAs, it's pretty competitive. But we're getting the expected market share there. The biggest issue from my perspective is you're not seeing margin expansion. And that's something that we're going to -- of course, you know us really well. In the 18 years we've been operating, we're always leaning to get more margin, and we're going to continue to test the waters on that. But it's a bit more competitive than we've historically seen when rates increase. Margins have come up a little bit, but not to the levels that we would have thought given the rally. Mark DeVries: Okay. Got it. And are you seeing some different margins across all the channels in purchase versus refi? Or was it refi that really was under pressure? And also, any thoughts on rates really kind of the decline we've seen kind of reducing some of the lock-in effect and starting to stimulate more purchase activity as well? David Spector: I think that given the fact that everyone is stretched on capacity. We're seeing -- typically, it's on both purchase and refi that we're just -- I'm not seeing one necessarily differentiation. But I think we're focused on -- in our consumer direct channel, we have a purchase team that we continue to focus on purchase activity. On the refi side, one of the strategies we put in place is we -- on the closed-end seconds, we took some of our focus in closed-end seconds and moved it over to conventional. And that's why you see the overall margin differential in consumer direct quarter-over-quarter. That's more of a mix issue than anything else. But I generally think that there there's a lot -- everyone is going after the loans. Operator: The next question is from Bose George with KBW. Bose George: I just wanted to follow up on the same themes here. Is this kind of a structural change in the industry where historically runoff happens, originations pick up and margins pick up because of capacity constraints. And now with technology and is it a scenario where people can run with excess capacity, so you don't see that offset to runoffs? David Spector: I'm not ready to declare it a structural change in the industry, okay? I think that the administration and others in the industry have been warning us for well over a year that they're going to be pulling levers to reduce rates. And so I think it gave people the that they needed to have capacity in place. I think that there is -- on the other side of it, it's going to get increasingly easier to refinance loans as you start to see technologies like we're using and others are using to reduce the amount of time to refinance a loan to get the borrower a lower payment. And so this is why I think that one of the things that we're focusing on more and more is issues like revenue per loan and net income per loan as opposed to margin. because margin as we have it is a gross number. And as we see these expenses come down, I would expect the revenue is the gross margin, but I would expect the net income per loan to go up ultimately. And so that's something that is something we're talking about internally. But I think -- look, I think the story of this quarter, we've seen it with some of those who've already reported, volumes have been up, margins have been down. And I generally think it's just the fact that people were ready for rates to decline in this initial decline. If rates were to decline 75, 100 basis points, you definitely would see margin expansion. There's just no doubt about it. Mark DeVries: Okay. Great. That's helpful. And then in terms of the competition in the different channels, in the correspondent channel, did you -- was it really driven by the GSE cash windows? Or how about sort of other participants? David Spector: Yes. Look, I think on the conventional side, it was generally the cash windows. And I think that's going to be the story for 2026. I think that with the announcement coming out of Washington, D.C., the GSEs are going to be very active. And so we have to -- we will -- I'm not expecting a share decline per se, but I'm not expecting us to be at 25% at the end of the year either. We're going to maintain our discipline, and we're just not going to be focused on volume and share. I think that -- on the government side, there, it's -- we had a really good December. I would say, in October, November, we saw some of the other market participants get very aggressive. And so our market discipline there has caused us to really just wait for the market to come our way. And in fact, as I said, in December, we had a really good December. Operator: Your next question comes from Doug Harter with UBS. Douglas Harter: As you were talking about the benefits from Vesta, do you envision that of actually taking costs out of the origination business or just continuing to build capacity and as volume comes back, lowering the cost per loan? David Spector: The answer is both, okay? I will tell you, first off is with the deployment that will be in place in Q1, we will get the benefits of just a more modern system that will lead to just greater efficiency gains on both the sales side and the fulfillment side. Throughout 2026, and this is what's very exciting for us. We're going to see more and more deployment of AI tools and AI agents that's really going to have a meaningful effect on our ability to originate a loan in as inexpensive as anyone else in the industry, as quickly as anyone in the industry and most importantly, to be able to close the loan when the borrower wants to close the loan. And so that's something that is very exciting to us. And I think that's something that I'm really looking forward to sharing with you all as it gets deployed. Operator: Your next question comes from Trevor Cranston with Citizens JMP. Trevor Cranston: A follow-up on some of the earlier questions. I guess as we think forward for this year, if we were to see an additional leg down in mortgage rates, whether it's driven by reduction in G fees or some of the other things that have been discussed a little bit. How should we think about the net impact on the company if that were to happen? Would you expect to see the production offset kick in pretty well if there is an additional rally? Or how should we think about kind of the net impact on the returns of the company? David Spector: Look, we are -- there's no one driving for more capacity in this company more so than me. And so I will tell you that we want to have enough capacity to be able to withstand a ferocious rally, and that's going to come in two forms. The obvious one is we're going to need to add some headcount to deal with some of the regulatory requirements for LOs to speak to customers. But at the same time, I expect to get more and more capacity benefits coming out of our technology. And I -- it is my stated goal to not get to be in this position where we're saying to you that we had amortization that exceeded the recapture necessary to balance it. And that's something that we are going to continue to perfect. And it's not like aspirational. It's something that's going to take place this year, and it's going to be achieved long before the end of the year. So, I think, that we're going to be in a position to be able to execute on a rally. Daniel Perotti: The other thing that I'd add is that we talked about it a little bit earlier, is that we continue to increase our hedge ratio as well. So as or if interest rates decline further from here, we have even greater protection from our financial hedges that we put into place and our hedging discipline. Trevor Cranston: Got it. Okay. And I guess as a second part to that question, can you maybe talk about how you're thinking about the likelihood of something coming through like a significant reduction in G fees or a change to loan level pricing or sort of other levers that could be pulled in an attempt to lower mortgage rates? David Spector: Of course, I read everything you're reading. I don't necessarily see a reduction of guarantee fees coming. While the administration is hyper focused on affordability and doing what they can to drive down rates, I think the usage of the portfolios to buy mortgages is the logical place for them to continue to lean on. And the $200 billion number is a big number, but that's not to say it couldn't get bigger. I think that as it pertains to loan level price adjustments between the capital rule and other rules that they have, changing those would take some time. And so I generally think that they're going to continue to focus on keeping mortgage spreads tight to treasuries, and they're going to continue to try to job loan rates down. But look, we manage the company to a range of outcomes. And so I generally believe, of course, if GPs comes down, that's better, and we'll have the capacity in place to take advantage of that. And likewise, at times we hear loan level price adjustments are going to be going up. And that speaks to the work we've done to distribute close to 15% of our agency collateral outside of the agencies to insurance companies and whole loan investors. And so managing to the range of outcomes and continuing to build and enhance the customer journey is something that we'll be able to react to. Operator: Your next question comes from the line of Crispin Love with Piper Sandler. Crispin Love: Can you talk a little bit about first quarter activity thus far, what that means for near-term ROEs just you have spreads tighten and mortgage rates got pretty close to 6%. Are you experiencing an episodic rate and pickup in refis? Just kind of curious how purchase is trending and then the momentum through January, the trajectory there? And then just kind of bigger picture, how you'd expect ROEs to trend throughout the year as you add capacity and invest? Is it a ramp higher? Just curious on how you're thinking about it. David Spector: Yes. So, Dan will go over the ramp in a second. January has been a good month. For a month that historically has been very slow coming out of the holidays, we've had a good production month. We're seeing nice increases in production. Offsetting that, we're seeing increases in demand statements that I would expect to see prepayments in February kind of go back to where they were in December. January, I think, will be a little bit slower. And so I think one of the things I'm looking at is our recapture and our recapture numbers are going up. Of course, I want more. Everyone wants more in the organization, and that kind of speaks to the ramp. But it's something that we're seeing. And margins are generally holding in. And so I think that that's something that I really am pleased to see. And I generally think in TPO, we saw a hypercompetitive market in Q4 that I believe is starting to -- we're getting a little bit of rational pricing coming into that. And so I'm generally the belief that our growth in TPO, while perhaps was slowed a bit in Q4 due to a price war, will continue to accelerate at higher margins. Daniel Perotti: And with respect to the trajectory through the year, I think consistent with the way that David described it in our implementation of these initiatives and continued build of capacity and so forth, we are expecting basically a ramp through the year, consistent with the guidance that we gave during the prepared remarks. So starting out in the lower double digits and then ramping up to the mid- to high double digits as we get later in the year. Crispin Love: Great. And then just a little bit deeper into that, kind of what's baked into the ROE guide for realization of MSR cash flows and recapture beyond the first quarter? It seems that 1Q should be similar to 4Q. I think the MSR prepay rate was about 16% in the fourth quarter. So, curious on how you think about that through the year. I completely understand it's just a point in time now, very rate dependent, but just curious on that and kind of where you are on recapture today and what kind of levels you might be targeting? Daniel Perotti: So, overall, in terms of the realization of cash flows, we are expecting on a dollar basis to be at a pretty similar level in the first quarter and also as we move through the year as you have the sort of dynamics given that we did see this initial responsiveness and there will be a little bit of a pullback in terms of borrower responsiveness at these levels as we move overall through the year, but expecting overall dollar realization of cash flows to remain in a fairly similar place to what we saw in Q4 and Q1 and both -- and similarly as we move through the year. With respect to recapture, also expect incremental gains consistent with the way that David had described it as we move through the year to facilitate the increase in production income as well as gains in our share in TPO or in broker that will further increase our production income as -- which will offset some of the declines that we've seen in the servicing segment. Operator: Your next question comes from Shanna Qiu with Barclays. Gengxuan Qiu: So just looking at the FHA delinquencies, it looks like it ticked up to 7.5% this quarter from 5.9% sequentially. I think it was roughly 6% last year. So, can you comment on what you're seeing in the FHA loans? I think previously, you guys had shown some slides that showed your FHA delinquencies substantially below the industry level and it feels like quite a jump there. Any context or color there? Daniel Perotti: Sorry, we weren't able to hear your question very clearly, but I know that it was on delinquencies and specifically FHA delinquencies. So we do see delinquencies increase seasonally in the fourth quarter. We look at our overall delinquency profile or our overall delinquencies for our book increased marginally year-over-year, had a similar sort of slope in terms of delinquencies through the year. Overall, with respect to FHA delinquencies, as we mentioned as in part of the prepared remarks, the FHA did change its policy around modifications during the latter half of the year, moving from allowing streamlined modifications that required no trial payments to requiring trial payments. And really, what that is going to result in is a bit of a lag in terms of loans that had been delinquent, getting those modifications implemented and coming back to current. And so that is generally what is driving some of those increases in delinquencies that you're seeing specifically in FHA. We do expect that, that's primarily a lag and not something that is going to dramatically change the performance overall of the FHA book. We also saw that impact our revenue from EBO redeliveries during the quarter, that went down by about 1/3 from last quarter. Again, we expect that to be just a lag. And our current expectation is that will come back up to levels that we had seen over the past few quarters to come back up by that 1/3 as we get into the first quarter, and we see those folks move through the trial and receive those modifications and come back to current. Gengxuan Qiu: Okay. And then I know you guys mentioned your hedge ratio is now over around 100% and you moved it up from last quarter. I think there's a bit of rate -- there has been a bit of rate volatility in 1Q and we had heard that some -- that could cause some basis hedging issues so far in 1Q. So just any color on the rate moves and if you've seen any impacts on your hedging strategy from that? Daniel Perotti: Overall, during the first quarter thus far, as you said, there has been specifically some basis movements really related to the announcement around the GSE buying. We did see some of that volatility did have a slight impact thus far on our hedging results. Obviously, we're still early in the quarter and a lot of things can change. Overall, I would say it had a slight impact, but not anything substantial. David Spector: The hedge performed really well in the fourth quarter. Daniel Perotti: And third quarter. David Spector: In the third quarter. And I will tell you that absent this one change when they announced that the GSEs are going to be buying mortgages and everything stayed flat with the exception of mortgages, which rallied, which really had a very small effect on us. The hedge continues to perform along the lines that we've seen in the third and fourth quarters. Operator: Your next question comes from Eric Hagen with BTIG. Eric Hagen: A lot of good discussion here. I think I just have one. Lots of debt raised over the last couple of years, unsecured debt. I think a good portion of that has been used to pay down the secured term notes that you guys have. I mean, how do you guys think about the asset liability match on the balance sheet right now if prepayment speeds are picking up, right? And if the macro backdrop is for faster speeds, is there a limit to how much unsecured debt that you keep on the balance sheet? Or do you think there's room to raise more? Daniel Perotti: I mean, so we generally look at our overall debt with respect to the balance sheet. The main lens that we look at that through is our nonfunding debt-to-equity ratio, which we've maintained around that 1.5x basically for the past couple of years, I think, at this point. And so as we continue to build equity in the business and retain equity and continue to build our MSR portfolio, notwithstanding runoff or sales, we do expect to continue to grow our overall MSR asset and our overall equity. And given both of those, we do think that there is potential for additional debt, including unsecured debt as we move forward. With respect to would we -- with respect to our balance sheet, our preference is generally to deploy into unsecured debt. We think that's a stronger deployment, gives us greater liquidity flexibility with respect to our ability to draw down on facilities if we so need that are secured by our MSR as we -- as mentioned in the prepared remarks. And so we do think that there is potential for us to issue additional unsecured debt as we move through 2026 and beyond, but will be related to what the build is like as I mentioned, in terms of our equity and our MSR asset and maintaining our leverage ratios at prudent levels. Operator: Your next question is from Ryan Shelley with Bank of America. Ryan Shelley: Most of might have been answered. I just want to touch back on recapture. It sounds like it's going to be a theme here. So you've talked about investments you're making in AI, other technologies to improve. And then you also, in the deck here, talk about implementation of specific solutions. Can you just run through what those solutions might be? And then I might as well try for it. Anything you could do to quantify that potential upside that you see remaining? David Spector: Yes. Well, thanks, Ryan. Look, the -- I would tell you that the solutions obviously start with bringing on more capacity, bringing on additional headcount as well as getting the technology fully deployed across the organization. In the meantime, we're -- as I mentioned to you earlier, there are some strategies that we deployed in Q4, including taking some of the focus that we typically have had on closed-end seconds and moving that focus to the conventional recap efforts and the recap efforts in general. On the fulfillment side, there, we're just continuing to add capacity. And as I said, we're getting some good inroads from the technology move that we made. And I think that generally, it's something that combined with continuing to test the waters to try to drive up margins. Those are the strategies to increase recapture in a profitable -- in the most profitable fashion, which is what I think is really, really important that we want the profitability, and we wanted to do it in the most, I would say, productive way when combined with the actual production. Operator: Your next question comes from Bose George with KBW. Bose George: In terms of the areas where you saw the increased prepayments where the offset on the margin wasn't as expected. Was that more on the Ginnie Mae side versus the conventional? Or is that -- was that kind of across the board? David Spector: So, look, I think it's generally across the board. I will tell you, and you your question indicates you understand this, there are loans with the varying servicing strips in Ginnie servicing. And obviously, when you have 69 basis points of servicing, your basis in the loan is much greater than when you have 19. And so with the proliferation of 69 basis point strips in the market over the last three years, that's something that obviously is just provides a bit of a headwind when you're running a balanced business model. But having said that, this is one of the reasons why we brought the hedge ratios up, and this is something that we continue to focus on getting the recapture on those loans. But obviously, I think on the Ginnie side, the fact that there's more 69 basis point strips in the portfolio just lends itself to this issue. On the conventional side, there, I think it's really, as I mentioned, on the higher balance product. And there, we're just seeing a lot of activity, a lot of competition from those who are buying trigger leads, which, by the way, that goes away at the end of Q1. But that's something that the last her for that activity. And so I think that had a little bit of play. When we looked at our runoff that we didn't recapture at the top of the list with broker originators. And I generally think that they're going to be hard-pressed to duplicate that once this trigger law comes into play. Operator: Your final question comes from Eric Hagen with BTIG. Eric Hagen: The stock has done so well, but can you refresh us on how much room you have on your buyback authorization right now? David Spector: We have a little over $200 million of buyback available. And that's -- I think it's something that, as you know, historically, we've had no problems using, and it's something that I think it's something that in our culture of capital allocation and cost of capital and how we think about capital deployment, that's one of the tools that we have, and it's something that we utilized ever so briefly in Q3, and it's something that we look at on a regular basis. Operator: We have no further questions at this time. I'll now turn it back to David Spector for closing remarks. David Spector: I just want to thank everyone for joining us on this call today. Great questions, good robust discussion. And if anyone has any follow-up questions, I'm available, Dan is available. Isaac and Kevin are available. Please don't hesitate to reach out. Thank you all for the time, and have a good day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the PLS December quarter conference call. [Operator Instructions] Please be advised today's conference call is being recorded. I would now like to hand the conference over to your speaker today, PLS Managing Director and CEO, Dale Henderson. Please go ahead. Dale Henderson: Thank you, Maggie. Good morning, and good evening, and thank you all for joining us today. I'd like to begin by acknowledging the traditional owners of the lands on which PLS operates. The Whadjuk people of the Noongar nation here in Perth and the Nyamal and Kariyarra people in the Pilbara. We pay our respects to their elders, past and present. Joining me today is Flavio Garofalo, our Interim CFO; and Brett McFadgen, our Chief Operating Officer; and also members of our senior leadership team. This call will run for approximately an hour before opening the line for questions. Over the past 18 months, the lithium market has been in what many have described as a lithium winter, a period of oversupply pricing pressure and heightened volatility. Since the trough spodumene pricing has more than tripled, signaling a material shift in market conditions. For PLS, the December quarter marked an inflection and validated the resilience and operating leverage of the PLS platform as pricing improved. 3 numbers catch this shift: realized pricing increased 57% quarter-on-quarter, cash margin from operations increased from $8 million to $166 million and cash increased by $102 million to $954 million with a further $85 million in provisional pricing adjustments expected to come through in the March quarter. Importantly, we achieved this without changing our operating footprint or capital intensity, reinforcing that the business is structurally cash generative across a wide range of market conditions. That outcome reflects deliberate countercyclic decisions taken over the past 18 months, maintaining operating capability, controlling costs and preserving balance sheet strength while prices were challenged. As a result, today, we have approximately $1.6 billion of liquidity, giving us the flexibility to choose timing and sequencing rather than being forced to act by the cycle. The December quarter demonstrates that approach working with strong cash margins, continued cost discipline and the option to selectively reengage growth options while maintaining discipline. Turning to Slide 2. Our strategy has not changed. Our mission remains powering a sustainable energy future, and this is underpinned by our strategic pillars. What has changed is not our strategy, but the market context in which we are executing it. Improving market conditions are now allowing those pillars to work together with discipline remaining the gatekeeper for any capital deployment. Importantly, strategy execution remains anchored to balance sheet resilience and return generation rather than short-term price signals. Turning to Slide 3. This slide highlights why PLS is well positioned as conditions improve. We operate 100% owned assets anchored by the Pilgangoora operation, a long-life Tier 1 asset with a scalable and flexible processing platform that provides direct leverage to pricing movements. Beyond Pilgangoora, we have deliberately preserved optionality, including downstream exposure via our joint venture with POSCO in South Korea, providing access to ex China battery supply chains. We have geographic diversification through the Colina project in Brazil, offering longer-dated growth optionality. Finally, we have retained balance sheet strength, which allows us to choose timing and sequencing on how we respond to market conditions. Turning to Slide 4. This slide captures the core December quarter story. Pricing improved materially and that improvement translated directly into a higher revenue and cash generation. Key outcomes include sales of 232,000 tonnes, up 8% quarter-on-quarter, a 50% increase in realized pricing, revenue up 49% to $373 million, and cash margin from operations increased to $166 million, supporting a cash balance of $954 million, reflecting strong conversion of pricing into cash. Production was in line with plan and FY '26 guidance reaffirmed across all metrics. Taken together, the quarter marks a shift from a period focused on protection and resilience to one of margin expansion, which enables value-accretive options to be reassessed with capital discipline unchanged. Now with that, I'll now hand over to Brett for an update on the operations. Brett McFadgen: Thanks, Dale. Moving to Slide 5. Safety remains our first priority. During the quarter, we recorded 2 injuries with TRIFR increasing to 3.79% from 3.08%. That outcome is just simply not acceptable. In response, we have implemented targeted safety campaigns and strengthened frontline leadership engagement. Quality safety interactions increased to 3.8 per 1,000 hours worked well above our target of 1.6. Our focus is on embedding consistent behaviors and controls to sustainably reduce risk, not just responding to incidents. Every team member going home safe, healthy every day is nonnegotiable. Turning to Slide 6. Operations delivered a solid quarter in which we continue to increase the proportion of contact ore in our feed. Total material mined increased to 8.1 million tonnes, reflecting continued progress in the transition to an owner-operator mining model supported by our additional haul truck deliveries. Ore mined decreased to 1.5 million tonnes as planned as we deliberately prioritized waste stripping to position the operation for future production and improved sequencing. Processing produced 208,000 tonnes, which was in line with the plan. Lithium recovery of approximately 76% remained robust reflecting our strategy to increase contact ore and maximize our ore sorter performance. Despite the higher contact ore throughput, ore sorters continued to perform strongly. However, the increased throughput resulted in elevated wear rates in the front end of our crushing circuit impacting on our average run time. To mitigate this, additional crushing capacity was mobilized to provide operational contingency and maintain adequate crushed ore buffers, supporting the plant utilization through periods of elevated wear. Sales of 232,000 tonnes exceeded production, drawing down inventory to meet strong customer demand and supporting improved cash generation during the quarter. I'll now hand back to Dale. Dale Henderson: Thanks, Brett. Moving now to Slide 7. A brief update on Chemicals. This forms part of our long-term strategy to preserve growth optionality and strategic positioning across the lithium value chain. These initiatives are being progressed in a staged and disciplined way. As it relates to our midstream project, construction of the midstream demonstration plant was completed in December with an update on commissioning plans expected in the coming months. As it relates to joint venture with POSCO, the P-PLS joint venture, the P-PLS, the Korean battery supply chain has experienced significant disruption following recent U.S. policy changes, resulting in order cancellations and deferrals from multiple certified customers. In response, the JV strategically idled the facility to preserve capital, whilst PLS successfully reallocated spodumene volumes to alternate customers at prevailing market prices. This demonstrates the flexibility of our portfolio and sales strategy when one pathway is temporarily constrained, we can redirect volumes without sacrificing value. During the quarter, we contributed $38 million to maintain our 18% interest in the JV. No further equity contributions are expected in FY '26. And we retain call and put options providing flexibility to maintain our current interest and increase our interest to 30% or exit the investment over time if we so choose. Strategically, P-PLS continues to provide PLS with exposure to lithium chemicals market, and ex China battery supply chains, whilst allowing us to manage capital deployment in line with market conditions. The technical capability of the facility has been demonstrated, and our approach ensures us optionality and diversification is preserved without placing pressure on the balance sheet. Lastly on chemicals, the Ganfeng study for a potential downstream partnership. That study continues with the sunset date extended through September '27, allowing additional time for site evaluation and market outlook clarity. Moving now to Slide 8. As market conditions improve, our focus is on sequencing growth through the cycle rather than accelerating investment. The discipline we applied through the downturn, protecting operations, reducing costs and preserving balance sheet strength continues to guide how we reassess timing today. Ngungaju represents short-term cycle optionality. We are evaluating a potential restart of approximately 200,000 tonnes per annum with early works completed and customer engagement underway. The board expects to consider this during the March quarter, and no decision has been made yet. And as it relates to that customer engagement, we've been pleasingly surprised by the strength of those offers made from the market, which, of course, underscores confidence in the upward trajectory we're observing at this time. As it relates to P2000, this is a larger, more capital-intensive option, however, provides a strong rate of return. The feasibility study continues with study timing under review and an update on timing expected in the March quarter. Colina provides longer-dated geographic diversification. Drilling and study optimization continue with study timing also under review and an expected update in the March quarter also. Taken together, these options provide flexibility across multiple time horizons and our focus remains on sequencing growth in a way that enhances value while preserving balance sheet resilience. With that, I'll now hand over to Flavio to take us through the financials. Flavio Garofalo: Thank you, Dale, and good morning to those on the call. Moving to Slide 10. I'm pleased to share the group's key financial metrics for the December quarter 2025. Revenue rose 49% to $373 million, driven by an increase in pricing and sales volumes. On costs, FOB unit operating costs increased to $585 a tonne, primarily due to lower production volumes and spodumene inventory drawdown, with sales higher than production versus an inventory build in the September quarter. While unit costs move higher due to volume dynamics, our Cost Smart program continues to deliver, driving sustained cost discipline across the business. This combination of improved pricing and continued cost discipline resulted in cash margins increasing significantly from $8 million in the prior quarter to $166 million in the current quarter. This reinforces our strategy to protect the business through the downturn and allow operational leverage to work as markets recover. Moving now to Slide 11. Slide 11 shows a cash flow bridge for the December quarter 2025. Our cash balance increased $102 million to $954 million, supported by a strong cash margins of $166 million, disciplined cost management and the prior year income tax refund. An additional $85 million in positive pricing adjustments for the December quarter shipments is expected to be received in the March quarter of 2026. Capital expenditure was $45 million on a cash basis, and we also made a $38 million equity contribution to the P-PLS joint venture, maintaining PLS' 18% ownership. Financing activities and FX impacts resulted in cash outflows of $20 million. With a cash balance of $954 million and approximately $1.6 billion in total liquidity, we now enter improved market fundamentals from a strengthened position, providing capacity to selectively pursue growth options whilst maintaining cost discipline. Moving to Slide 12. Looking at the half year performance. H1 FY '26 delivered strong pricing and volume growth, with revenue of $624 million, 47% higher than H1 FY '25. Unit costs improved compared to the prior corresponding half with FOB unit operating costs decreasing 8% to $563 a tonne driven by ongoing operational efficiencies and higher sales volume. Cash margin from operations increased to $174 million from $41 million in the prior corresponding half. Moving now to Slide 13. Slide 13 shows the cash flow bridge for the half year ended 31 December 2025. While cash margin from operations increased to $174 million, closing cash for the half year decreased by $20 million, primarily due to working capital timing effects. This included $32 million in customer refunds from lower final pricing on FY '25 shipments which were settled in early H1 FY '26, while approximately $85 million in positive pricing adjustments on the December quarter shipments are expected to be received in the March quarter. When adjusted for these timing effects, underlying cash margin would be approximately $291 million, reinforcing the strength of the business as pricing improves. And with that, I'll hand it now back to Dale. Dale Henderson: Thank you, Flavio. Moving to Slide 15. The December quarter marked a clear improvement in lithium market conditions following an extended period of destocking. Inventory levels tightened materially with Chinese domestic carbonate inventories finishing December at around 2 to 3 weeks of consumption. That tightening alongside continued strength in EV sales and accelerating demand from energy storage drove a meaningful recovery in pricing during the quarter. To put that in context, spodumene spot pricing on an SC6 basis increased by approximately 80% through the quarter, recovering from unsustainably low levels earlier in the year. A combination of factors is supporting this recovery, including constructive policy settings in China, particularly around energy storage deployment and EV adoption as well as ongoing uncertainty on the supply side, including the timing and extent of potential restarts of higher-cost sources. Importantly, while we have long held the view that pricing needed to recover from the mid-25 lows, we're not calling an end to volatility. The market remains sentiment driven with pricing continuing to respond sharply to policy signals and supply expectations. What this reinforces for us is the importance of disciplined capital allocation. Any investment in new or restarted supply must be resilient across a full range of market conditions, not just support of short-term pricing. With that context, I'll now walk you through the structural demand drivers that underpin our long-term conviction. Moving to Slide 16. The 3 charts on this slide tell an important story. Since 2020, the industry has delivered sustained compounding growth with EV sales growing at 45% CAGR, battery energy storage installations at 96% CAGR and that translating to a 32% CAGR in total lithium demand. These are not projections. This is growth that has already occurred through a period that included significant volatility. Looking at calendar '25 specifically, global EV sales reached 21.1 million units, up 20% year-on-year, with penetration increasing to 24% of total vehicle sales. Importantly, demand growth is becoming more geographically diversified. While China remains the largest market at 12.9 million units, growth outside of China is accelerating with Europe up 33% and Asia ex China, up 52% and the Rest of the World up 39%. That diversification strengthens long-term demand resilience. The other standout driver of battery energy storage. Global BESS installations reached approximately 290 gigawatt hours, up 45% year-on-year and are increasingly material as the second pillar of lithium demand alongside EVs. With significant policy support and large-scale deployment already underway, energy storage is emerging as a durable multiyear demand driver in its own right. Moving to Slide 17. Turning to the long-term picture. The outlook for lithium demand remains structurally strong and increasingly diversified. EVs and BESS energy storage are expected to account for more than 90% of lithium battery demand by 2030, reinforcing the long-term nature of demand growth. EV adoption continues to gather pace globally with Benchmark Minerals intelligence, forecasting penetration to increase to around 35% by 2030 and approaching 70% by 2040. By that point, EVs alone are expected to represent about 3/4 of total lithium demand. Battery Energy Storage is the fastest-growing segment, having increased from a small share of lithium demand in 2020 to a material contributor today and is expected to continue growing strongly over the coming decades as grid scale storage is deployed globally. Taken together, these trends support sustained long-term growth in lithium demand. But importantly, that growth will not be linear and will continue to be accompanied by periods of volatility as we've seen today. For PLS, this outlook reinforces the value of scale, flexibility and balance sheet strength allowing us to sequence growth decisions thoughtfully, navigate near-term volatility and capture long-term value without compromising discipline. In closing, the December quarter demonstrated the cash-generating power of the PLS platform as pricing improved, validating the operating leverage we've built countercyclically through the down cycle and reinforcing that this is a structural cash generation from a more resilient operating base. While market conditions have improved, volatility remains a defining feature of the sector. Our focus, therefore, remains on disciplined capital allocation, balance sheet resilience and value creation through the cycle. With a strong balance sheet and a 100% owned asset base, we have the flexibility to reassess timing and sequencing from a position of control and any growth decisions will remain gated by confidence in market sustainability and returns. That combination, structural cash generation, balance sheet resilience and disciplined capital deployment underpins our approach to managing long-term shareholder value. Thank you very much for your time. And with that, I'll now pass back to Maggie for questions. Operator: [Operator Instructions] First question comes from Levi Spry from UBS. Levi Spry: Dale and team, I guess just a question on the growth as you sharpen the pencil on all these projects, specifically on P2000. So you did the PFS nearly 2 years ago, a new 5 million tonne per annum plant, $1.2 billion CapEx and then ramping up to 2 million tonnes for 2029. How should we think about time lines and scope as you sharpen the pencil? What potentially could have changed? Or can we simply inflate numbers and delayed for 2 years? Dale Henderson: Yes, it's a bit early to guide you on that one, Levi. The review, which we're working through at the moment, we'll be particularly focused around study time lines. And the production of that study will be the key point to inform the market on the broader trajectory. So unfortunately, I can't really shed much light at this point on that one. Operator: Next, we have Glyn Lawcock from Barrenjoey. Glyn Lawcock: Happy New Year, Dale. Just a couple of quick ones, if I could. Just with the restart of Ngungaju, are you looking for price floors or something like that? Or are you still happy to take the market? Just wondering sort of how the discussions go along the lines of what you'd want to restart Ngungaju from that perspective? And then just any comments you might make on shareholder returns now that pricing is back? Dale Henderson: Yes. Happy New Year, Glyn. As it relates to the restart, we've reached out to market, engaging with market for offers. And within that, yes, we are considering our price floors. But of course, there's always other terms often come with these offers. So we're carefully thinking through potential offtake and we'll see how we go. But as I mentioned in my commentary, we're feeling very buoyed by that market engagement. So looking forward to updating the market in due course. As it relates to shareholder returns, obviously, yes, our capital management framework that sets out contemplates dividends based on certain thresholds. So that sits there ready to go. If the market continues to perform strongly, well, of course, we'll be applying distribution proceeds in accordance with that framework. Does that answer your question, Glyn? Glyn Lawcock: Yes. I guess it's really a decision for the Board next month if pricing stays where it is. It's a potential to recommence dividends, but won't know until then. Dale Henderson: That's right. You got it. Operator: Next question comes from Hugo Nicolaci from Goldman Sachs. Hugo Nicolaci: Date, Flavio, Brett, very Happy New Year with both pricing but also your fleet productivity and operational performance. First one on contracting. You've outlined that you've executed two offtake agreements during the quarter. I think you've previously had the option to elect across 3 offtakes for 2026. So I heard you might not get into specifics of which of those you've gone with, but can you maybe give us a little bit more color in terms of the magnitude of volumes and the outline price premium in those offtakes? Dale Henderson: Yes, sure. Happy New Year, Hugo. And as it relates to those two new offtakes, they're not material in the sense of the volumes involved. From memory, it was sort of circa 50,000 tonnes in both cases. And within those offtakes, we have designed on a few options at PLS' discretion to extend and push per the tonnes in their direction if we so choose to. Of course, that speaks to the strength of the market and PLS as a preferred supplier. So really happy about that. Yes. And as I say, not material by volume since we didn't disclose. We didn't do a market disclosure around each of those offtake awards. Hugo Nicolaci: Yes. No, that's helpful. So fair to assume that the other 3 options that you had for 2026, you let expire? Dale Henderson: From memory, we still have options available to us, and we've just taken the decision to integrate more options. So those 2 new offtakes to include bringing a new customer, building out the POSCO customers stable even further. Hugo Nicolaci: Great. Got it. And then if I can just pick up a little bit from Levi's question. Obviously, refreshing the timing of growth options, potentially more with the Feb results on that one. But just looking at the language around for those projects and your comments around sequencing, is it fair to say then that P2000 is now comfortably the priority just given that you've got studies and a number of approvals already in hand there. And in that study was previously due to sort of the end of calendar '26. Is there actually that much scope to bring it forward in terms of timing? Dale Henderson: Look all will be revealed once we've completed the reviews. But just by sort of additional context in the case of the Colina project, well, of course, we got the keys in March last year. So we've been -- had the opportunity to do more work, do more drilling and consider how can we maximize value further. So that, of course, informs potentially a new outlook for that project. And then as it relates to P2000 as per the original study was always a compelling investment, albeit a larger ticket price in terms of CapEx, the returns are very strong. So it's not necessarily a case of acceleration. It's more a case of sequencing and just thinking through what's the right next step as we think about growing with the market. So we'll provide more color on that in due course as we flagged, we'll update in the March quarter. Operator: Next, we have Mitch Ryan from Jefferies. Mitch Ryan: The first one is just -- you talked about elevated crusher wear rates during the quarter and the utilization of contractors. Can you put some more color around that? What are you seeing in the operations? Will you have to expand some of the capacity going forward? Can you just help us understand what's happening there? Brett McFadgen: Yes, Mitch, it's Brett here. Yes, look, we did see -- it's really the front end of the crushing circuit where it does all the heavy lifting. We just started to see a little bit of higher accelerated wear rates as we increase some of our contact ore. And right towards the end of the quarter, we mobilized a small mobile crushing circuit just to give us a bit of flexibility there so that we could keep up some crushed ore stocks rather than trying to have any type of plant outage or slowdown. So it was really just a risk mitigation in that one. Mitch Ryan: So you're planning to sort of keep processing an increasing amount of contact ore, will you need to keep that crushing capacity on site? Brett McFadgen: That gives us the flexibility if we do start to push up the contact ore. We're probably -- we've got the flexibility now to actually flex that up and down. And -- but we'll just try to take those decisions to make sure that we can make sure that the business is robust and it's a good risk mitigation, we'll do that. But we are developing some additional work through that front end of the crusher as you deal with liner wear and some of those packages. So it's too early to tell at this stage, but not a big issue by any means. Mitch Ryan: Okay. And then my last question just relates to strip ratio stepped up in the quarter. I thought they've been guided to sort of step down over the course of the remainder of the financial year. Is that just a function of where you are in the mine plan? Can you just give us a bit of commentary about what's happening with the strip ratios going forward? Brett McFadgen: Yes, a bit of where we are in the mine plan and just an opportunity to undertake some of the next cutback as well, whilst we've got good ore stocks, and we're using some of the stockpile contact ore. We just take an opportunity with our efficiencies that we're getting through the mine owner mining transition as well, just to take a bit of an opportunistic look at getting ahead of ourselves in one other cutbacks. Operator: Next we have Rahul Anand from Morgan Stanley. Rahul Anand: Dale and team, look, a lot of the operational questions have been asked. I wanted to come back to the pricing. Obviously, a very strong quarter for you. Can you perhaps dissect that performance into the 3 parts that contribute to it? Obviously, spot sales being one provisional pricing and then also the shipment timing, if you had to kind of help us understand which one of the sort of key drivers for that very strong result, especially versus your peers? And that might help us kind of thinking about the future pricing, and I'll come back with a follow-up. Dale Henderson: Sure. Rahul, so I can obviously expect to this in general terms. But the -- in terms of the quarter, which was there was some spot sales by proportion, pretty small. And the pricing and the realized prices in GPC through offtake sales very much as the majority as to what is the makeup of that pricing. And again, I'll talk in general terms. It's broadly spodumene-indexed and the timing is broadly as calculated close to the time of shipment or shortly thereafter, depending on which offtake. So you might recall that as we're working through a sort of a price decline environment that was a disadvantage to us in certain quarters, we were 1 or 2 percentage points below some of our competitors, depending on how they're going. Well, at this part of the cycle where the trend is reversed. This structure works in our favor as pricing rises to have pricing essentially finalized in the future which works through advantage in a rising market. So that's principally, I think the main cause of the delta between us and the competition, of course, not knowing what our competition is up to, I'm presuming here. Rahul Anand: Got it. Okay. And just for the follow-up, just coming back to the original question around Ngungaju restart. So obviously, you're having conversations with your downstream partners about floor pricing, et cetera. But given where the price is currently for spodumene, it's moved up very rapidly and created a genuinely large margin for you there. Is it fair to think along the lines that there is opportunities here to restart, even if you don't get those commitments? Or is that absolutely going to be the deal breaker if you're thinking about that restart and you don't get that floor pricing agreement in place? Dale Henderson: Yes. Good question, Rahul. I don't think it's a deal breaker. The presence of floor prices in the industry is few and far between in terms of what we've been able to observe. And historically, we haven't placed reliance on full prices, but we'll see how we go. So the short answer is no. I don't think the restart decision will necessarily be contingent on that requirement. But ultimately, [indiscernible]. Operator: Next, we have Austin Yun from Macquarie. Austin Yun: Most of the questions have been asked. Just a quick one on your comments about the upstream growth portfolio given you're doing the revaluation, can please confirm, are you referring to the internal opportunities you're having already? Or this is more kind of outside of the Pilbara Minerals in an inorganic way to further boost and beef up your upstream portfolio? Dale Henderson: Austin, the comments around Australia about organic growth profile of Pilgangoora. Nothing, nothing about inorganic. Operator: Next, we have Matthew Frydman from MST Financials. Matthew Frydman: Sure. Date and team, can I please extend Rahul's question on the potential Ngungaju restart. We're just wondering your thoughts on whether the resilience of Ngungaju through the cycle has changed with the improvements you've made to the asset or could make to the asset. You mentioned the crusher upgrade and you've talked previously about other improvements you could make before turning it on. I guess, but also what you've done across the site in terms of owner operations or mineralogy understanding and adjusting the mine plan collectively, are all of those things enough to ensure that if you do turn Ngungaju back on, you can be confident that it's going to underpin a return and you don't need to turn it off again through the cycle even if you don't have a price floor in your offtake or is it always going to be a bit of a swing asset and the Board is really going to have to take a view on, I guess, the market and the timing of bringing that asset back into the current market? Dale Henderson: Yes, sure. Thanks, Matthew. To address that, I might sort of go big picture and then ladder down a little bit. So as we think about the overall Pilgangoora operation on a multiyear horizon, we've, of course, been working hard to drive down the cost structurally, and we're pleased to report this last -- the quarter results we released today sort of speak to that disciplined investment over time. So obviously, all the owner-operated mining or the efficiencies there, the ore sorting at Pilgan, progressive power installations, the trend to more owner operate across the board, et cetera, et cetera, all of that sort of impounded into the lower cost we're enjoying. But then as we step down to the processing plant level, as it relates to Ngungaju, that too has been on a journey of investment and driving costs down. But in the main, I think we're pretty much at the back of the optimization curve. You might recall that over the years, we did a full sort of build-out of a new float circuit, a bunch of refurbishment, adding in a whole bunch of other tech, but we're basically maxed out that asset and the main -- given the bones of it or where they were in terms of Altura built. So what that all means is the Ngungaju asset on a processing basis is higher cost than the Pilgangoora processing plant. So a bit of a long answer, but that's why we turned it off. So we went to the P850 model as there was a chance to preserve cash in a particularly low-priced environment. Now to your question of what's the probability that it's turned on and sustained on is, of course, a function of market pricing. Now when you look in the rearview mirror and as we've discussed historically, pricing can sometimes be irrational and disconnect from fundamentals for the lithium market. And that was certainly our view as we look back as recent 6 months, where we saw pricing down around the high 500, sort of 600, that was deep into the cost curve. And most of the industry was losing money. That didn't make sense. So as we look forward to that environment occur again, who knows would be the answer. If the lithium market remains volatile and hence, we continue to remind the market of that picture. But volatility is not always bad and it cuts both ways. And this is really where the flexibility of our operating platform comes to bear. And yes, we like the idea of potentially bring that on, making hay while the sun shines and then look at that sustained well, that will be fantastic for PLS and our shareholders. We'll see what happens. Matthew Frydman: Okay. Detailed answer to obviously, a pretty complex question. Can I maybe just quickly one for maybe for Flavio and happy to take it offline if it's easier. But if I just look at the revenue reported in the December quarter $373 million, and I take you sales volume, your reported realized price and the exchange rate for the quarter, I guess to more like $410 million. So can you explain the difference? I suspect it's to do with how you recognize revenue for some of those pay adjustments. But yes, there's a short answer. So that's appreciated. Flavio Garofalo: Yes. Matthew, it's spot on. It's also due to timing differences and movements within debtors. But we can take it offline. I can walk you through that in detail. Operator: Next, we have Kaan Peker from RBC. Kaan Peker: Just continuing on the Ngungaju restart, sort of understand how the assets evolved over the course of the last couple of years. But is there a question around pricing stability? Or is there a requirement around pricing stability or offtake commitments that need to be seen before a restart? Just potentially avoiding adding supply into a policy-driven market. And then secondly, I'll circle back with one on the assets. Dale Henderson: I think I got most of that. In terms of pricing stability, yes, that's sort of central to the various dimensions we need to weigh up around the restart decision. And that's, of course, what we're thinking through deeply at this time. And ultimately, we'll be recommending a path with the Board. So we're still very much working through that thinking. But central to that is what do we think the strength of the market is. Of course, with current pricing today, that asset, the Ngungaju asset will make a very, very strong margins. I think we're all very comfortable with that. The question is, yes, to what sort of strength of confidence do we see it persisting in the future. So we're weighing that up. But I have to say, in terms of all of the indicators I've got access to, we are very positively disposed to the short-term outlook. Everything is looking very, very strong on sort of a 6- to 9-month basis. Obviously, the further that you look out, it gets harder to take a view. But in terms of what I'm seeing to the computations I'm having across our customer set and including some of the major chemicals groups whom I met face-to-face with as recent as the weekend, the near-term outlook is looking very positive, but we'll see how we go. Kaan Peker: Just maybe also adding on to that some of the softer elements sort of hiring and when remobilizing, how is that being considered? Brett McFadgen: Yes, Kaan, Brett here. It's a great question. When we decided to put the Ngungaju asset into care and maintenance, we returned quite a number of our key staff so that we would -- we redeployed them into the P1000 operation into various roles over there. So we've got some key people that we can place back straight into that asset if we do get the go ahead to restart. So that's a great ability to have that experience there. And then we would refill the rest of the remaining roles with just industry and go out to recruitment. And yes, we have a good training program at site as well. So yes, I think the timing of that would be part of the -- as we've said in the 4 months ramp up. Dale Henderson: We're not anticipating, sorry, Kaan, just to add, we're not anticipating any issues in that regard in terms of total personnel to recruit. The volumes are not that high. And just if we can blow our own trumpet, the turnover rates are at our lowest level ever in history of the company. So we like to think that speaks to the company we've got and the culture we've got and we think we have -- it's a work in progress, but we think we've built a good reputation for ourselves, and we're not expecting any challenges as we go for a recruitment drive. Kaan Peker: Understood. And second one on Pilgan. Just understand that more contact was being fed. Do you have a better sense on sort of the upper bounds on using contact ore now before recoveries and costs start to degrade meaningfully. It sounds like possibly happening now given the added maintenance around wear and tear and contract crushing. Is that fair to assume? Brett McFadgen: Yes. A lot of the work that we've done through the optimization of our ore sorting has been around what are our limits. We understand the ore mineralogy really well. So now it's really just getting that balance right of making sure that our costs are in the mining and the processing are giving us the best outcome financially and also the recovery is one of the variables is contact ore, but I would say that the work that we've done with P1000 and our operating teams on site just gives us that robustness around that recovery improvement. And really understanding where we go with our contact ore volume percentage as well. And that's built on the years of test work that we've done to understand the mineralogy and the plant performance. So I think it really kind of reinforces that life of mine recovery assumptions as well. Operator: Next, we have David Feng from CICC. Tingshuai Feng: I have some follow-up questions on the restart Ngungaju. Just wish to have some color on the restart costs if possible? Like should we expect any kind of extra CapEx to be involved? Brett McFadgen: Yes. David, there is -- we've done our refurbishment work, which was fairly minor and included in our capital outlook. So there's not a large capital outlay to restart Ngungaju. It's mainly in the cost curve, as we talked to before, in recruitment and ramp-up and some maintenance getting ready out of care and maintenance. But yes, nothing much in the capital front. Tingshuai Feng: Before being put on care and maintenance, it should be around like 20% to 25% higher than Pilgan, so shall we expect this cost number to be subject to any potential changes? Like how would the recovery be affected? Dale Henderson: David, I might have a crack at that and Brett can weigh in. Yes, in terms of outputs from Ngungaju, the best guide would be to go back to prior to when we put in care of maintenance. So that issue has been such the recoveries, volumes and you take a view of unit costs at the aggregate level. And -- but we don't split it out, we don't report plant by plant, but I'd point you to that to get a guide. As we think about our confidence around being able to produce those outputs again, my view is very high. We've got complete confidence in Brett and the team. It sets you probably the new floor. Brett? Brett McFadgen: Yes. Yes, absolutely. And P1000 and the ore mineralogy work that we've been doing with is directly applicable over to Ngungaju as well. So I have confidence, as we have said before, we've got key players from that operation within our operation to go back in there, and we're advancing as we go. So I've got confidence that we'll -- if we get the go ahead and have all the indicators are there to give us the confidence then we'll bring that plant on and continue on from where we were. Operator: There's no further questions from the audio side. I will now pass to James Fuller. James Fuller: Thanks, Maggie. Just a few questions from the webcast. Dale, based on your leadership and the disciplined approach to capital allocation, where do you see PLS in 10 years' time? Dale Henderson: That's a great question. I think my hope for PLS and the vision that we have, the team is rallied behind us, our aim is to be a material player in this industry. We want to be a mainstay of the industry, and that is absolutely within our grasp care of the organic growth opportunities we have. By a reckoning, if P2000 was built today, we would be the largest lithium producer globally. But further, of course, we've got the Colina asset plus downstream initiatives. And on a 10-year horizon, you'd have to expect PLS to carry on and do more leveraging the unique skill sets, know how supply chain relationships were built. So we've got a very motivated energetic team. We're very focused on making the most of this incredible growth market. So I think 10 years from today, PLS will be an impressive company. We're set up to get there. James Fuller: Any comments about gaining share sales the other day. Dale Henderson: So I have spoken to Ganfeng. They explained to me it's cash management is what they've chosen to do there. I understand they sold 1% of their holding, which must make them about 4% or thereabouts by reckoning. So certainly, no concerns at all with that share sale. And as it relates to our relationship, the various partnering activities we're doing together, it's all on the relationship and fantastic standing. So certainly no concerns there. James Fuller: Thank you, Dale. Is PLS seeing operational productivity gains and cost savings from the use of AI? Dale Henderson: Brett, do you want to? Brett McFadgen: Yes. Yes, early days as we go into the AI, but the AI is giving us optionality to mine through a lot of the data and look for some of the trends. So we're certainly on that journey. And yes, some of the technology we put in with P1000 will give us some good insights once we can get the AI to look at that on a deeper level, but early days as it is with a number of operations. James Fuller: Do you see the growth in BESS connected to increasing energy demand of new technologies, including AI and quantum? Dale Henderson: Short answer is yes. I mean, the BESS growth rates have been very impressive. But the reasons behind that growth rate are many, and it does include data centers and, of course, data centers being built for AI and the necessity for energy stability. That's a key sub-growth segment of BESS. But separate to that, is it just makes sense to -- for grid stability and lower cost energy, in particular, when it's interconnected with solar and other renewables and solar growth rates continue to be phenomenal. globally. So adding depth to those systems is abundantly sensible. So this is all part of what's fueling BESS growth rates globally. James Fuller: Okay. How is the midstream demonstration plant being received within the sector? Is there any interest from other producers to use the technology? Dale Henderson: So as it relates to the demonstration fine concept in terms of a midstream product, yes, we get plenty of inbound interest around that concept. And we are engaging with market around potential buyers of the product from the downstream plant if and when we're going to the next phase of that project as it relates to the actual processing technology itself. The short answer is yes. There's other competitors who are very interested in the tech and that would be wise to be interested and we're open for that. Our JV with Calix contemplates the option of allowing others. Ultimately PLS in combination with Calix will be a benefit of the proliferation of that tech, if that's where it ends up and that could potentially be a future revenue stream. James Fuller: If you were to go ahead with P2000 and Colina, are you concerned about bringing on excess supply that will affect the process [indiscernible]? Dale Henderson: The short answer is no. As you consider the expected growth rates of demand for the industry, and project that forward, you need P2000, you need Colina and you need more assets to come online to serve that growth demand. So ultimately, we see both those assets being built in serving the market. As to the probability they both happen at the same time, I think that's pretty low. And the reason they have been more driven around what's the optimum development pathway for each of those assets, respectively, to maximize value. Potentially for Brazil, we might look to do some more drilling and grow the asset over time, but we'll see. We'll come back and provide more color on this later. James Fuller: One for Flavio. What does the $38 million in other investment activities include? Flavio Garofalo: Yes, that includes the equity contribution to the POSCO joint venture, as outlined in the call earlier. James Fuller: Okay. Another one, will there be a dividend declared in the foreseeable future? Flavio Garofalo: I can take that. So again, that was covered by Glyn's question. It's a matter obviously for the Board, and it's something that we'll review in the second half of the financial year. James Fuller: Okay. Final question from online. Tesla appeared to have eliminated a couple of processes towards batch manufacturing. Does Tesla development alter PLS' investment plans for value-add products? Dale Henderson: Not quite clear. Not clear on that. James Fuller: Okay. We're not clear on what that refers to. So we'll leave that one. That's it for online questions. Dale Henderson: Great. Thank you, James. Thank you, everyone, for dialing in for our December quarterly results call. We look forward to coming back to you with the half year in a couple of weeks. Thank you all for your time. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Thank you for standing by. My name is Jael, and I will be your conference operator today. At this time, I would like to welcome everyone to the Schneider National, Inc. Fourth Quarter 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to withdraw your question, simply press 1 again. I would now like to turn the conference over to Christyne McGarvey, Vice President of Investor Relations. You may begin. Christyne McGarvey: Thank you, operator, and good morning, everyone. Joining me on the call today are Mark Rourke, President and Chief Executive Officer; Darrell Campbell, Executive Vice President and Chief Financial Officer; and Jim Filter, Executive Vice President and Group President of Transportation and Logistics. Earlier today, the company issued an earnings press release. This release and an investor presentation are available on the Investor section of our website at schneider.com. Our call will include remarks about future expectations, forecast plans, and prospects for Schneider National, Inc. These constitute forward-looking statements for the purpose of the safe harbor provisions under applicable federal securities laws. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. The company urges investors to review the risks and uncertainties discussed in our SEC filings, including, but not limited to, our most recent annual report on Form 10-Ks and those risks identified in today's earnings release. All forward-looking statements are made as of the date of this call, and Schneider National, Inc. disclaims any duty to update such statements except as required by law. In addition, pursuant to Regulation G, reconciliation of any non-GAAP financial measures referenced during today's call can be found in our earnings release and investor presentation, which includes reconciliations to the most directly comparable GAAP measures. Now I'd like to turn over the call to our CEO, Mark Rourke. Mark Rourke: Thank you, Christyne. Hello, everyone, and thank you for joining the Schneider National, Inc. call today. I want to begin by acknowledging that the fourth quarter results fell short of our expectations. When we provided our update last quarter, October results and market conditions were supportive of finishing 2025 at approximately $0.70 of earnings per share. However, November and much of December were materially more challenged than our guidance had contemplated, reflecting a very truncated peak season and poor weather conditions throughout the Midwest. We saw momentum as we exited the year, which we believe is a direct result of supply attrition in our industry in the last several months. We believe we are in the early innings of normalizing market conditions, in part due to the various regulatory actions being taken. Importantly, these actions are not only driving capacity to exit the market at an accelerated rate, but the ability to backfill new entrants is also increasingly diminished. We expect the full impact will likely be measured in quarters, not months. Still, the last several years have proved to be a challenging backdrop, and we are not satisfied with our results. During this downturn, we made strides in lowering our cost to serve in network, changes that are structural and will improve our operating leverage going forward. At the same time, we have grown our dedicated offerings to nearly 70% of our fleet, increasing the durability and resilience of our truckload segment. We've created true differentiation and value in the marketplace in our intermodal offering and scaled our flexible asset-light tech-enabled solutions. All of which have been supplemented with our accretive acquisitions. We recognize that improving market conditions is needed for the full benefit of these investments to be evident, but we believe we will exit this down cycle more ready than ever to meet a market correction. We are not simply waiting for improved cycle dynamics. We enter 2026 with more conviction in the importance of continuing to execute our strategic initiatives to drive structural improvement in our business. We are carrying momentum from our cost savings program, including ramping synergies in our acquired companies, leading intermodal growth, including the recent launch of our intermodal fast track service, heavy dedicated start-up activity, and network earnings improvement into this year. I will provide more commentary on our outlook and expectations for 2026, but first, I want to hand the call over to Darrell, who will provide a more comprehensive overview of fourth-quarter results. Darrell? Darrell Campbell: Thank you, Mark, and good afternoon, everyone. I'll review our enterprise and segment financial results for the fourth quarter, along with our year-to-date cash flow trends and provide a capital allocation update. Summaries of our financial results and guidance can be found on pages 21 to 26 of our investor presentation available on our Investor Relations website. In the fourth quarter, revenues excluding fuel surcharge were $1.3 billion, up 4% year over year. Our fourth-quarter adjusted income from operations was $38 million, a decline of 15% compared to a year ago. Adjusted diluted earnings per share for the fourth quarter was $0.13, down from $0.20 a year ago. As Mark referenced, fourth-quarter results reflect more challenging market conditions than we had previously anticipated in our guidance. October saw steady demand with elements of seasonality, though more subdued than is typical. Our guidance had assumed that trend would persist through the balance of the year, but demand turned sluggish in November, affecting minimal peak activity as shippers worked down inventory, which created a significant volume shortfall versus our expectations. This was exacerbated by the poor weather in the Midwest that brought volume and caused headwinds. However, the sharp reaction of spot rates to the weather disruption demonstrates how the excess of capacity in recent months has brought the market closer into balance. Volumes remained fairly muted until December when shippers began to feel an inventory drawdown and more actively sought out additional capacity as routing guides became stressed. This enabled us to realize some premium project business, still, the strength exiting the year was compressed and not enough to offset the temporary demand that characterized much of the quarter. These more challenged market conditions were also compounded by extended and unplanned auto production shutdowns with certain customers, spiking third-party capacity costs in logistics, and heightened healthcare costs. Market dynamics in the quarter have masked our continued progress on our strategic efforts, including those related to improving asset efficiency and lowering our cost to serve. We achieved our targeted $400 million of cost savings, including synergies from the common systems acquisition. Our momentum will continue in 2026, with an additional $40 million of cost savings, which Mark will detail in his remarks. From a segment perspective, truckload revenue, excluding fuel surcharge, was $610 million in the fourth quarter, up 9% year over year. Truckload operating income was $23 million, a 16% increase year over year. Operating ratio was 96.2%, an improvement of 30 basis points compared to last year. The impact of the market was most evident in the network, which remained unprofitable. Restoring profitability in the network remains a key focus, and the fourth quarter did see modest year-over-year improvement as our ongoing cost and productivity actions at least partially offset softer conditions and elevated healthcare costs. These actions include efforts to improve equipment ratios, rationalize non-driver headcounts, and increase bill miles per tractor. As market conditions improved, we did see momentum in December in both productivity and realized price. Dedicated operating income grew year over year, benefiting from an additional two months of Cowen, versus 2024. While volumes were not immune to market conditions, we also saw adverse impact from unplanned auto production shutdowns with select customers. After two quarters of elevated churn, this moderated in the fourth quarter as expected. Startups also picked up as new business wins remain elevated versus the first half of the year, and we finished 2025 with approximately 950 trucks sold. Our fleet count was roughly flat quarter over quarter, as productivity enabled us to utilize our existing equipment for implementations. Armor startup activity drove greater than expected headwinds to track the productivity and costs, particularly in driver recruiting. Intermodal revenues excluding fuel surcharge were $268 million for the fourth quarter, a 3% decline year over year. This reflected volume growth of 3%, which was more than offset by mix-related declines in revenue per order. Despite last year's tariff-related pull forward creating a more difficult comp, volumes grew for the seventh quarter in a row. We also continue to outperform the broader market strength led by Mexico, which grew over 50% year over year. However, demand slowed in December, reflecting an earlier end to peak season, after some additional pull forward in the third quarter. Intermodal operating income was $18 million, a 5% increase compared to the same period last year, driven by solid conversion of our volume growth and the benefit of our cost initiatives, which drove operating ratio to 93.3% or a 50 basis points improvement versus last year. Logistics revenue, excluding fuel surcharge, totaled $329 million in the fourth quarter, up 2% from the same period a year ago, driven by the Cowen acquisition and an increase in gross revenue per order offsetting ongoing volume pressure. Logistics income from operations was $3 million, down from $9 million last year, while operating ratio was 99.2%, an increase of 180 basis points. While gross revenue benefited from the spike in spot rates in December, we also saw a disproportionate spike in our purchased transportation, especially in certain geographies such as California, which we believe was exacerbated by regulatory pressure on capacity. This resulted in significant compression in the net revenue per order on our contract-rated business, including power only. Even as we were able to leverage our spot exposure to accept and serve the highest spot-rated business. Some project-related business materialized late in the quarter, but this only partially offset the net revenue margin compression. Turning to our balance sheet and capital allocation. As of December 31, 2025, we had $403 million in debt and lease obligations and $202 million of cash and cash equivalents. Our net debt leverage was 0.3 times at the end of the quarter, an improvement from 0.5 times at the end of the third quarter because of the pay down of $120 million in debt. This also marks continued deleveraging from 0.7 times at the end of 2024, enabled by strong cash flow generation even in a difficult backdrop as we prioritize capital discipline. The strength of our balance sheet gives us ample dry powder to complete additional accretive acquisitions if the right target becomes available while still maintaining an investment-grade profile. In the fourth quarter, we paid $17 million in dividends and $67 million for the year. During the quarter, we opportunistically repurchased approximately 284,000 shares. On January 26, 2026, the board of directors authorized a new stock repurchase program under which $150 million of the company's outstanding common stock may be acquired over the next three years. Under the previous program, we repurchased 4.4 million shares for $110 million. Net CapEx in 2025 was $289 million compared to our guidance of approximately $300 million, primarily due to the timing of certain payments. Free cash flow improved 14% year over year. We expect net CapEx for 2026 to be in the range of $400 million to $450 million. This primarily encompasses the replacement CapEx needed to protect our Asia fleet. We head into 2026 with a continued focus on growing earnings by prioritizing asset efficiency gains over outright equipment growth. Our adjusted earnings per share guidance for the full year 2026 is $0.70 to $1, which assumes an effective tax rate of approximately 24%. We expect to see supply-driven market improvement and the benefits of our incremental $40 million in cost savings built through 2026. As a result, we anticipate a stronger second half of the year. However, we remain in an environment that's characterized by both inflationary cost pressure and demand uncertainty. The midpoint of our guidance assumes demand is consistent with what we saw for 2025, with elements of seasonality but no acceleration. Moving from the low end to the high end of our guide assumes varying degrees of demand, with the low end assuming modest softening, especially in the consumer sector, and the high end reflecting a slight overall pickup in economic activity. I will now turn the call back to Mark to share more perspective on 2026 expectations and outlook. Mark Rourke: Thank you, Darrell. I want to start with my perspective on the freight market as we move into 2026. As outlined earlier, results were marked by conditions that were softer than expected for much of the quarter, though we did experience material tightening in December. The volume follow-through from our customers came primarily toward the very tail end of the quarter. The capacity crunch at year-end caused some of our most transactional customers to push freight into the early days of January. As the month progressed, conditions reverted to more normal seasonal patterns with spot rates moderating from recent highs. The end of the month also saw severe weather conditions across much of the country, which caused disruption to our operations. However, customers are also feeling the impact and have large backlogs. We are beginning to see premium opportunities to help them work through the disruption. As we look forward, the industry is already feeling the impact of supply rationalization related to regulatory actions in areas such as non-domiciled CDLs, English language proficiency, and driver school certifications. These actions are both removing capacity outright and, importantly, restricting the funnel of new entrants. As a result, we expect capacity attrition to continue to ramp, and we continue to believe the impact is likely to be greater than what we saw from the electronic logging mandate in 2017. From here, demand is the largest swing factor in how the cycle evolves. The trajectory of consumer spending, impacts from the big beautiful bill, and interest rate policy all have the potential to significantly influence the timing and magnitude of improvement in market conditions. We closed 2025 with contract price renewals on our expected ranges. We are far from finished, and more progress needs to be made on rate restoration across our service offerings. We are very early in the freight allocation season, but it is clear that customers are increasingly cognizant of the growing supply side risk. While the network is a smaller portion of our business today than our history, our spot rate exposure is also at historical highs, which will enable us to quickly capitalize when conditions improve. Our spot exposure will stay elevated in the near term and potentially even beyond 2026 if we feel rates have continued upside amid a significant shift in capacity. Beyond network, we also expect improved cycle dynamics to drive outperformance in rate and volume in our traditional brokerage, along with backhaul gains and dedicated, stronger over-the-road conversion in the model. We look forward to transitioning to a more supportive market. We also enter 2026 equally as eager to build on the progress we have made in our efforts to drive structural improvement in the business. We will continue to drive growth through differentiation and maintain a disciplined focus on doing more with less. Beginning with our strategic growth initiatives in truckload, the network remains a key part of our service offering, but we have made significant progress over the last several years to pivot the portfolio to more of a dedicated configuration. While we are not targeting a specific mix, we will continue to lean into dedicated earnings growth, particularly with specialty equipment solutions, which is now a majority of our pipeline. We are seeing strength in food and beverage, home improvement, and automotive verticals. Our specialty configurations typically have unique equipment or value-added actions by the driver, or often both, that are not easily replicated, creating durability in the business. We are seeing strong momentum in building the early stages of our pipeline, creating a wide funnel to support continued growth even as new implementations ramped up. In intermodal, while we will not be immune to market conditions, we believe we can continue to drive share gains by leaning into our most differentiated lanes. A direct reflection of our ability to drive win-wins for our customers and for Schneider National, Inc. We expect Mexico to continue its growth leadership. The launch of our Fast Track offering, where our service reliability is exceptional, will drive incremental growth, and we are already seeing customer interest and conversion. Despite the strong growth in 2025, we see a long runway for over-the-road conversion amid more greenfield market opportunities. This includes opportunities from the changing rail landscape where we remain engaged with both Eastern railroads. Finally, we will continue to leverage our multimodal offering to meet our customer needs however they manifest. In 2026, we will optimize volumes between our network and logistics offering based upon market conditions. In the near term, more volumes will flow toward the network. As conditions strengthen, logistics will enable us to meet increased demand and scale revenue while maximizing network profitability. As we continue to execute our growth plans, we will remain disciplined in our approach, focusing on growing earnings through operational efficiency regardless of market backdrop. As Darrell mentioned, we achieved our 2025 cost savings program. This was comprised of Cowen synergies, which continued to ramp in the fourth quarter, and broader productivity-led cost reductions. We expect these to be structural even as we enter a more robust market. We have reduced our non-driver headcount by 7%, which was primarily achieved in the second half of the year, bringing momentum into 2026. In 2026, we expect to deliver another $40 million in cost savings as we continue to execute our ongoing initiatives, including incremental benefits from reductions in headcount, further tightening of equipment ratios, and additional insourcing of third-party spend, including maintenance and drayage expenses. We also continue to roll out AgenTik AI throughout all our service offerings in a variety of support functions. We are already seeing enthusiastic adoption across the enterprise and early payoffs in improving service levels and in lowering our cost to serve. This discipline will also be reflected in our capital spending, as we prioritize growing earnings through asset productivity. In Intermodal, even with our market-leading growth in 2025, we believe we can grow up to 20% to 25% without having to add containers. We may add some dray capacity over time, but this will enable us to insource even more of our drayage capacity, improving productivity, and reducing third-party spend. Within dedicated, we believe we can accommodate much of our growth plans to increase productivity and by reallocating resources away from lower-performing accounts. We have identified our lowest returning assets, and the actions needed to improve them. In many instances, we will work with our customers to drive a win-win, but it is where we are not. The strength of our new business wins enables us to put our assets to better and higher use. These actions are already underway, and we expect to have the majority implemented by the second quarter of the year. Taken together, as we noted earlier, we believe the full course of supply rationalization is likely to occur over several quarters and through more than one bid cycle. We believe 2026 will mark only the beginning of normalization and cyclical recovery but not in its full breadth. Realizing that full impact, as well as the continued execution of our strategy and a more sustained demand inflection, marks a clear path to stronger mid-cycle returns beyond 2026. Finally, as you likely saw yesterday, we announced leadership changes. Beginning July 1, I will assume the role of Executive Chairman of the Board of Directors. And I am pleased Jim Filter will be appointed Schneider National, Inc.'s next President and Chief Executive Officer. I am confident in Jim's ability to position the company for its next phase of growth as he brings nearly three decades of Schneider National, Inc. experience and deep operational expertise. He's been integral in executing our commercial and operational strategies. And now I'd like to turn the call over to Jim for his remarks. Jim? Jim Filter: Thank you, Mark, and thank you to the entire board of directors for their trust and support. I am honored to take the helm at Schneider National, Inc. Despite a challenging market in 2025, our actions throughout the year strengthened our foundation and positioned us to benefit as conditions continue to improve. We are already seeing early signs of improving market conditions as supply rationalization is underway. We remain disciplined, focused, and well-aligned to capture the upside of a recovering cycle. With a strong balance sheet, a resilient portfolio, and momentum in our strategic initiatives, we are optimistic about the opportunities ahead and confident in our ability to drive earnings and returns higher. As I look forward to stepping into this role, I'm focused on leading Schneider National, Inc. through this next chapter and driving long-term value for our shareholders. Thank you, Jim. And with that, we will open it up for your questions. Operator: Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press 1 again. If you're called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. And we do request for today's session that you please limit yourself to one question and one follow-up. Your first question comes from the line of Ravi Shanker of Morgan Stanley. Your line is open. Ravi Shanker: Great. Thanks, everyone. A CEO transition at Schneider National, Inc. is not something that happens very often. So I just want to recognize the moment. Mark and Jim, congratulations on the next phases of your career. Maybe, over the questions. I think, Mark, you gave us a sense of what you thought of 2026 so far. Just in your guide, kind of what bid season is kind of priced in the midpoint and high end? I think you said expected ranges of pricing. What does that look like? And also, I think, Darrell, you walked through some of the demand side moving parts in the guide. What are the supply side assumptions that underpin your guide? Mark Rourke: Thank you, Ravi. This is Mark. So maybe we'll just tackle the guide a little bit relative to, I think, your first part of that was price. As we came out of 2025, and really, if you break across the portfolio in our network business, even in a less constructive, in my view, environment, we were able to get mid to low single-digit contract renewals. Even if that meant placing some additional capacity into the spot market for the short term. And so we would expect that we're going to continue to lean into price because price recovery is part of what needs to occur to get back to our mid-cycle earnings targets. We also would expect that increasingly, we need to see some of that in the truckload space as we normally do before we start to see that transpire in intermodal. And what I'm really proud about the intermodal group is that we're growing volumes even with different mixes relative to the revenue per order, a little higher backhaul, a little shorter length of haul, and we're still able to translate that additional volume into incremental margins into the business. And so I think we have a solid path to continue to lead intermodal growth. Focusing on our key differentiation markets, and remain very bullish there. But maybe again, a little bit more time before we see price catch up to what we expect in truckload. Darrell Campbell: And then, Ravi, as it relates to the supply side, so, you know, pretty wide range, which, you know, reflects the uncertainty in the market, but in all, you know, points in our guidance, we're expecting supply to continue to exit. There's a lot of momentum as it relates to regulatory enforcement that's driving supply out. We've seen that in 2025 or the next expect that to, you know, continue into 2026. So one of our baseline assumptions is that, you know, capacity will continue to exit. Now the degree at which and the pace at which that supply exits, you know, will determine how we move along, you know, from the low end to the high end of the range. From a demand standpoint, the low end of the range at $0.70, just as a reminder, we finished the year at $0.63 of EPS. You know, there's an admission that there is some conservatism that's embedded in $0.70. We're assuming that demand conditions at $0.70 are, you know, comparable to what we saw towards the end of 2025, the second half. So softer market conditions, but as we kind of move up the range, we expect, you know, a more constructive demand picture. As it relates to the midpoint of the range, we're focused on a lot of things that are within our control. So all the initiatives that Mark outlined in terms of cost, you know, we completed $40 million of cost savings in 2025. We expect to continue and, you know, sign up for another $40 million in 2026. So that's embedded within the midpoint of our range. We're also focused on going where we have differentiation intermodal, specialty dedicated. So the midpoint assumes that. We also face some headwinds towards the end of the year. You know, the unplanned auto shutdowns, the heightened healthcare costs, we don't expect any of those to recur. So that's all built into our midpoint assumptions. Operator: Very good. Thank you. Next question comes from the line of Jonathan Chappell of Evercore ISI. Your line is open. Jonathan Chappell: Thank you. Good afternoon. Mark, I wanted to talk about the dedicated revenue per truck per week for a second. If we look at the sequential move from 3Q to 4Q, it looks like it's the lightest it had been in at least ten years, and minus almost 4% year over year. So it just seemed kind of counter-seasonal, and I know our models certainly don't line up with yours all the time, but it looks like the biggest area of the shortfall in 4Q EPS. So, I know there are start-up costs that hit OR, but maybe help explain the dedicated revenue per truck per week and why that may have lagged so much in 4Q. Mark Rourke: Sure, Jonathan. Thank you for the question. One of the things that are embedded in there is the automotive shutdowns that occurred because of componentry issues, namely around chips, which really affected Dedicated specifically, but also some of our intermodal business coming in and out of Mexico. And so that was unplanned. That was not forecasted well, and our OEMs had to adapt and adjust to that. And that predominantly hit in the month of November, but it hit most of the month. So, unfortunately, that was most prominent in our metrics within dedicated. And, also, as we have three large start-ups, which we anticipated in our guidance relative to the fourth quarter. We have some additional cost issues there relative to capacity and some of the difficulty getting all of that sourced, which also had some impact. So those were the items. Again, we don't think those are long-term in nature. You know, we always have levels of start-up activity, particularly when you sell 950 units throughout a year. But we have three larger start-ups in the fourth quarter. Darrell Campbell: And this is Darrell. One other thing I'd add is the healthcare costs that we saw that were heightened in the fourth quarter, most of that was in truckload, and the majority of the truckload was in dedicated revenue of the truck. Jonathan Chappell: Thank you. Just as a follow-up, going back to that $40 million of costs, they're targeting again this year, how much of that is volume/revenue dependent? Because if we just add $40 million kind of the adjusted net income from '25, you get pretty close to the midpoint of the '26 guide. So is that, like, $40 million if the fundamentals of the business kind of track as you're expecting and maybe something less than that if we're closer to the low end of the range from a volume or a pricing perspective? Darrell Campbell: Yeah. So I think as I mentioned, this is Darrell. Sorry. As I mentioned in the prepared remarks, the $40 million of cost savings, a lot of it is productivity-based. So as volume increases, you know, some of those will be more evident, especially because they're structural. So as volume returns, the costs aren't going to return at the same pace. There is an acknowledgment at least that we're still in an inflationary environment, so while we do expect that the cost savings will, you know, offset much of that, it won't offset all of the inflationary pressures. That's another factor to consider. So I'm not sure if that answers the question. Jonathan Chappell: Yep. No. That's helpful. Thanks, Darrell. Thank you, Mark. Darrell Campbell: Thank you, Jonathan. Operator: Your next question comes from the line of Brian Ossenbeck of JPMorgan. Your line is open. Brian Ossenbeck: Hey, good afternoon. Thanks for taking the questions. Now that the merger application's been filed and, I guess, will be refiled, I wanted to see if you could give some comments, see if you had some time to digest what maybe some of the domestic intermodal commentary within there might mean for Schneider National, Inc. and how you're kind of viewing that. Also, one of your peers filed for Chapter 11. So maybe just some broader comments about the lay of the land and domestic intermodal with those two big factors out there. Jim Filter: Yeah, Brian. Thanks. This is Jim. So, obviously, all the way through this process, we've been engaged in collaborating with each one of the rails and especially the two Eastern providers. We're very happy with our current provider in the East, but, you know, we're continuing to understand the information as it emerges. There really wasn't any significant new information to submission, but everything that has come out just reinforces our confidence in that intermodal, our intermodal team, their ability to assess new services, help us navigate through any opportunities that emerge. And in terms of the overall competitive dynamic in intermodal, you know, we feel very good about our position. We've had seven quarters in a row where we've been able to grow, and we're growing into areas of differentiation. And there's a lot of those. So, you know, you think about in Mexico, we're delivering service that's one to three days faster, 99.98% claims free. It's really that's a big advantage, not just to other intermodal carriers, but over the road as well. And now we're leveraging some of our differentiation with Fast Track with shippers that have really high service expectations. So, you know, we feel really good relative to all of our competitors. And so, you know, we're not immune to market conditions, but I feel like we continue to outperform in our intermodal business. Brian Ossenbeck: Alright. Thanks, Jim. Darrell, maybe a quick follow-up on CapEx. It looks like it's going up a reasonably decent amount next year. I'm sure they're subject to market conditions perhaps, but you can give a little bit more color in terms of what's in there. It sounded like maybe some of that was equipment. Is that for purely replacement, or is there some growth in there? Darrell Campbell: Yeah. Sure. Good question. So, yeah, as it relates to CapEx, the past several quarters, we've been talking about just focusing on growing earnings as opposed to truck count, and we've seen that across, you know, dedicated network intermodal across the board. We're focused on doing more with less and dedicated, for example, where reallocating equipment to, you know, higher-yielding business. So our CapEx plan for 2026 is mostly replacement-based, just given our focus on keeping our fleet count flat. So we're protecting our Asia fleet. And primarily all of the CapEx is replacement. Mark Rourke: Brian, we also had a little less CapEx this year as we were looking for tariff clarity. That has emerged and clear, and we also had a little bit of timing in the fourth quarter to the first quarter just based upon availability of one facility and some equipment. So that's really the step up, and it's all, to Darrell's point, firstly, in the replacement cycle. Brian Ossenbeck: Okay. Thank you. And congrats, Mark and Jim. Mark Rourke: Thank you. Thanks, Brian. Operator: Your next question comes from the line of Ken Hoexter of Bank of America. Your line is open. Ken Hoexter: Hey, great. I'll start off with the same. Mark and Jim, congrats as you each move on to the next phase. Well deserved. The auto plant shutdowns, I mean, seem like such a major differentiation for your business alone. Given that scale, and I guess the last conference you did was in November, was there any thoughts to doing a pre-release? Or since it's such a change of magnitude to your thoughts on your outcome, and then, I guess, as you look forward to the operating ratio, right? So typically, you deteriorate about twenty basis points into the first quarter at Truckload. And I know you don't do quarterly rollout, but maybe just given the a couple of things you threw out there, Darrell, on the timing of cost savings or, you know, as the $40 million rolls in. Anything you want to kind of talk about differentiation from normal given where we're leaving off and the different dynamics here? Mark Rourke: Yeah. Ken, let me take the first one as it related to the automotive. And certainly one of the items that we've leaned into and diversification of our revenue base is looking for new growth opportunities. Manufacturing was one of those that we had targeted. And production part automotive is playing a bigger role in our portfolio, which in many conditions is a very good thing. And there was a lot of uncertainty. The OEMs didn't know exactly all was going to happen there when that problem occurred, and so we didn't have full understanding clarity as our customers were working through that. But one of our acquisitions and certainly our organic dedicated growth has had success in the production automotive parts. So in 2026, that's a development that's a bit more of our story, which we think in the long term is a very good thing, particularly as we continue to leverage our strengths in and out of Mexico. And the importance of the automotive industry relative to the Mexico base. So we would have liked to have clear visibility to that in a whole host of ways. But that was an emerging issue that a number of our OEMs had to work through, and they worked through that to varying degrees of success to keep production up. So that's really what occurred there, and from a transparency standpoint. And then follow-up on his other question. Darrell Campbell: Yeah. So a lot of the cost savings again are, you know, structural, but also relate to productivity. The expectation is that the second half of the year shows more improvement. And that follows through also with cost similar to what we saw in 2025 where there was a ramp throughout the year. Some of the initiatives are going to be consistent throughout the year. Such as the, you know, the non-driver FTE, you know, reductions but anything productivity-based would be more back half-weighted. Mark Rourke: And then I was really the first quarter, we're off to a very interesting start, obviously, with the weather conditions and the disruption that we're feeling, but also what our customers are feeling. And so we believe there is a backlog of significance across the supply chain just because the entire breadth of the weather looks like we may have another storm coming at us this weekend. So I think that comes with opportunity. It comes with the depth of our portfolio that we're going to be able to respond, and I think we'll be able to leverage how we help customers deal with that. And be paid reference to the value that we're going to create. And so we're seeing some of that emerge already, Ken, but I think it'll come down to what is the how's that whole quarter play out from the cost, the recovery, and the demand catch-up. So the company and we are poised to take advantage and be there for our customers, and it's just but it's a really, really disruptive time just based upon the extent of the storm and the impact. Ken Hoexter: Yep. If I could just get one clarification. Right? So it seemed like the Cowen fleet total stayed fairly consistent through the year. It didn't look like the fleet dropped off. But intermodal, your loads really dropped off. You know, I had big load wins in the second and third quarter, upper single digits that tail off in the fourth quarter. Is that the same thing in the auto business on intermodal that you're talking about on the truck rates to John just before? Mark Rourke: It feels like a sneaky third question, but we're going to go ahead and let that one go. Go ahead. Jim Filter: Okay. Thanks, Mark. You know, really, if you look back at the comps for last year and the fourth quarter of last year is when we really started seeing across the industry a pickup in demand. I remember there was the threat of tariffs, and then, that really carried into 2025. The pull ahead. And so you know, we continue to grow year over year, which actually is much better than the overall industry. So from our lens, we really didn't see a drop-off. It was really just a matter of a tougher comp year over year. Ken Hoexter: Wonderful. For the time, guys. Appreciate the thoughts. Darrell Campbell: Okay. Operator: Your next question comes from the line of Jordan Alliger of Goldman Sachs. Your line is open. Jordan Alliger: Yeah. Hi. Just wanted to come back to demand a little bit. Obviously, you alluded to it a few times, but there's been a lot of puts and takes this past '25 with tariffs pull forward, etcetera. There were some indications that we had seen perhaps that inventory at wholesale and retail had drawn down quite a bit and maybe this dovetails a little bit with your comments on the pickup in demand in December. So you have any contacts from customers or what have you, how they're feeling about inventory levels as we move into this year? And is there some sense of optimism perhaps that, you know, maybe with various stimulatory effects, we could see a restock type of event for freight? Thanks. Jim Filter: Yeah, Jordan, this is Jim. I'll take that one. And so you're absolutely right. As going through November, December, we believe end-market consumer demand remains stable. But we were seeing customers starting to work down inventory, and that really changed the last two weeks of December. And so there was some restocking activity that was attempting to take place in the last couple of weeks of December. So there were some shippers that were scrambling for capacity, and some of that pushed into January. And we're working through some of that backlog with some shippers that had some freight carryover. And I'd say that was really the most transactional shippers that had that carryover, as Mark was talking about. Also generating some premiums and also some additional cost to shift drivers around. We are still working through that when, you know, winter storm Fern came through. And, initially, that created some cost for us as we're, you know, getting equipment back up. We've been operating through that. We're not completely clear, and now we have another storm coming through. And so I think some of this carryover is going to continue for a few more weeks as we look out there. And so we have some of those activities taking place. I say that impact is going to be disproportionately negative for the most transactional customers. And, historically, when we look at these things, the spot rates it's not just a quick event. It goes up higher over multiple weeks, and it starts, you know, in the area that's immediately impacted but then expands beyond that as capacity is dislocated, and then if we look further out on the horizon, there's a lot of positive catalysts that we see out there, whether it's from capital investments as a result of the One Big Beautiful Bill Act, some strong tax refunds, interest rate cuts that surface for home investment again. So, you know, the positives out there. But that being said, you know, we've seen some head fakes before. While we are absolutely seeing supply come out of the market already, still waiting a little bit for those demand catalysts to convert before we completely underwrite it. Mark Rourke: Maybe just to put a bow on that, Jordan, as you look at the logistics manager index, you really did see a precipitous drop in inventories at the latter part of the year, particularly in December. Which feels consistent with what our experience was in the month of November, which we saw drop off really in most demand categories, and then it really started to bounce back as Jim said, late in the year when capacity was tight, and it's really carried that concept through here for the first several weeks of January. So, absolutely, I think that could lead to a more intense replacement or replenishment cycle. We'll have to see. But we think that's lining up for more probability in that direction. Jordan Alliger: Thank you. Operator: Your next question comes from the line of Tom Wadewitz of UBS. Your line is open. Tom Wadewitz: Yes. Good afternoon and Mark and Jim also want to add my congratulations to both of you. Mark, certainly a pleasure working with you over the years. And wish you the best. And, likewise, Jim, I'm sure you'll do a great job in the new leading position. Let's see. So wanted to get your thoughts on, you know, if we don't see improvement in demand, how much rate you think you can get from just the supply side. Right? Like, you seem pretty optimistic on supply with good reasons by reduction. Can you get kind of mid-single-digit trade on that with, say, truckload contract rates if you don't get help from demand? Or you think that's going to be is that maybe too high of too high a bar? Jim Filter: Yeah. Tom, thanks. This is Jim. So let me just maybe clarify a little bit on capacity and our position on that, and then I'll step into rates. So, you know, generally, we subscribe to the fact that this is an efficient market, and when it's working properly, you see an upcycle that lasts about eighteen months, followed by a down cycle that lasts about eighteen months. And here we are four years into a down cycle, so something is different. Not normal. We've been talking about shadow capacity for quite a while. And that's coming from non-documented workers that are able to get CDLs, CDL mills, graduating students without the investment to become safe drivers. Drivers that don't meet the English language proficiency, b one committing cabotage, and ELDs that are self-certified improperly. So the step up in enforcement that we're starting to see that's not only removing capacity, but that's starting to constrict the top of the funnel with new drivers entering. And in particular, the most irrational capacity is what's exiting, and that's what's we believe, creating a condition that will enable the market to adjust. And, you know, we're starting to see that when you have a little bit of tightness out there. We also see it in our own business. We see that in our driver recruiting volume moderating. We've had some buyers of our tractors canceling purchases because of their driver pool shrinking. And we've seen a sharp contraction in our brokerage carrier account. Particularly in regions where non-domicile exposure was outsized in places like California. But it's not an event-based situation. There is no cliff. It's going to take time to play out. So we expect that capacity is going to continue to decline even well after the market reaches equilibrium. And so, you know, it's going to take quarters for us to get there, but this cycle might last longer. And so as we're talking to shippers, I think they're starting to understand that as well. Because what I've been hearing from shippers more recently is they're focused on the supply risk. They're looking for rate assurance. And, you know, they saw this in December. They're seeing it through these storms. So we have more shippers asking us for multiyear deals. We're seeing that, and they're, you know, they're coming with more mini bids, which tells us there's some disruption. So I talked to the most strategic shippers. They understand our costs and the nature of this industry. So they look at the same Atri data that we do that says our costs are up about 25% since before the pandemic. Meanwhile, rates haven't moved very much. In 2019, was a pretty low base. And so, you know, this is something that's going to take some time and perhaps going to take several bid cycles to play out. But that could also mean that there's some potential for several years of upside. Tom Wadewitz: Okay. Thank you. Thank you for that. How I guess, given your framework of how you think it plays out, where would you where are you most optimistic on improvement? I guess from a margin perspective in 2026, like do you think brokerage could really kind of move beyond the squeeze and do really well? Do you think intermodal, like shippers, start to really, you know, kind of give you more volume or is it all about rate and truck? Just how do you think about where you might see a stronger opportunity for improvement in '26? Jim Filter: Yeah. Thanks, Tom. So the first place that I would expect that we're going to see that improvement is going to be in our network business. That's where we have an outsized exposure to the spot market today. Higher than what we normally have. So I think there's opportunities to see that move very quickly. I mentioned intermodal. I do believe that we're well-positioned to capture some additional upside when that truckload market improves and inventory levels are, you know, starting to be replenished, we'll be able to take opportunities there. And then our logistics business is very nimble, and so I think there when there's disruptions out there in the marketplace and customers are looking for a broad portfolio to solve problems, they really become that glue that jumps in and can provide great service to the customer, but also returns back to the enterprise. Mark Rourke: And, Tom, I'd also add on dedicated. I think one of the underappreciated facts about dedicated is the value that you can provide as a multimodal platform that we have relative to backhaul efficiencies. With the 8,500 trucks operating in various configurations, there are opportunities to drive value back to the shipper, but also to ourselves relative to margin enhancement. This was one of the really great places of using AgenTeq AI to talk to other agent AI to garner efficient volumes on our backhauls that can, you know, it's a very high incremental margin play for us, and so we're really leaning into that. The scale that we have in dedicated allows us to really take advantage of that. And it's also one of the values of having a logistics offering and a network business is because we can leverage those various channels to achieve that. So I'm very bullish as well that with what we have available to us and dedicated that we can still drive self-help margin improvement on a whole series of approaches and backhaul being one of them. Tom Wadewitz: Do you think you'll see good responsiveness and dedicated too as I guess, as freight picks up? Jim Filter: Yeah. Yeah. I do. You know, because you look at, you know, a couple of things. We had a terrific year of selling 950 units of new business. We didn't see all that obviously translate into the count of the fleet. That's because we have the opportunity now to drive efficiency because some of that churn we experienced last year wasn't true loss. Business. It was current customers not having as much demand. And that brought a correction in the number of units that we placed against those contracts. So if there's demand improvement, there's automatic improvement in our account structures because of what kind of went backward a bit in 2025 when they didn't have the demand. And plus the margin-enhancing opportunities I'm talking about here with backhaul. Tom Wadewitz: Right. Okay. Great. For the time. Jim Filter: Thank you. Operator: Your next question comes from the line of Bruce Chan of Stifel. Your line is open. Andrew Cox: Hey, good afternoon team. This is Andrew on for Bruce. I just wanted to discuss consolidation in Dedicated and how you guys think that's going to affect the competitive dynamic. And what's your expectations for, you know, the trend of more consolidation in the industry, and maybe what's you guys' appetite for dedicated M&A at this juncture versus other capital allocation priorities? Thanks. Mark Rourke: Yes. From a capital allocation standpoint, obviously, organic growth is our number one objective there. But we've been a player in the dedicated consolidation with three primary dedicated acquisitions over the last three years. Our balance sheet and our deleveraging even further has allowed us ample opportunity to even consider something larger than what we've done to date. So, yeah, we have not lost appetite. Each of those acquisitions has done very, very well for us. We've really gained our stride relative to getting after synergies, how to assess those things. And so we're not going to take a stretch and a reach for something just to put something on the board. But we have the ability to leverage what we have in our strengths and so very much. We're constantly reviewing. We're leaning in. And really more than just dedicated, but dedicated has been the place that we saw a really target-rich environment. To continue to advance what we believe is a long-term value for our enterprise and long-term value for our shareholders. Andrew Cox: Agreed. Thank you. If I can follow up maybe with one on the intermodal side. Were you wanted to know how you guys are thinking about the FMC probe? You know, would you guys think that an adverse ruling here would negatively affect fluidity service and potentially the road to rail conversion thesis? Mark Rourke: I'm not sure we caught that front end of that question. Can you do that again, please? Andrew Cox: Sure. Yeah. We were it's about the FMC probe. We're just wondering if an adverse effect if an adverse ruling there would affect fluidity and service. Jim Filter: Yeah. I think primarily what that impact would be on the ocean side rather than for domestic carriers. Andrew Cox: Domestic intermodal? Jim Filter: Yeah. For domestic intermodal. Andrew Cox: Okay. Thanks. I'll pass it back to you. Operator: Your next question comes from the line of Chris Wetherbee of Wells Fargo. Your line is open. Chris Wetherbee: Hey, thanks. Good afternoon, guys, and congrats Mark. Congrats, Jim. Best of luck to you guys. I guess, I wanted to ask about network profitability. So, I guess, what do you think the steps are or maybe what do you need to see from a market perspective, whether it be pricing demand, some combination of that? To get the network back to profitability? And I guess, maybe in the range, $0.70 to $1 kind of how do you sort of book on that at the low end? Is sort of network gotten back to profitability? At the high end, it is? I guess, I'm trying to get a sense of how to think about that within the range as well. Mark Rourke: Yes, Chris. Thank you. And certainly, the network has been most impacted by the cycle here and the overcapacity of the market. And there's really two things that we think are paramount for us is what we're working relative to how do we put additional productivity across our assets. In fact, one of the benefits of having just a little bit of recovery in the month of December, we had a multiyear high relative to our build miles per truck and actually had it didn't really make up for the whole quarter of the tepid demand, but just that whole tightening of capacity really led and the demand picture led us to a very solid result there in addition to some price capture, which is really the second thing. We have not adequately recovered in that market, particularly the cost inflation that has occurred that Jim referenced just a couple of minutes ago. So it's a combination of those two levers predominantly. We like the size of the business where it's at. We're not after a particular mix. And the other thing that we're looking to do to help it recover here is leverage our logistics capability alongside our network business to optimize across power-only brokerage and our assets, and we believe in an increasing demand market we'll be able to take care of the assets first and then lever some of these other opportunities that we have to scale our business and take additional volume without putting additional capital but really focusing on the margin recovery of the network. But it's going to take both productivity and some price recovery. Jim Filter: And this is Jim. You know, just to add on to that, what encourages me is that when we saw spot prices increase here multiple times over the last six weeks. We've increased our exposure to spot. To take advantage of those opportunities. And to me, that's the start of driving change into that business. Chris Wetherbee: Okay. And any thoughts around the range how to think about network profitability for '26? Darrell Campbell: Yeah. This is Darrell. What I would say is that even just to add on to Jim's point, even in a softer backdrop in 2025 and, you know, even in the fourth quarter, you know, the year, we did see improvement in earnings in the network without the benefit of price. Right, or significant benefit of price. So as we get more productive and as volume comes through, as Mark said, we do believe that there's an outsized leverage that we'll see first of all in the network. As it relates to specific guidance, we don't give guidance by sector. But there's an expectation of, you know, meaningful improvement given initiatives that we're after. Chris Wetherbee: Okay. And then just a quick follow-up on the intermodal side. The pricing in the fourth quarter. Any I guess, maybe yield in the fourth quarter or maybe any comment about how you're thinking about bid season might start to be developing as you think about 2026? Jim Filter: Yeah. Thanks. This is Jim. So as we look at last year, our contract renewals remained flat. But by leaning into our areas of differentiation through the allocation season, able to continue to grow and grow off of a base where we're already growing. Including in a market that has some pretty difficult comps. So in terms of, you know, pricing, there is a little bit of pressure was driven by, you know, doing more backhaul. It's a little bit more mix-related. Also, were fewer instances of premium opportunities in the fourth quarter, given the shorter and earlier peak season that we talked about in the third quarter, so we didn't have that benefit. As we're looking going forward, expect that, you know, we're going to continue to lean into those areas of differentiation and be able to grow through the allocation season. Mark Rourke: Yes. So, the improvement in intermodal did not come with an improving market of premiums or a project quote work in this fourth quarter. Jim Filter: Yeah. For, you know, just to tack on to that, for the year, we delivered nearly 20% operating income growth for Intermodal with a little help from the market. And that's really because of growing in areas of differentiation. Chris Wetherbee: Got it. So much for the time. Appreciate it. Darrell Campbell: Thank you. Operator: Next question comes from the line of Ariel Rosa of Citigroup. Your line is open. Ariel Rosa: Hi, good afternoon. So I wanted to ask get your thoughts on how you think about normalized mid-cycle earnings potential. There's a lot of moving pieces, obviously, with the cost-cutting initiatives and the acquisitions that you've done that you referenced. You know, especially as it was Mark who mentioned it might take a couple of bid cycles to get back there. Just how are you thinking about what mid-cycle earnings could look like for the business? And if it takes a couple of bid seasons or bid cycles, does that mean we're talking about something beyond '27? Is it really kind of '28 or '29 before we start to see that type of performance from the business? Thanks. Mark Rourke: Great. Thank you for the question, Ariel. Yeah. We think, certainly, we're not guiding out to '28 and '29, but we think we can certainly get track a meaningful traction towards our long-term targets across our various sectors. We don't think we'll probably get all the way there, obviously, through one cycle in the 2026 season, but I certainly don't I wouldn't want to leave the impression that it's going to take the twenty-eighth to twenty-ninth. We'll provide more updates as we get through the year on how we're progressing in the business. But we think this market and I always like to look at what's different now than what maybe you came into last year's condition? There's just a, in our view, more favorability certainly on the supply side. There appear to be more catalysts on the demand side, and we're experiencing just in these most recent events, the really fragile nature of what happens when you get demand and capacity a little bit closer. And so again, how well those things and the speed from which that demand and the capacity hits, I think, will dictate the speed from which we get back to the mid-cycle returns. We have a lot of self-help items that we have that we can get there and make material improvement without it being just what's going on in the broader market. Operator: Thank you. We've run out of time. That concludes our Q&A session. This also concludes today's conference call. You may now disconnect.
Operator: Hello, and welcome to the Robert Half Fourth Quarter 2025 Conference Call. Today's conference call is being recorded. [Operator Instructions] Our hosts for today's call are Mr. Keith Waddell, President and Chief Executive Officer of Robert Half; and Mr. Michael Buckley, Chief Financial Officer. Mr. Waddell, you may begin. M. Waddell: Hello, everyone. We appreciate your time today. Before we get started, I'd like to remind you that the comments made on today's call contain forward-looking statements, including predictions and estimates about our future performance. These statements represent our current judgment of what the future holds. However, they are subject to the risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. These risks and uncertainties are described in today's press release and in our most recent 10-K and 10-Q filed with the SEC. We assume no obligation to update the statements made on today's call. During this presentation, we may mention some non-GAAP financial measures and reference these figures as adjusted. Specifically, we present adjusted revenue growth rates, which remove the impacts on reported revenues from the changes in the number of billing days and foreign currency exchange rates. Additionally, we present adjusted gross margin; adjusted selling, general and administrative expenses; and adjusted operating income by combining the gains and losses on investments held to fund the company's obligations under employee deferred compensation plans with the changes in the underlying deferred compensation obligations. Since the gains and losses from investments and the changes in deferred compensation obligations completely offset, there is no impact on our reported net income. Reconciliations and further explanations of these measures are included in the supplemental schedule to our earnings press release. For your convenience, our prepared remarks for today's call are available in the Investor Center of our website, roberthalf.com. For the fourth quarter of 2025, global enterprise revenues were $1.302 billion, down 6% from last year's fourth quarter on a reported basis and down 7% on an adjusted basis. We are very pleased to see talent solutions and enterprise revenues return to positive sequential growth on a same-day constant currency basis for the first time in over 3 years. Weekly revenue trends during the quarter continued to show positive momentum, which extended into the first 3 weeks of January. Our revenue and earnings exceeded the midpoint of our previous fourth quarter guidance. Net income per share for the quarter was $0.32 compared to $0.53 in the fourth quarter 1 year ago. We entered 2026 very well positioned to capitalize on emerging opportunities and support our clients' talent and consulting needs through the strength of our industry-leading brand, our people, our technology and our unique business model that includes both professional staffing and business consulting services. Cash flow provided by operations during the quarter was $183 million, the highest quarter this year and an 18% increase over 2024 Q4. In December, we distributed a $0.59 per share cash dividend to our shareholders of record for a total cash outlay of $59 million. Return on invested capital for the company was 10% in the fourth quarter. Now I'll turn the call over to our CFO, Mike Buckley. Michael Buckley: Thank you, Keith, and hello, everyone. As Keith noted, global revenues were $1.302 billion in the fourth quarter. On an adjusted basis, fourth quarter talent solutions revenues were down 9% year-over-year. U.S. talent solutions revenues were $623 million, down 9% from the prior year's fourth quarter. Non-U.S. talent solutions revenues were $200 million, down 8% year-over-year. We conduct talent solutions operations through offices in the United States and 18 other countries. In the fourth quarter, there were 61.4 billing days compared to 61.6 billing days in the same quarter 1 year ago. The first quarter of 2026 has 61.9 billing days as did the first quarter of 2025. Billing days for the remaining 3 quarters of 2026 will be 63.1, 64.6 and 61.1 for a total of 250.7 billing days in the year, which is the same as the full year of 2025. Currency exchange rate movements during the fourth quarter had the effect of increasing reported year-over-year total revenues by $15 million. That was $10 million for talent solutions and $5 million for Protiviti. Contract talent solutions bill rates for the fourth quarter increased 3.2% compared to 1 year ago, adjusted for the changes in the mix of revenues by functional specialization, currency and country. This rate for the third quarter was 3.7%. Now let's take a closer look at results for Protiviti. Global revenues in the fourth quarter were $479 million. $373 million of that is from the United States, and $106 million is from outside of the United States. On an adjusted basis, global fourth quarter Protiviti revenues were down 3% versus the year ago period with U.S. Protiviti revenues down 6%, while non-U.S. Protiviti revenues were up 9% compared to 1 year ago. Protiviti and its independently owned member firms serve clients through locations in the United States and 28 other countries. Turning now to gross margin. In contract talent solutions, gross margin was 39.2% of applicable revenues in the current quarter compared to 39.1% in the fourth quarter 1 year ago. Conversion or contract to hire revenues were 3.2% of contract revenues in both the current quarter and the fourth quarter of 2024. Our permanent placement revenues were 12.5% of consolidated talent solutions revenues in the current quarter compared to 12.1% in the fourth quarter of 2024. When combined with contract talent solutions gross margin, overall gross margin for talent solutions was 46.7% of applicable revenues in the current quarter compared to 46.4% in the fourth quarter of 2024. For Protiviti, gross margin was 21.9% of Protiviti revenues in the fourth quarter and 24.9% in the fourth quarter 1 year ago. Adjusted gross margin for Protiviti was 22.8% for the quarter just ended compared to 25.1% last year. We ended 2025 with 11,200 full-time Protiviti employees and contractors, up 1.5% from the prior year. Enterprise selling, general and administrative costs were 35.9% of global revenues in the fourth quarter compared to 34.1% in the same quarter 1 year ago. Adjusted enterprise SG&A costs were 34.6% for the quarter just ended compared to 33.8% 1 year ago. Talent solutions SG&A costs were 47.6% of talent solutions revenues for the fourth quarter versus 44.4% in the fourth quarter of 2024. Adjusted talent solutions SG&A costs were 45.6% for the quarter just ended compared to 43.9% last year. We ended 2025 with 7,400 full-time internal employees in talent solutions, down 3.2% from the prior year. Fourth quarter SG&A costs for Protiviti were 15.7% of Protiviti revenues compared to 15.3% for the same quarter 1 year ago. Operating income for the fourth quarter was $22 million. Adjusted operating income was $43 million in the quarter or 3.3% of revenues. Fourth quarter adjusted operating income from our talent solutions divisions was $9 million or 1.1% of revenues. Adjusted operating income for Protiviti in the fourth quarter was $34 million or 7.1% of revenues. Our fourth quarter 2025 income statement includes a $21 million gain from investments held in employee deferred compensation trusts. This is completely offset by an equal amount of higher employee deferred compensation costs, which are reflected in SG&A expenses and direct costs. As such, it has no effect on our reported net income. Our fourth quarter tax rate was 32% compared to 28% 1 year ago. The higher tax rate in the current quarter is due to the increased impact of nondeductible expenses relative to lower pretax income. At the end of the fourth quarter, accounts receivable were $748 million, and implied days sales outstanding, or DSO, was 51.8 days. Before we move to first quarter guidance, let's review some of the monthly revenue trends we saw in the fourth quarter and so far in January, all adjusted for currency and billing days. Contract talent solutions exited the fourth quarter with December revenues down 8.9% versus the prior year compared to a 9.9% (sic) [ 9.0% ] decrease for the full quarter. Revenues for the first 2 weeks of January were down 6.6% compared to the same period last year. Permanent placement revenues in December were down 11% versus December 2024. This compares to a 5.9% decrease for the full quarter. For the first 3 weeks in January, permanent placement revenues were down 9.4% compared to the same period in 2025. We provide information so that you have insight into some of the trends we saw during the fourth quarter and into January. But as you know, these are very brief time periods. We caution against reading too much into them. With that in mind, we offer the following first quarter guidance: revenues, $1.26 billion to $1.36 billion; income per share, $0.08 to $0.18. Midpoint revenues of $1.31 billion are 5% lower than the same period in 2025 on an adjusted basis. Our midpoint revenue guidance for the first quarter reflects continued positive adjusted sequential revenue growth for talent solutions. Our Q1 midpoint adjusted operating margin guidance declined sequentially by 1 percentage point, which is consistent with long-term historical trends. This includes Protiviti's sequential decline of 4 percentage points. Historically, Protiviti's Q1 segment margins seasonally declined by mid-single-digit percentage points on a sequential basis. There are 2 primary drivers. Internal audit revenues are negatively impacted as clients focused instead on annual financial statements and related external audits. In addition, Protiviti employees receive annual compensation adjustments effective January 1, which are recovered through pricing adjustments realized as client contracts are negotiated. Segment margins then improve accordingly. We estimate our midpoint tax rate for the first quarter to be 56% to 58%. This is much higher than normal for 2 reasons: as expected tax charge related to stock compensation and the magnified impact of nondeductible tax items when measured against seasonally low Q1 pretax income. A majority of our employee stock compensation awards vest in the first quarter each year, and the related tax impacts are measured based upon the stock price at that time. With the current stock price below grant values, a tax charge estimated at $4.5 million or $0.05 per share results. For the remainder of 2026, a quarterly tax rate of 33% to 35% is expected. The major financial assumptions underlying the midpoint of these estimates are as follows: adjusted revenue growth year-over-year for talent solutions, down 4% to 8%; Protiviti, flat to down 4%; overall, down 3% to 6%; adjusted gross margin percentages for contract talent, 38% to 40%; Protiviti 18% to 21%; overall, 35% to 38%; adjusted SG&A as a percentage of revenues for talent solutions, 44% to 46%; for Protiviti, 15% to 17%; overall, 33% to 36%; adjusted operating income as a percentage of revenues for talent solutions, 0% to 3%; Protiviti, 2% to 5%; overall, 1% to 3%; tax rate, 56% to 58%; shares, 99 million to 100 million; 2026 capital expenditures and capitalized cloud computing costs, $70 million to $90 million with $10 million to $20 million in the first quarter. All estimates we provide on this call are subject to the risks mentioned in today's press release and in our SEC. Now I'll turn the call back over to Keith. M. Waddell: Thank you, Mike. Our fourth quarter results reflect a return to sequential growth on a same-day constant currency basis for the first time since early 2022. Concerns around a near-term economic downturn have moderated supported by a more conducive macro environment. Continued progress in the rate cutting cycle, easing inflation, less regulation and relatively more clarity on trade policy all contribute. The NFIB Small Business Optimism Index has continued to trend higher with hiring plans holding steady and labor availability remaining a key constraint. At the same time, the Uncertainty Index declined meaningfully last month, falling to its lowest level since June of 2024. Although hiring and quit rates remain subdued, job openings continued to run well above historical averages, underscoring significant pent-up demand for skilled professionals. Decision time lines are beginning to shorten, and we're seeing increased client engagement as clients revisit postponed initiatives and discuss hiring tied to business-critical priorities. Internal resource levels at small businesses remain particularly lean as these companies have focused on cost containment for much of the last 4 years. Employment data from the ADP National Employment Report indicates that between January of '22 and December of 2025, companies with fewer than 500 employees have grown their employee counts by only 1.1% annually, while below the 2.8% annual growth rate seen among companies with over 500 employees. As project activity begins to pick up, this places additional strain on already limited internal capacity. Against this backdrop, unemployment remaining low and skilled talent in short supply, clients increasingly require specialized expertise to help fill open roles and execute critical work, supporting demand for both our talent solutions and consulting services. While prospectives on medium- to long-term structural impact of AI on the labor market vary greatly, most of the evidence suggests a negligible impact so far on our areas of employment particularly among small businesses. For example, a very recent study by Oxford Economics concludes that, "firms don't appear to be replacing workers with AI on a significant scale and we doubt that unemployment rates will be pushed up heavily by AI over the next few years." Also, feedback from our SMB clients indicates that potential future labor savings from AI are not a material factor in their current headcount decisions. That said, as AI reshapes how work gets done and the skills required for many roles evolve, clients are increasingly relying on us to help them navigate change, deploy talent quickly and support the implementation of new technologies, including the requisite data requirements. At the same time, the fast-growing use of generative AI by job seekers, particularly to tailor their resumes to client opportunities, has made it more difficult for clients to distinguish among candidates and authenticate their qualifications. This further reinforces the value of our services, including our proprietary data on actual candidate performance. As expected, Protiviti's year-over-year growth rate showed improvement in the quarter, although it continued to be impacted by tougher prior comparables from large project builds and by longer sales cycles and smaller sized new engagements. Protiviti's pipeline remains strong across all its major solution areas, and at the midpoint of our Q1 revenue guidance, its growth rates are expected to continue to improve. Our strategic engagement of contract professionals via our talent solutions divisions plays an essential role in Protiviti's success and further amplifies our unique enterprise-wide competitive advantage. Protiviti was recently recognized on Glassdoor's Best Places to Work for a third consecutive year. We begin 2026 energized by our time-tested corporate purpose to connect people to meaningful and exciting work and provide clients with the talent and consulting expertise they need to confidently compete and grow. We weathered many economic cycles in the past, each time emerging to achieve higher peaks. Aging workforce demographics and clients' desire for flexible resources with variable costs are structural tailwinds that are expected to propel us forward in the years to come. Finally, I would like to thank our global workforce for their continued dedication. Their efforts once again earned Robert Half recognition by Fortune as one of the World's Most Admired Companies for the 29th consecutive year. We're proud of our unique position as the only company in our industry to be awarded this distinction for nearly 3 decades. We are also recognized as one of Forbes' World's Top Companies for Women and chosen by Newsweek as one of America's Most Responsible Companies. Now Mike and I'd be happy to answer your questions. [Operator Instructions] Operator: [Operator Instructions] Your first question will come from Andrew Steinerman with JPMorgan. Hearing no response from that line, we'll take our next question from Mark Marcon with Baird. Mark Marcon: Keith and Mike, it looks like -- first of all, it's good to see that you're returning to sequential growth here. And when we take a look at the guide as it relates to 2026, we're still looking at a year-over-year decline, but you're expecting margins on the whole to improve, primarily because of Protiviti. And so what I'm wondering about is it's great to see the projection for the margins to improve. I'm wondering how you're thinking about the top line potentially inflecting kind of a modest economic environment. Obviously, there's still a lot of discussion with regards to the impact of AI. And a lot of it is unknown, and a lot of it is changing rapidly. So I'm wondering how are you thinking about the top line from a longer-term perspective? And also, if we end up having just a very moderate sort of improvement in terms of the top line, what are some of the steps that you've taken to increase the efficiency of the operations, which it seems like we're seeing in the first quarter, but just when we think about it from a longer-term perspective in order to be able to get back to halfway back and then ultimately all the way back to prior margins? M. Waddell: And so Mark, on the top line, so if you take our current trend line from a sequential revenue point of view, we would return to positive year-over-year growth in the third quarter and that would be both talent solutions, Protiviti and enterprise. As to steps for efficiency, I'd say we -- as you know, we've held on to our best producers throughout this downturn, and we would expect that they would ramp more quickly than what we'd otherwise ramp, and there's some positive leverage from that. We continue to get traction from our own use of AI, both in terms of how we match and in terms of rank ordering the prospects that we pursue as we try to capture that additional revenue as it becomes available. And so we've said for some time, we certainly expect we can retrace in a positive way the negative leverage we've had to deal with over the last 4 years. Mark Marcon: That's great. And then within talent solutions, just how are you thinking about the perm market just given relatively flat no hire, no fire kind of an environment thus far? Do you think that, that ends up seeing some sort of change? And what sort of impact as we start getting to Peak 65 could we end up seeing? M. Waddell: Yes. I'd say that perm is stronger than the headlines would lead you to believe. As we talked last quarter, we have just as much difficulty getting candidates to change jobs as we do getting clients having demand for additional roles and positions. And so given that the market remains tight, given that candidates remain conservative in their willingness to entertain new roles, I'd say the perm outlook is solid. And again, I understand the no hire, no fire overall environment, but our SMB clients are in a different place. As we talked about, they've added significantly fewer people the last 4 years. They've been in cost mode for quite some time. They've largely normalized their headcounts for that over that extended period of time and they're left very lean not only from a full-time standpoint but contractors as well. I would just say SMB is in a very different place. Operator: And the next question will come from Andrew Steinerman with JPMorgan. Andrew Steinerman: Keith, it's Andrew. I wanted to ask you about what I've been hearing with really kind of industry, staffing industry executives talking about the current labor uncertainty because of AI driving more interest in flexible workers as the labor recovery takes hold. What do you think of this thesis? And have you seen any evidence that flex might kind of gain share even in a moderate labor hiring environment? M. Waddell: Well, I think any time uncertainty declines, clients are more willing to add resources that, early on, they're conservative of adding those resources full time and are more receptive to contract help. I think in addition now, we've got this uncertainty around, well, if I hire full-time now, I might need to adjust that later because of AI is going to make everyone more productive. I think it certainly adds to that potential, but as I said in my prepared remarks earlier, we're not seeing a lot of current demand on the full-time side by clients saying they're holding off from their own internal hiring because of AI. I think they're basically saying, particularly SMB again, that they're not being impacted but for the potential of what AI might become. Operator: And the next question will come from Trevor Romeo with William Blair. Trevor Romeo: I had one on Protiviti. I think you disclosed the headcount numbers, talked about, I think, 1.5% growth for Protiviti, including contractors last year, while revenue, I think, was flat. So I think some rough math there. Protiviti's revenue per head well below what it was several years ago. So at this point, what are your headcount growth plans for 2026 there for Protiviti? And how much revenue upside do you think you could capture in that segment without adding meaningful headcount from where you are now? M. Waddell: Well, the other dynamic in Protiviti's headcount is their use of contractors, which flexes with the revenue and the revenue expectations. And so clearly, their full-time staff is underutilized relative to what it could and arguably should be. Further, as we've talked about before, some of their full-time staff is underutilized and that they've been reassigned to roles typically performed by contractors at much lower rates. And so there's hidden capacity, if you will, there, as that converts to what they're typically working on. And so I'd say there's full-time capacity. There's also a contractor capacity relative to what it's been in the past. So I don't think Protiviti is concerned about having the resources to scale up quickly and appropriately as the revenue support. Trevor Romeo: Okay. Helpful there. And then just sort of a, I guess, a modeling question. Last quarter, I think you were kind enough to call out the typical seasonal trends for 2 quarters ahead. I was wondering if you might be able to do that again for Q2, what you've kind of historically seen for revenue and earnings just so we're all on the same page heading into next quarter. M. Waddell: Well, there's certainly nothing near as dramatic as is the case for the first quarter because of Protiviti's seasonal impacts. But typically, in the second quarter, on the contract side, it's modestly down on a same-day basis. For full time, it's typically up seasonally relative to the first quarter. Protiviti, they began to recover from their seasonal low Q1, and overall, we certainly have more profitability in Q2 than we do Q1. But the seasonal impacts are nowhere near in Q2 what they are in Q1. And by the way, the tax rate that's been jumping all over the place as we talked about, it normalizes back to 33%, 34% in Q2 and beyond versus the much higher number that was the case in Q1. Operator: And the next question will come from Manav Patnaik with Barclays. John Ronan Kennedy: This is Ronan Kennedy on for Manav. Keith, you talked in your response to Mark's question on the first positive same-day CC sequential growth that if the momentum -- or if the trend sequentially continues, you would see positive growth in the third quarter. Could we just get a sense of your optimism on that and what you would need to see in the February, March weekly trends to confirm it will be a potential multi-quarter recovery if it's anything beyond weekly revenues such as time to fill, the rec conversion, pipeline, anything else? And then you also referenced some external leading indicators. What can you place trust in at this stage, whether it's ADP, NFIB, JOLTS, ASA, SAI? Curious as to your thoughts there and your overall optimism. M. Waddell: Well, I'd say our overall optimism is a reflection of, a, discussions with clients; b, weekly results. I'm very happy to report that, as of this morning -- and we get weekly results every Thursday, but as of this morning, they were very encouraging and better than they had been even for the first 3 weeks, which were good themselves. And so we sit here feeling very good about very short-term trends. As to external indicators and sources, there's no magic bullet there. We look at everything. We look at ASA. We look at SIA. We look at NFIB. We look at PMIs. I mean, we look at everything, but nothing has a high correlation factor in and of itself. But altogether, I mean, it certainly tells a trend story. And generally speaking, the entire staffing industry is trending upward. Most are close to, if not at positive year-on-year revenue growth. And I would say the differential there with us is most of them are larger mid- and large-cap enterprise serving staffing firms. We're mostly SMB enterprise typically leads SMB. Even ourselves, we're 70% SMB, 30% mid-cap. That mid-cap is doing better than SMB as we speak. So it's not a surprise that we're lagging a little. But like I said earlier, at current trends, which we're feeling even better about, as of today at those current trends, we'd be positive year-on-year third quarter. That's a great thing. John Ronan Kennedy: Understood. Appreciate it. And may I ask for your current assessment of capital allocation and sustainability of the dividend? M. Waddell: So the really good news is our cash flow, our free cash flow, operating cash flow for the first -- for the fourth quarter was really strong. And in fact, we added $100 million to our cash balance after paying for the dividend. And so for all of 2025 for the full year, our free cash flow covered the dividend, and we reached into the balance sheet for about $100 million to buy stock. And so given those trends, if you extrapolate them, that we just talked about, that would say that we would have enough free cash flow in 2026 to cover the dividend. And then we would have -- we could then look to our balance sheet to the extent we wanted to buy stock. And so excellent, excellent Q4 free cash flow quarter, the highest of the year. We did a very nice job of managing our working capital on both the receivables and the liability side. And we also got a $20 million benefit from the new Tax Act from expensing what would otherwise be capital cost. But even without that, it would have been our highest quarter of the year by a long shot, which is a great thing. Operator: And the next question comes from Stephanie Moore with Jefferies. Harold Antor: This is Harold Antor on for Stephanie Moore. I guess just on Protiviti, it seems as though like the revenue growth performance globally was a little bit different in the U.S. versus international. So want to know if you guys could discuss what you're seeing in the Protiviti business in the U.S. versus internationally in this. Any comments you could give on what you're seeing on the pricing side of that business? M. Waddell: And so U.S. versus international Protiviti, Protiviti international is stronger for a couple of reasons. One, the regulatory environment with financial institutions internationally is stronger. That is the case in the U.S. The regulatory environment in the U.S. is more benign. Examiners are more accommodating. That allows clients to use more of their internal resources for things they might otherwise have used outside partners for. So that's a modest headwind for U.S. Protiviti, not the case for Europe Protiviti, if you will. Further, U.S. Protiviti has these larger projects that you're just beginning to anniversary that impact their growth rates. The international locations didn't have the same extent of those larger projects, and to the extent they've had them, they haven't wound down. And so that would put international Protiviti a bit stronger. The other thing that I would say, offsetting what I just said about U.S., technology consulting in Protiviti, U.S. included, is very strong. It's actually leading as we speak, is Protiviti's largest solution area, particularly in the United States. Platform modernization is a big demand driver. Protiviti is participating nicely there, and so we feel good about Protiviti globally, U.S. and non-U.S. Pricing environment for some time has been very competitive with the Big 4. That continues, not really worse, not really better. Harold Antor: Got it. I guess, when you think of pricing going forward as AI's implemented, do you see risk if customers were to [ perhaps ] share in that benefit? And I guess my other question is just on ACS on admin and customer support. I guess to what degree of confidence do you have that the business line rebounds in line with historical levels? In the quarter, it seems to remain fairly weak. And given implementation of AI, there's -- there are comments out there that say that this business line could be one of the most at risk. So just any comments on that would be super helpful. And that's all for me. M. Waddell: So Protiviti pricing going forward in the AI era, Protiviti in virtually every consulting firm is currently looking at should they, could they, will they price differently than hourly time and materials going forward, should it be more outcome-based, should it be more unit-based, based on what's being worked on, a number of cases, number of transactions. And so I would say the entire industry is taking a very creative and innovative look at how it prices with a strong consideration to the value added and how should they appropriately participate in the value added that might be different than the time and materials of late. But early days there. ACS, we do have confidence in ACS. ACS had a couple of larger projects [ within ] that kept its negative growth rates higher than the rest. Oddly enough and kind of counter to the trend you hear about, our customer service, which includes call center, actually did better than the rest of ACS. So you can't pin AI call center impact on ACS' relative performance. Operator: And the next question will come from Jeff Silber with BMO Capital Markets. Jeffrey Silber: I want to ask a couple of questions about talent solutions that were asked about Protiviti, first, if we can just focus on your internal headcount. I know it shrunk a little bit, but the rate of decline, I guess, is getting less worse, so to speak. What do you expect for 2026? Do you think you'll be adding headcount in talent solutions? And what will it take to get there? M. Waddell: On talent solutions, we did not reduce heads as much as revenues would have otherwise dictated as things declined. And you should -- we, therefore, have unused capacity anywhere from 15% to 30% based on what metrics you use and how robust the demand environment is, but we can grow nicely in talent solutions without adding heads given what we've done so far, which is hold on to our better people. Jeffrey Silber: All right. That's great to hear. And then also on talent solutions, can we just get some comments what's going on internationally versus the U.S.? And maybe you can focus on any specific markets that are doing better or worse. That would be great. M. Waddell: Well -- and as we break out the growth rates between U.S. and international talent solutions, frankly, they're not very different one to another. Generally speaking, Germany is doing well. The U.K. is doing well. Canada is doing well and Brazil are doing well but not much different than the last few quarters and not much different than the U.S. Operator: And the next question comes from Kevin McVeigh with UBS. Kevin McVeigh: Keith, were there any charges or rightsizing of the expense base to position for '26 to help with some of the margin expansion that it looks like you're going to be able to put up over the course of the year? M. Waddell: No special charges in fourth quarter for headcount-related or any other expenses, and it's pretty much taking our current cost structure and getting more efficient where we can, getting more on the Protiviti side as they manage kind of all levels of their pyramid from managing directors down to the entry-level consultants and the mix of that versus contractors. All of those play a part in their gross margins and their operating margins. So no special charges. It is what it is. It's straightforward, but we do believe we can add to margins. In fact, Protiviti, I would say Protiviti would be disappointed if, for 2026, they didn't add 100 to 200 basis points to their gross and operating margins for the year. Kevin McVeigh: Got it. And then the commentary on the Q2 was super helpful. You think from an EPS perspective, should it be kind of the normal sequential step-up that you see from a Q1 to Q2? M. Waddell: I would say that's true. I think you need to be careful when you look at 2025's sequential trend from Q1 to Q2. We took a cost action charge in Q1 that didn't repeat in Q2. And so that progression is not representative of a normal progression and just be careful with that. But otherwise, from a revenue standpoint, as I said earlier, not much typical impact, contract a little less seasonally, perm a little more seasonally, Protiviti better and particularly better on the margin side as they start to distance themselves from their seasonally low first quarter. Kevin McVeigh: Right. So I know last year, it was about $0.24. It's -- so do you think maybe like $0.15 because I know there's the adjustment factor on the tax rate, too, right? The tax rate goes down a lot from Q1 to Q2. M. Waddell: That's right. That's right. And again, I think last year and prior trends at the revenue line are fine, but just be careful in SG&A, not to overly rely on the short-term trend because of the cost actions. Kevin McVeigh: That's helpful. And that was again about $0.17, I think, last year, right, or $0.08 something like that, $0.08? M. Waddell: It was $17 million, as I recall, in cost -- in severance cost in Q1 that didn't repeat in Q2. So Q2 showed an improvement with the absence of those costs, and you won't see that improvement this Q2 because we don't have those severance costs. Kevin McVeigh: And that's a normal tax rate, Keith, on the $17 million, right, just to make that adjustment? M. Waddell: Right, right. Yes. Operator: And the next question will come from Kartik Mehta with Northcoast Research. Kartik Mehta: Keith, I was hoping to go back to your comments on Protiviti and pricing. And you had said kind of the Big 4, nothing is different. It kind of stays the same. As you look to get price increases in 2026, I'm assuming you will since you've got to offset the comp expense, what's the environment like and maybe your confidence level as to why you might be able to get some price increases in 2026 to offset comp expense increases? M. Waddell: Well, I didn't say the industry aren't getting any increases. They are because -- but the other dimension to this is the nature of the work, both as to industry, as to solution. And many times, that mix determines the composite rate as much as anything. But being -- generally speaking, the industry is getting cost of living type increases as they have to give those to their staff, which is true with Protiviti as well. But mix is a big deal. And as Protiviti's had less of the large high-margin FSI regulatory that it has replaced with smaller, somewhat lower margin other types of work, there's been some compression there. But again, it's not like there are no increases currently in bill rates. What you see is more a function of mix, a relative mix of resources than the pure same level last year versus same level this year. Kartik Mehta: And then just your comments on AI, obviously, maybe not having as a negative of an impact as people would like to think. But what about on the other side? How could this be a driver? Or how much of a driver could it be, especially for Protiviti and maybe talent solutions in terms of helping your customers? M. Waddell: Well -- and that's an interesting question. A couple of comments on generally before I get to that. I'd say everybody wants to target accounting as being especially vulnerable to AI. And I would argue and I would at least ask everyone to consider that AI -- or the accounting even at SMBs is already fully automated. Even the smallest companies use QuickBooks and NetSuite. They have tax software, et cetera. And so I think you need to think about the starting point as to how impactful AI would be as much as what the impact itself going to be. I also would suggest that you need to think about that accounting is very precise and accuracy sensitive, which matters because, currently, GenAI, LLMs are nowhere near as accurate as they need to be to be trusted in accounting. And so as you think about AI adoption, particularly in accounting, particularly for SMBs, I think those are factors that need to be considered that typically aren't when people kind of race to accounting is particularly vulnerable. As to upside, AI is actually making it harder for our clients to hire. It's now easier for job seekers to mass apply, which overwhelms our clients. Further, over half, according to Gartner, job seekers today are using AI to tailor their resume to the job requirement, which makes it harder for our clients to distinguish one candidate from another. Further, LLM hallucinations in that process of tailoring resumes are actually creating fictitious work histories to improve the match. To prove this, we did a little test with our data science group. We took 25,000 job descriptions. We took 50,000 resumes. We gave those to the top 3 LLMs, and the prompt was while staying true to the original resume, tailor the resume to the job requirement. And what we found was one of the LLMs frequently fabricated and created fictitious work history. One of the LLMs never did that, and one was in the middle. But the point is it's harder than ever for our SMB clients to trust what a resume shows, particularly as to work history, which makes our services, our vetting even more valuable. And for us, the gold standard for vetting is having performance ratings for how candidates actually performed on prior assignments. And so as AI makes it harder for our clients to hire, we play a bigger and more important role, which is good for us. Operator: And the next question will come from Tobey Sommer with Truist Securities. Tobey Sommer: I wanted to just ask you a question about what incremental margins historically looked like in a recovery and then maybe you could point out any nuances or differences that you would anticipate as revenue improves here versus that historic norm. M. Waddell: I guess the easiest way to think about it for us is and hopefully a conservative way to think about it is we retrace on the way back up what happened on the way down. And as we delevered cost on the downside, we'll relever those costs on the upside. And while everybody wants to first attribute the headcount deleveraging to our recruiters and salespeople, quite frankly, it's much more related to corporate services and field management. And I would argue those are easier to relever than would necessarily be the case with recruiters and salespeople. And so I would say the conservative thing to do would be to retrace the path up similar to the path down. Tobey Sommer: Understood. If I -- if you could dig into Protiviti, what are the industry verticals that are sort of growing and contributing the most versus those that may be lagging? In your answer, I'd love it if you could touch on financial services and where that falls. M. Waddell: Well, clearly, FSI is Protiviti's largest industry group. As I said earlier, in the United States, the regulatory environment has become more benign. Examiners are more flexible, particularly with deadlines and dates, which means clients have more time to do it themselves, which comes at some expense to all of the third-party providers, Protiviti included. And so there's a modest headwind, modest headwind there. That's being offset by tech modernization, all the data optimization, platform modernization, everything related to that, that Protiviti is participating in nicely. Further, they're starting to see traction in the PE IPO transaction market, which there's also a tailwind coming from that. And so when you look at Protiviti's pipeline, it is disproportionately tech related as we speak, and we feel good about that. Tech consulting is Protiviti's largest solution area across their solutions. And it's been that way for some time, and it's becoming even more so as all this demand related to tech modernization, data optimization in advance of AI are prevalent. Operator: And the next question will come from Mark Marcon with Baird. Mark Marcon: A follow-up with regards to the margin improvement as you relever. If we take a look at 2025, we did $5.375 billion in terms of revenue with EBITA margin of 3.4% for the full year. And obviously, that included a charge, so we could strip that out. But what I'm wondering is, back in 2018, 2019 pre-COVID, we were able to generate 10% EBITA margins in the -- doing $5.8 billion to $6 billion in revenue. And so I'm wondering, is that a more appropriate way to think about the level of revenue growth that we need to get as it relates to the incremental margins? Or do we need to get back into -- we obviously had a post-pandemic boom in 2022 and parts of 2021. Do we need to get back to those revenue levels in order to get back to double-digit margins? M. Waddell: I haven't done the specific math that you're referring to, but I would say the biggest difference would be, between pre-pandemic and now, has been the cumulative inflation since then. And so we've had to pay our workforce that cumulative inflation. And that has to be offset as part of getting back to those margins, those EBIT margins. Mark Marcon: Got it. And then... M. Waddell: And then internal staff, right? Mark Marcon: Yes. M. Waddell: The contractor staff, it's a pass-through that we've covered nicely with gross margin. Mark Marcon: And this level setting, you mentioned the normal seasonal trends occur. Then, we may end up inflecting to positive year-over-year growth in the third quarter. If that ends up occurring, what would be kind of a realistic margin assumption around if we were just modestly up 1% to 2%? M. Waddell: Well, again, I started with Protiviti will be disappointed if they don't get another 100 to 200 basis points. Mark Marcon: I heard that. Yes. M. Waddell: Talent solutions, I think, with a continuation of the trend that we're talking, we would have modest improvements in the short term for that incremental revenue. But again, it would certainly be nice to see positive year-on-year growth of kind of low to mid-single digits in the third quarter. Mark Marcon: Certainly would. M. Waddell: Okay. So that was our last question. We appreciate you joining us today. Thank you very much. Operator: Thank you. This concludes today's teleconference. If you missed any part of the call, it will be archived in audio format in the Investor Center of Robert Half's website at roberthalf.com. You can also log in to the conference call replay. Details are contained in the company's press release issued earlier today.
Operator: Welcome to Visa Inc.'s fiscal First Quarter 2026 Earnings Conference Call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would like to now introduce your host, Ms. Jennifer Como, Senior Vice President and Global Head of Investor Relations. Ms. Como, you may begin. Thank you. Good afternoon, everyone. Jennifer Como: And welcome to Visa Inc.'s fiscal first quarter 2026 earnings call. Joining us today are Ryan McInerney, Visa Inc.'s Chief Executive Officer, and Christopher Suh, Visa Inc.'s Chief Financial Officer. This call is being webcast on the Investor Relations section of our site at investor.visa.com. A replay will be archived on our site for thirty days. A slide deck containing financial and statistical highlights has been posted on our IR website. Let me also remind you that this presentation includes forward-looking statements. These statements are not guarantees of future performance, and our actual results, outcomes, or timing could differ materially as a result of many factors. Additional information concerning those factors is available in our most recent annual report on Form 10-K and any subsequent reports on Forms 10-Q and 8-K, which you can find on the SEC's website and the Investor Relations section of our website. Except as required by law, we do not undertake any responsibility to update these forward-looking statements. Our comments today regarding our financial results will reflect revenue on a GAAP basis, and all of the results on a non-GAAP nominal basis unless otherwise noted. The related GAAP measures and reconciliation are available in today's earnings release and related materials available on our IR website. And with that, let me turn the call over to Ryan. Thanks, Jennifer. Ryan McInerney: In our fiscal first quarter, we delivered strong financial results with net revenue up 15% year over year to $10.9 billion and EPS up 15%. Payments volume grew 8% year over year in dollars to nearly $4 trillion, and processed transactions grew 9% year over year totaling 69 billion, demonstrating resilient consumer spending. We continued to build and deliver innovations and scalable technologies across the Visa as a service stack, acting as a payment hyperscaler to enable anyone in the ecosystem to build, launch, and scale money movement and payments businesses across the globe. Let me share some more detail on the recent progress we have made in the services and solutions layers of our Visa as a service stack. More specifically, in the evolution of Visa credentials, AgenTik Commerce, stablecoins, as well as in B2B and P2P money movement, issuer processing, and risk and security. The core of our consumer payments business is the Visa credential. It is much more than a physical card; it can be digital, in a wallet, online, mobile. It's the connection point to the Visa network on top of which we're able to layer all types of services, solutions, and access now totaling more than 5 billion Visa credentials. We have continued to enhance Visa credentials in a few important ways this past quarter. Tap to pay, Visa Flex credential, and tokens. Our Tap to Pay penetration has now crossed the 80% mark of all face-to-face transactions with the US at nearly 70%. Transit acceptance remains a key enabler with our recent launches in San Francisco and more than 10 other systems globally this quarter. In our first quarter, we have continued to enable tap to pay use cases for the different form of the credential. For example, in Europe, we recently announced new digital wallet enablement of iOS wallets such as Klarna in 14 countries, and Vips MobilePay in The Nordics. We also will soon launch a pilot in Italy with the domestic scheme Bancomat. In addition, we enabled Apple Pay for Visa cards issued in China for cross-border face-to-face, in-app, and online transactions. This spans eight issuers representing nearly 60 million Visa credentials, supporting the many Chinese consumers traveling or living abroad, with more issuers coming soon. Our tap to phone capability, which has helped to grow our acceptance locations to more than 175 million globally, has added more than 20 new markets and more than doubled transactions in the last year. A second important area of progress enhancing Visa credentials is enabling multiple funding sources from one single credential with our Visa Flex credential. This past quarter, Block announced the pilot launch of a new Cash App Visa debit card, which enables Afterpay as a feature for their customers to pay over time anywhere Visa is accepted, and leverages Visa's DPS issuer processing solution for the debit component. Globally, we have about 20 million Visa Flex credentials, just a small fraction of our total credentials but growing fast. They are offering funding sources such as debit, credit, multicurrency accounts, rewards, installments, and more. And we expect to expand to more than 20 additional issuers this year. The third and maybe most revolutionary credential technology is the Visa token. Our token technology delivers a digitally native payment credential designed for the unique characteristics and needs of digital commerce. We have more than 17.5 billion tokens globally, over three times the number of physical cards, which means that the solution has been embraced broadly across the ecosystem. We continue to make progress on the tokenization of e-transactions to our ultimate goal of fully replacing card-centric PAN technology, further improving Visa's competitive positioning against cash, check, and legacy forms of digital payment. We utilize a variety of tools such as incentives, sales-oriented case studies, performance compliance programs, and enhancements, to encourage tokenization and enhanced data sharing to make the e-commerce environment as safe as it can be. Issuer enrollment efforts are underway across Europe, CEMEA, and LAC, as we expand the click-to-pay directory to enable credentials to be always digital. Globally, we have also been working with acquirers and payment facilitators to ultimately eliminate the guest checkout that occurs today, which we have reduced from 44% of all Visa e-transactions in 2019 to about 16% in fiscal 2025. And among our top 25 sellers, it's less than 4%. This means that at our top 25 sellers, 96% of transactions now require only a simple click or biometric authentication and do not require a burdensome and error-prone form filling. We continue to build new capabilities on top of our token service platform, positioning our credentials and tokens as the fundamental building blocks for the future of payments. One of those that is enabled with Visa tokens is an important area of innovation, AgenTik Commerce. Our Visa Intelligent Commerce solution utilizes tokens and their configurability as the core underlying foundation for AgenTik payments. We're working to enable AgenTik Commerce with more than 100 partners across the commerce ecosystem globally. Over 30 partners are actively building in our sandbox, with multiple agents and agent enablers running live production transactions and more partners expected in the future. Just this quarter, we expanded into B2B AgenTik payments with Ramp, streamlining corporate bill payments, enabling their business customers to capture cash back on card payments, and optimizing working capital. We also reached an agreement with AWS to make Visa Intelligent Commerce available on AWS Marketplace to support developers building AgenTik Commerce solutions connecting secure automated payment workflows at scale through blueprints for workflows such as travel bookings or retail purchases. In our CEMEA region, ALDAR, a leading real estate developer, investor, and manager, is integrating Visa Intelligent Commerce to make recurring payments such as property service charges on their Live Alder app. Our Visa trusted agent protocol continues to help define the connectivity and data elements required to bring trust to the agentic environment. In Q1, we announced partnerships with leading Internet security players, first Cloudflare, and then Akamai, who collectively serve millions of businesses globally, including nine of the world's top 10 retailers. In addition, we are building interoperability between key elements of Visa Intelligent Commerce and Google's new universal commerce protocol as part of our global effort to help ensure that Visa transactions are securely supported as different protocols evolve. Our AgenTik solutions are live in the US and CEMEA, and we are initiating pilot programs in Asia Pacific and Europe. LAC is soon to follow, where we have already begun token enrollment for AgenTik commerce with issuers. We believe that we are well positioned to be the infrastructure provider and key enabler in AgenTik Commerce, so that every agent interaction is trusted and secure. Like AgenTik Commerce, stablecoins have tremendous growth and disruption potential but are still in the very early stages of adoption for payments use cases. As new stablecoins and blockchains continue to emerge and show the promise of true utility, Visa's goal remains clear: build the secure and seamless interoperable layer between stablecoins and traditional fiat payment at scale across the world. This past quarter, we expanded our capabilities across several fronts. First, we added Stablecoin card issuance in nine additional countries in Q1 to surpass 50 countries worldwide, and payments volume continues to grow at a fast rate as we enable more consumers and businesses to spend stablecoins with Visa. This quarter, we also expanded our stablecoin settlement capabilities with USDC into the US, improving speed and liquidity for banks and fintechs, and providing interoperability to modernize treasury operations for our clients. And total stablecoin settlement has reached an annualized run rate of $4.6 billion globally, as demand has grown among both stablecoin native and more traditional clients. We're finding that more and more participants in the payments ecosystem—financial institutions, merchants, acquirers, and consumer-facing technology companies—are looking to develop and refine their stablecoin strategy. As such, we recently launched our stablecoins advisory practice globally, where we are working closely with our clients providing access to training, strategy, and market entry planning and technology enablement. In addition to being a design partner with the Tempo Layer One blockchain initiative, we recently announced our participation in the Testnet of ARC, a Layer One blockchain from Circle. With both, we see Visa's role in supporting both transaction processing and delivering value-added services. Finally, we are piloting Visa Direct stablecoin payouts, allowing platforms and businesses in the US to send payouts directly to users or workers or employees' stablecoin wallets. This innovation expands the reach of Visa Direct by providing creators, freelancers, and marketplaces with a stable store of value and faster access to funds, even in markets facing currency volatility or limited banking infrastructure. The stablecoin opportunity remains additive to what Visa is doing today, and we will continue to invest where we see the greatest demand. On ramps and off ramps, settlement, money movement, consulting, and other value-added services. We believe that Visa is well positioned as a global trusted technology provider to deliver a full stack of bank and enterprise-grade infrastructure that our clients need to build the future of their business on-chain. Stablecoin is just one way that we are enabling money movement. We also have continued to make enhancements to our Visa Direct and commercial solutions capabilities. In Visa Direct, we have continued to deepen relationships with existing partners like acquirer Nuvei, who has expanded their agreement to include Visa Direct to account in addition to card more than 30 countries. After initially enabling Visa Direct in 25 markets in 2023, PayPal's Zoom recently expanded its Visa Direct cross-border reach to more than 60 markets. In our B2B or commercial solutions, we continue to create compelling purpose-built offerings with a number of our services. In Europe, we've expanded our partnership with Revolut to launch Titan in the UK, an ultra-premium card designed for high-growth companies that attracted thousands of business customer sign-ups on day one. Also in Europe, Eden Red Paytech has chosen Visa as its strategic partner to expand across multiple B2B use cases with our solutions, including open-loop workplace benefits, open-loop fleet and mobility, B2B travel, insurance payouts, and procure-to-pay. Another area of innovation and expansion in the services and solutions layers of the Visa as a service stack has been issuer processing. Visa has been in the issuer processing business for over thirty years. We have continued to invest in this space by enhancing DPS, but also through the acquisition of PISMO. Many issuers around the world are seeking to upgrade their technology stacks to ensure they can deliver for customers in a digital age. Visa's issuer processing capabilities enable clients to have one connection to Visa from which they can access our other solutions and services such as network products, value-added services, tokenization, risk products, and more. One of the two agreements I would highlight this quarter is Pismo's first commercial offering since the acquisition with Banco Bisse in Chile. In collaboration with expense management platform Mendel, we will offer a business credit corporate issuer processing program for Bisse and their large and middle market B2B clients. The second agreement is Pismo's first fleet card offering with FinanceNow in New Zealand. Visa will also provide fleet card issuance, tokenization, and risk services as well. We will continue to look for ways to invest in to both modernize and enhance payment systems globally and accelerate the adoption of our value-added services. The final area I want to highlight is our risk and security solutions. As you know, we closed on our acquisition of FeatureSpace just over a year ago, and we have continued to invest in this platform to provide a holistic AI-driven solution for our clients, before, during, and after a transaction. Nets, part of Nexi Group in Europe, has chosen FeatureSpace to expand fraud prevention for 150 banks across Nordic and Central Europe regions, leveraging cloud hosting and advanced fraud models. Another AI-powered solution, Visa Account Attack Intelligence, was announced in 2024 in the US to help clients prevent enumeration attacks, which are when bad actors systematically initiate e-commerce transactions to obtain valid payment credentials. The results of this solution in the US have been impressive, with over 60 billion transactions scored and nearly 600 million suspicious transactions identified in the last twelve months. We are now investing in its market expansion with launches in the rest of our regions where we are also seeing strong results. In LAC, for example, in just six months, have almost 90% of clients already activated and have prevented more than $10 billion of fraud. We have brought our network-agnostic risk solution, Visa Advanced Authorization, to more countries as well, including recently securing the business from Morocco's national switch, Switch Elmarib, to score all domestic transactions. We have also expanded our A2A risk solution, Visa Protect for A2A, to two more countries this past quarter, with a half a dozen more planned by the end of the year. Of course, these represent just a small set of examples, and throughout the quarter, we have developed many more solutions that will help us drive long-term growth. Collectively, all of our efforts produced 15% year-over-year net revenue growth, with our growth pillars continuing to deliver very strong results. Commercial and money movement solutions constant dollar revenue grew 20%, with 10% constant dollar commercial payments volume growth and 23% Visa Direct transaction growth. Value-added services constant dollar revenue grew 28% and represented around 50% of our overall revenue growth in the first quarter. These results and our feedback from our clients give us confidence that our strategy is working and we are investing in the right capabilities to position Visa and our clients and partners for the future. Visa is delivering breakthrough innovations that redefine what's possible in payments as we enable our partners to achieve global scale quickly and securely. Now to Chris, where he will discuss our financial performance. Thanks, Ryan, and good afternoon, everyone. We had a very strong start to our 2026 fiscal year, driven by strong driver growth, a strong holiday season, and continued execution of our strategy across consumer payments, commercial and money movement solutions, and value-added services. Business drivers remain strong. In constant dollars, global payments volume was up 8% year over year, and relatively consistent with Q4. Cross-border volume, excluding intra-Europe, was up 11%, and total processed transactions grew 9%. Fiscal first quarter net revenue was up 15% year over year, with the outperformance largely driven by stronger than expected value-added services revenue, lower than expected incentives, and stronger than expected commercial and money movement solutions revenue. Christopher Suh: These three factors more than offset lower than expected currency volatility. First quarter revenue was up 13% in constant dollars. EPS was up 15% year over year, better than expected, primarily due to stronger than expected net revenue growth. EPS was up 14% in constant dollars. Let's go into the details. US payment volume was up 7%, with e-commerce growing faster than face-to-face spend, reflecting resilience in consumer spending. Credit was up 7% and debit was up 6%. The slight step down in USPV throughout the quarter was driven by debit, primarily as a result of a Visa Direct client moving the remainder of its volume to its own solution, and a number of other small factors including the loss of some interlinked volumes, to the Capital One debit migration and severe weather that affected certain spend categories. Growth across consumer spend bands remained relatively consistent with Q4, with the highest spend band continuing to grow the fastest. We did not see a deterioration in the lower spend band, and across our volume, both discretionary and nondiscretionary spend remain strong. Honing in on the holiday season specifically, which we define as the period from November 1 to December 31, I would note a few items. In the US, consumer holiday spending growth was in line with last year, reflecting continued strength in retail, an improvement in fuel, and some moderation in other spend categories. Focusing on retail, holiday spending growth was slightly better than last year, driven by strong growth in e-commerce, which continues to take on a greater share of consumer retail spend. In several key countries around the globe, we saw similar trends, with consumer retail holiday spending growth up from last year led primarily by e-commerce growth. First quarter total international payments volume was up 9% year over year in constant dollars, generally consistent with the growth we've seen over the past several quarters. Now to cross-border volume, which I'll speak to in constant dollars and excluding intra-Europe transactions. Q1 total cross-border volume was up 11% year over year, consistent with Q4. Cross-border e-commerce volume was up 12%, slightly below Q4 primarily from lower growth in cryptocurrency purchases. Travel-related cross-border volume was up 10%, consistent with Q4. We saw continued strength in commercial volumes and we started to see improvement in US inbound from Canada. With that as a backdrop, I'll move to discuss our financial results, starting with the revenue components. Service revenue grew 13% year over year versus the 9% growth in Q4 constant dollar payments volume, primarily due to pricing and card benefits. Data processing revenue grew 17% versus the 9% growth in processed transactions, primarily due to pricing, strong value-added services performance, and higher cross-border transaction mix. International transaction revenue was up 6%, below the 11% increase in constant dollar cross-border volume growth excluding intra-Europe. Even with the favorable FX, we saw a much lower than expected volatility, with additional negative pressure from mix and hedging. Other revenue grew 33%, primarily driven by growth in advisory and other value-added services, and pricing. Client incentives grew 12%, lower than our expectations due to one-time true downs related to client performance and deal timing. Now to our three growth engines. Consumer payments revenue was driven by strong payments volume, cross-border volume, and processed transaction growth. Commercial and money movement solutions revenue grew 20% year over year, in constant dollars. CMS revenue was better than expected, driven primarily by our commercial solutions business. Commercial payments volume grew 10% in constant dollars, consistent with Q4 and faster than Visa's overall payments volume growth, primarily due to strong client performance driven by both new wins and continued cross-border strength. Visa Direct transactions grew 23% to 3.7 billion transactions, with strength in both domestic and cross-border. Value-added services revenue grew 28% year over year, in constant dollars to $3.2 billion, driven by strength across all portfolios. Value-added services revenue growth was better than expected, primarily due to greater demand for our advisory and other services, especially in marketing services. Operating expenses grew 16%, above our expectations, primarily due to an unfavorable FX impact from balance sheet remeasurement and higher than expected marketing from both timing of marketing spend and marketing services related expenses, some of which are associated with the stronger value-added services revenue I just mentioned. Non-operating expense was $4 million, better than our expectations, primarily due to investment income. Our tax rate for the quarter was 18.4%, slightly higher than expected due to the timing of the resolution of a tax matter. EPS was $3.17, up 15% year over year, with an approximate one-point benefit from exchange rates and a minimal impact from acquisitions. In Q1, we bought back approximately $3.8 billion in stock and distributed approximately $1.3 billion in dividends to our shareholders. We also funded the litigation escrow account by $500 million, which has the same effect on EPS as a stock buyback. At the December, we had $21.1 billion remaining in our buyback authorization. Now let's look at drivers through January 21, with volume growth in constant dollars. US payments volume was up 8%, with credit up 9%, and debit up 6% year over year. For constant dollar cross-border volume, excluding transactions within Europe, total volume grew 11% year over year, with e-commerce up 12% and travel up 10%. Processed transactions grew 9% year over year. Moving to our guidance. Now that a quarter has passed since our initial FY26 commentary, I would note the following on our key assumptions. As we regularly say, we are not economic forecasters, so we're assuming the macroeconomic environment stays generally where it has been and consumer spending remains resilient. So no change. On pricing, we also have no material changes, with the benefits of new pricing expected to be similar in magnitude as last year and the majority in the back half. What that means from a cadence perspective is Q2 would see a relative step down in the year-over-year growth pricing contribution from Q1. On incentives, we had true downs and deal timing that helped in Q1, that we do not expect will carry into Q2. As such, this implies a step up in the growth rate from Q1 to Q2, with Q3 continuing to have the highest year-over-year incentive growth rate and the full year remaining relatively unchanged. On volatility, it has been much lower than we expected so far this year, and we are assuming that that volatility continued at current levels for the rest of the year, implying a larger drag for the rest of the year than in Q1 and with Q3 having the toughest comparable to last year's higher levels. We pull these assumptions together on an adjusted basis defined as non-GAAP results in constant dollars and excluding acquisition impacts. You can review these disclosures in our earnings presentations for more detail. For the full year, we have no material changes in our expectations for our adjusted and nominal net revenue growth. We still expect our full year adjusted net revenue growth to be in the low double digits, reflecting anticipated weaker volatility environment the rest of the year, that's offset by the Q1 outperformance and higher utilization of our products and services. On the expense side, we have no material changes to our prior full year guidance, and still expect adjusted operating expense growth to be in the low double digits for the year. As a result of Q1, our expectations for non-operating expense are now between approximately $101 million and $125 million. On our tax rate, as a result of the claim of right tax benefits related to recent and anticipated legal settlements, we now expect our full year rate to be lower than we guided, between 18% and 18.5%. I should reiterate that we still expect our long-term tax rate to be between 19% and 20%. This implies adjusted EPS growth in the low double digits, albeit a bit higher in the range than previously guided, primarily due to the change in tax rate. Moving to Q2 financial expectations. We expect Q2 adjusted net revenue growth in the low double digits. The primary reasons for the step down from Q1 net revenue growth include the lower contribution from pricing, lower volatility, and higher incentive growth. We expect adjusted operating expense growth in the mid-teens, about a point above Q1 adjusted operating expense growth. This reflects the step up in marketing-related expenses primarily due to the Olympics and FIFA. And you may recall that Q2 last year had lower than expected operating expense growth due to timing. Non-operating expense is expected to be about $30 million, and our tax rate in the second quarter is expected to be around 16.5%, primarily as a result of the claim of right benefits I mentioned previously, that we expect to realize in the second quarter. As a result, we expect adjusted second quarter EPS growth to be in the high end of low double digits. As always, if the environment changes, and there are events that impact our business, we will remain flexible and thoughtful on balancing short and long-term considerations. It's an exciting time in payments, and we're confident in our strategy and investments to fuel Visa Inc.'s future growth. And now, Jennifer, I'll hand it back to you. Jennifer Como: Thanks, Chris. And with that, we're ready to take questions. Operator: Thank you. If you would like to ask a question, please press 1 and clearly record your name. You will be announced prior to asking your question. To ensure all questioners are heard, we ask that you please limit yourself to one. Once again, to ask a question, please press 1. To withdraw your question, press 2. Dan Perlin with RBC Capital Markets, your line is open. Dan Perlin: Thanks. Good evening, everyone. I just wanted to dig in a little bit on the opportunities around value-added services, but specifically, around purpose-built offerings for events. So here, we're really talking about the Olympics and World Cup. Given the value-added services is a much bigger part of the business today than the last time that occurred. Ryan McInerney: Yeah. So you see if I hit the core question then. So we first of let me just start with these sponsorship assets that we have. They're obviously marquee sponsorship partnerships. Talking about, for example, this year, FIFA. This year, Winter Olympics. You know, global, very, very global in nature. And what we have through our sponsorships is the ability to pass through those rights to our clients and partners all over the world. And that's what we do. Our value-added services sales teams go to market. They sit with our clients many, many months in advance of these programs. And they design programs that are bespoke and custom-built for our clients to help them grow their business. So for some clients, those might be advertising campaigns that we develop together with them in support of maybe a sweepstakes for their cardholders. Things like that. For other clients, they might want to create client events for their private banking clients at one of the FIFA Games in the US, Canada, or Mexico. So in that example, our team works with them to build bespoke events, obviously branded for the bank or financial institution and those types of things. It's a very busy time of year for us. It's a very, very busy year for us. There is a ton of demand from our clients, and the great thing about this is not only are we helping our clients, not only are we generating revenue from these services, we're deepening our partnerships with our clients. And so, you know, we get more renewals because of them. We get more business because of them. And so we feel really good about it. Jennifer Como: Next question, please. Operator: Our next caller is Darrin Peller with Wolfe Research. Your line is open. Darrin Peller: Thanks, guys. Maybe we just touch on what you're seeing strength and that's actually it seems like it's offsetting the lower than expected FX volatility such that you're able to maintain your full year for revenue growth. I know VAS and CMS seems to be standing out pretty well. And just if I could just throw one more about capital return. Have you guys thought through any changes given where the market is placing valuations now over capital allocation, buybacks maybe is picking up a notch? Thanks, guys. Christopher Suh: Okay. Hi, Darrin. Well, yeah, let me jump in. Value-added services in particular, we saw in Q1 really great performance, strong execution, strong client demand. Ryan talked about some of that around some of the events, but the strength was really quite broad-based. We saw strong growth year over year in all four of the portfolios that we talk about. Issuing solutions, acceptance, risk and security, and advisory. The team continues to do very well across that. And so when we think about the performance and then, of course, CMS had a very high growth quarter as well, performing above what we expected. So when we think about the full year expectations, those are the moving parts that we talked about. We said, volatility, it you know, obviously, it's hard to determine where that's gonna go, but given the persistent low that we saw in Q1, if we extend that throughout the rest of the year, that does provide for more downside than the momentum that we have in the business that we anticipate will continue throughout the rest of the year, those two become largely offsetting. To your second point around capital return, as you know, Darrin, our approach to capital return and share buyback has largely been programmatic. We've executed on that very consistently throughout our history. But at the same time, you know, we do take advantage when we see opportunities, when we think the market is underpricing our stock and we see an opportunity, we'll lean in as well, and we'll continue to look for opportunities to do that as well. Jennifer Como: Next question, please. Operator: Thank you. Will Nance with Goldman Sachs. Your line is open. Will Nance: Thanks for taking the question today. I wanted to ask just the advisory question on the regulatory environment. CCPA has been and then there's quite a bit. Just if you could share your updated thoughts on how you're thinking about I guess, the risk to the business from that potentially going forward as well as how you're thinking about recent conversations on the Hill and know, the likelihood of that. Becoming a reality. Thank you for taking the question. Ryan McInerney: Hey, Will. You cut a little out when you asked about specific thing. Was it CCTA you mentioned or something else? Will Nance: Yeah. It was it was CCCA kind of effects of implementation as well as, you know, recent conversations on the hill and likelihood of passing. Ryan McInerney: Yeah. So as you'd expect, we're very engaged. On the hill. We're very engaged with members. As you know well, there's many things floating around. And, you know, we view it as our job to educate elected representatives on the impacts that the various policies that are being floated around could have. In the case of CCCA specifically, we've talked extensively, in this call and other places about our view and it's you know, it hasn't changed. It's very harmful. And it's just simply not needed. So, you know, when I have a chance to talk to elected officials and the rest of my leadership team does, like, they're listening. They're understanding. Know, these people don't live in our industry every day. So, you know, they they they do need the time to understand it. You know, when we talk to them about why it's not necessary, we explain the competitive environment in this business. It is intense. We have new players entering all the time. You know, we talk on this call about crypto stablecoins, BNPL. Obviously, all the competition in the credit card and debit card markets. You know, wallet players, A2A. We take them through an explain, you know, this competitive environment. And we also explain why the market is working so well. And there's no need for government intervention. And the second thing we explained was just how harmful it would be. I mean, this legislation would have far-reaching negative consequences. At a time when, you know, the economy certainly doesn't need that. Consumers and small businesses would see reduced access to credit, you know, rewards would be eliminated entirely. There'd be fewer credit card options. And, by the way, weaker security protection. Less innovation, all these things, and we explain why. I think this is just gonna be this is gonna be part of what we all do regularly because there's elections. You have new elected officials. They're very busy with lots of other things, and so we just have to continue to remind them of the impacts whether it's CCCA or anything else for that matter. Jennifer Como: Next question, please. Operator: Adam Frisch with Evercore ISI. Your line is open, sir. Adam Frisch: Thanks, guys. Nice results. Could you double click into the much better than expected growth in commercial and what you saw there? It was just a great quarter? Or did something unlock in a market with immense potential but I think previously, was supposed to be a little bit more slow and steady. And then would appreciate if you could provide just a quick perspective on spending trends around the world, maybe some color on what you're seeing in the major regions and to the extent you can, some insights on affluent versus mass. Thanks, guys. Ryan McInerney: Hey, Chris. Let me start a little bit on commercial from a business perspective, then you can follow-up on the numbers, and then you can hit the other questions that's fed in trends. I think what you're seeing in commercial is the results of the strategy we've been talking to you about now for, really for a few years. And you know, I I think just, credit to our teams, like, we've been shipping great product. Our sales teams have been engaging with players all around the world. We've been winning. You know, we we talk when we think about the commercial space, we've been talking with you all about three different types of opportunities, and we're having great success across all three of them. You know, we talked about converting more small business and medium business spending. And, you know, what's an example I'd point to there? I you know, point to, the Chase Sapphire reserve for business product. You know, that was a portfolio win that we announced a great product in the market that's doing exactly that. And the second opportunity we talked about is scaling large and middle market. Card and virtual payables use cases. And, again, that's an area where we've been shipping some great product and having some great client wins. I'd point to our trip.com global virtual travel card issuing business I think it's a great example there. And then the third opportunity, the third leg of this strategy, and we've been talking to you all about is delivering product innovation and network flexibility to help our partners reach underpenetrated spend. And, you know, I I I think it was maybe the last call or call before that I mentioned, you know, our win at at BMO up in Canada where we launched our network agnostic enhanced spend management capabilities with them. And, you know, that's gonna allow them to to really capture some of that underpenetrated spend. So I think it's the strategy. It's the results. Been shipping great product. Having great client wins, you know, like the the ones that I mentioned. And then you wanna pick up on some of the numbers? Sure. I think Ryan covered CMS and VCS. So let me just hit on some of the question you had around some of the regional volume numbers. So when we look at our international volume in total, which was 9% this quarter, that was largely in line with what we saw last quarter. And if you think which was 10%, if you think about the difference in that in we did see some idiosyncratic things that sort of helped the in Q4, the international volume growth to be 10%. And so when you normalize for some of those things, we we see a lot of stability. As you click into each of these regions, some of these things do show up in in some of the regional stories. So if I if I, you know, do sort of a tour around world and and give a little bit of a high level commentary, in Europe, payments volume was relatively consistent. With Q4. We continue to to execute well, and and we're seeing the benefit of some of the wins that we've had there. In SAMEA also, you know, that was down maybe a couple points from Q4, and that's being impacted by some of those idiosyncratic things that I talked about. But still very strong growth. Very strong growth. Let me be very clear about that. One of our fastest growing regions, but it was really related to the timing of promotional campaigns that we saw in Q4. And maybe the last one I'd call out is AP as well. AP is growing, low single digits. A little bit slower than Q4. But that was one that we also called out before in terms of timing of tax payments that we saw. In Asia. And so when we normalize for some of these timing differences, we're seeing a relative stability across international payments volume. Jennifer Como: Next question, please. Operator: Sanjay Sakhrani with KBW. Your line is open, sir. Sanjay Sakhrani: Thank you. I know you talked about VAS a decent amount already, but just curious if that 28% growth this quarter can sort of sustain itself for the remainder of the year? Or do you think there's some specific factors in the quarter that drove the strength and that may not reoccur? And then just Chris, you mentioned that there were some expenses that were higher as a result of the stronger VAS revenue growth. I'm just curious, is that a variable component? Or can that be leverageable in the future? Thanks. Christopher Suh: Sure. Hi, Sanjay. Let me try to address it. Yeah. You know, just building on what I said earlier about the strong start to the year in VAS. Obviously, we don't guide to growth pillars, but you know, a lot of the things that we've talked about, you know, Q1 being 28%, that is above where we expected it to go in, but it's also you know, in line with the momentum that we've seen. We were we've seen growth in the 25-24, mid-twenties for for some period of time. It's really a reflection of you know, similar to what Ryan was saying about CMS. It's a reflection of the fact that we're executing against our strategy. We're investing behind it. We, you know, we have a clear strategy and a clear address market that we're going after. The teams are certainly, doing a really, really great job of about that. You know, some of the things also just tie into some of the other conversation we've been having, the first question is around events. And this year is a unique year that we do have two events. Both FIFA World Cup and the Olympics. We've talked about how that's gonna benefit marketing services in particular, which lands in sort of the other revenue line. That is a business where, you know, clients are super excited to engage with us and activate and have access to these sponsorships, and and we're excited about that. But that does also contribute to some of the revenue, some of the expense reasoning that that we talked about. And so let me talk about that real quick. So with both those two big events, you know, it from an expense standpoint, we see a little bit more quarterly variability this year than a normal, let's say, a typical year. When we went into the year, we said the expense associated with these two events will be in primarily peaking in Q2 and Q3. And so, therefore, as we look at sort of Q1 and Q2, we do think half one expense is a little bit higher than half two as a result of that. It really is associated with incremental revenue that we're capturing. Related to these two events. And so, you know, we're happy to do that and, obviously, clients are thrilled as well. Jennifer Como: Next question. Operator: Andrew Jeffrey with William Blair. Your line is open. Andrew Jeffrey: Thank you. Good afternoon. Appreciate you taking the question. I wanted to ask a question on the Flex credential, which is really intriguing. And and recognizing it's very small as a percent of your total credentials today, could you maybe sort of frame out a growth trajectory for us? Is there a point in time when you think about Flex really bending the growth curve for Visa? And and just I'm just trying to dimensionalize what it can mean over the next, say, three, five, seven years for your revenue growth. Ryan McInerney: You know, it's still early in the development of Flex. I talked about, you know, some of the wins we had this quarter and others. I also talked think, in my prepared remarks, about some of the expansion opportunities we have in the pipeline. Clients are very excited about it. You know, we if you just step back for a sec, you know, we think about the Flex credential like the Swiss army knife of payments. You know, it like, it's got multiple funding options that are all packed into one card. And that resonates with different players across the ecosystem. You know, you look at a SMCC in Japan who you know, they're they're more of a traditional bank, and they launched this product to to bundle know, credit, debit, rewards, etcetera, all into, you know, one product. You know, I've mentioned on this call in the past, BNPL players like Affirm and Klarna, and now as you heard in my prepared remarks, Block, who are able to take BNPL offerings that they used to have to go build out merchant by merchant by merchant around the world, which is obviously very difficult, time-consuming, and costly. Now they can offer their users a Visa Flex credential and they can go use the the BNPL offering anywhere where Visa is accepted, which is you know, all over the world. And and, you know, kinda goes on and on. So in terms of, like, the growth impact it's gonna have, we're still early in sales cycle. Like you said, these numbers at this point, you know, are small in the context of our 5 billion credentials. But you know, when you look at other things that we've done, like tokenization, when you look at Visa Direct, you look at some of the other innovations that we brought to market, it you know, we follow a similar strategy and path. Build great product, get it out there in the ecosystem, and then and then go at it year after year after year to ultimately help serve our clients and grow the business. Jennifer Como: Next question. Operator: Thank you. Tien-Tsin Huang with JPMorgan. Your line is open, sir. Tien-Tsin Huang: Thanks so much. Hi, Ryan, Chris, and Jennifer. I want to ask on the issue of processing side, if that's okay. Just I heard there's some good wins in DPS like Block, and you you talked about the Pismo expansion. So it's got just got me to thinking, how much have you invested in both of these assets from a tech perspective especially it it feels like there's some momentum on the on the processing side and maybe can you discuss if the TAM has changed around issuer processing? Love to hear just an update. On that. Thanks. Ryan McInerney: Hey, Tien-Tsin. No change in the TAM. It's enormous. I mean, you think about you think about the the opportunity, every bank on the planet except a few, needs to go through the process of modernizing their tech stack. Whether that be you know, debit issue or processing, which is where DPS is focused in the US in a more narrow place. But more broadly, their their whole entire issue of processing stacks and their core banking stacks. And yeah, we've been, we've definitely been investing, product and engineering resources into both. I think we've been shipping some great products in both. Which is, you know, what's driving the wins both with, you know, more traditional financial institutions, and with fintechs like you referenced. And PISMO especially. You know, our thesis, when we bought Pismo was that our clients were facing big decisions on how they could modernize their tech stacks and ultimately move into the cloud. And that's know, that's what that's what's proving out. Is we're we're having great sales interactions with financial institutions all around the world. And when we're able to take them through the PISMO capabilities and show them that it's cloud native, you know, provides issuer processing, core banking. It does it for all products. You know, debit, credit, commercial. You know, current accounts, DDAs, etcetera, we're getting a lot of uptick. Now, you know, these are long sales cycles. You know, the you know, a a bank kind of changing out its its, you know, its core banking infrastructure moving from on-prem into the cloud. Like, these are big decisions. They take time. And we knew that going into to buying Pismo. And, you know, we'll continue continue at the sales cycle, continue to ship great product on it, and we're very excited about the space. Jennifer Como: Next question, please. Operator: Thank you. Ramsey El-Assal with Cantor Fitzgerald. Your line is open. Ramsey El-Assal: Hi, thank you for taking my question this evening. I wanted to ask about your commentary on stablecoins of $4.6 billion of settlement. It's a small number, but it's ramping seemingly quite quickly. Do you expect more growth in stablecoin flows to be related to settling payments? Or do you see the bigger opportunity for Visa on sort of the disbursements money movement side of things? And just one quick point of clarification for Chris. You said there was some pressure on cross-border revenues from low FX hedging and mix. What did you mean by mix? Thanks. Ryan McInerney: Yeah. So let me let me just try to to frame this. I I think the short answer is the latter. But let me let me unpack that. You know, in terms of stablecoins, the areas where we see product market fit are generally the areas around the world with significant TAMs and areas where we're actually underpenetrated today. Know, what is that? So one is you know, it's countries around the world where there's high currency volatility or hard to access US dollars. And we've had great success issuing Visa credentials I think I said in my prepared remarks, I I I talked about this now in more than 50 markets, around the world to provide on and off ramps, for stablecoins. And, you know, that's that's an area where there's great product fit. Product market fit. The second area where we see, good product market fit is around cross-border, whether that's remittances, at the consumer level or whether that's B2B payments, or even B2C payments for disbursements. Another area of opportunity another area where we're generally under underpenetrated, another gigantic TAM. And then coming back to the beginning of your question, we're seeing a lot of interest. As you noted, the numbers are still small in the big scheme of things. But the growth rates are very high. Settlement on our network with stable coins. When we have partners that settle on our network with stablecoins, they're able to get access to seven-day-a-week settlement. For example, because, you know, with stable coins, we can settle on Saturdays, and we can settle on Sundays even when, correspondent banking, is not generally available. And that creates more liquidity for partners and clients. They're able to get access to settlement flows faster. In the case of some instances where they might otherwise have to hold collateral, during a weekend, they don't have to do that. So yeah, I mean, we're we're very excited about the opportunities. I guess just to be very clear about it, to the beginning of your question, we don't see a lot of product market fit in developed digital payment markets like The United States or like, you know, The UK or Europe. For stablecoin payments. You know, as I said before, in The US, if a consumer wants to pay for something using a digital dollar, they have ample ways to do that today. They can pay from, you know, their their checking account or their savings account. It's it's become quite easy to do. So we don't see a lot of product market fit for stablecoin payments and consumer payments in digitally developed markets. Christopher Suh: Hey, Ramsey. I'm gonna tackle the second part. I'm glad you asked the question about the commentary, the prepared commentary on international transaction revenue. And that's the first place I'd start. I'd differentiate. Because of the way you ask questions, you cross pressure on cross-border yields. International transaction revenue does not equal one to one cross-border revenue. Cross-border revenue lands in all of our service lines. It lands in it contributes to the 15% growth we saw across the business. It contributes to the 17% growth in data processing. And it also obviously contributes to the international transaction line. And and I will say when we look at the cross-border business in total, obviously, the volumes have remained strong and stable. This business remains high yielding and very profitable. And so it it remains a very healthy business. Now to your specific question, around, you know, the commentary around the difference between international transaction revenue, I I called out three things. I won't go through them all. But the first one and the biggest one was volatility. And we talked about, you know, sort of the low currency volatility. The second one was mix, which is the one that that you've talked that you brought up. As we've talked about mix in prior quarters, and, really, this is talking about the composition of yields across our business. Different clients, different products, different regions have different yields. As growth rates across these different items vary, then it, you know, it can have a mix impact. This quarter, the one I doubt is Visa Direct, which continues to grow fast. And also very profitable, but typically has a lower yield than carded transactions. So to the extent Visa Direct cross-border transactions are growing faster than carded, then that's gonna mix the yield down. And so that's an example of of mix. Jennifer Como: Next question. Operator: Got it. Thank you. Dan Dolev with Mizuho. Your line is open. Dan Dolev: Hey, guys. Great quarter. Thanks for letting me ask a question. I just have a follow-up on the PISMO update. It sounds like it's off to a really good start and you're making a lot of progress. Can Ryan, can you maybe update us on how PISMO is trending you know, in terms of wins with large versus small banks? And and how much bigger do you think could be in two to three years? Because it sounds like it's a great business here, and you're making a lot of getting a lot of traction. Thank you. Ryan McInerney: Yes. Thanks, Dan. Yes. As I mentioned, we remain very excited about it. You know, the large versus small bank question, it's really both. You know? The the the smaller players tend to be the fintechs. You know? And I you know, the other part of our thesis, when we bought PISMO beyond what I said earlier was fintechs are limited in their capabilities that they have to drive international expansion in many markets around the world. Often, fintech will, you know, grow up in one country and then wanna expand, and what they quickly run into is a challenge. They can't find a a technology partner that can help them scale to the next five, 10, 15 countries. So on the smaller fintech side of things, that's where PISMO has been a great fit. Right? Because it's cloud native, we're able to move with fintechs and help them expand broadly around the world. By the way, that helps the fintech. That's great news for PISMO because it it drives revenue. But it's really good news for Visa. Because we're able to help more fintech scale more broadly into markets that are underserved with Visa credentials. So it's a real win-win-win in that sense. On the more traditional financial institutions and and the bigger banks as as you referred to them as, it's more about kind of engaging with clients on this journey that they're embarking on, moving from on-prem legacy technology stacks to the cloud. And that's for, you know, that's for visual processing. That's for core banking. And know, what we're finding is that when these big sophisticated large clients really dig through the PISMO capabilities, they're extraordinarily impressed. And they find what we found, which is when we found PISMO, that it really is the best cloud native issuer processing and core banking stack on the planet. Jennifer Como: Alright. We'll take one more question, please. Operator: Thank you. And our last caller is Harshita Rawat from Bernstein. Your line is open. Hi, good afternoon. I want to ask about tokens. Harshita Rawat: As you said, they've grown to over 17 billion, three times the number of cards you have. We know the authorization rates and fraud deduction benefits, which are meaningful. It's also using the agentic capabilities. My question is, how does this proliferation of tokens and the benefits it brings changes the conversation you have with your issuer customers and merchants and merchant acquirers? Does it further change the nature of those conversations from network fees to the value of ringing? And I know there could also be more opportunity for pricing for value here. Thank you. Ryan McInerney: Thank you. As I mentioned in my prepared remarks, we're the progress, that we've made with 100% tokenized transactions. I wanna before I answer your question directly, I wanna go back to something I alluded to, earlier. You know, to get to the point where we are right now, with 17.5 billion tokens and 50% plus of transactions. It has been a multiyear journey. You know, our teams in in countries around the world have had to go you know, client by client, both the issuers and the the acquirers and merchants as you asked about. Get them to embed the tokenization into their tech stacks, help them understand the value of it, and and do that work for many, many years, which has led us to where we are. The nature of the the dialogue both with issuers in a with merchants and acquirers, has been great. You know, if, you know, if you're a if you're a retailer, big or small, like, your number one goal is more sales. And when we're able to show the sales uplift that tokenization provides, it's a real moment. You know, the the other thing that is very much on the minds that you alluded to of, merchants and acquirers all around the world is fraud reduction. And when we're able to show them the impact that tokenization can have on their fraud rates, they're very very impressed. So what we're doing right now is we're just continuing that journey. We're engaging with merchants and acquirers and issuers on case studies and showing them the impact like I described in my prepared remarks. We're really focused on merchants who have large stored credentials, cards to file. And we're showing them the benefits of converting those cards on file to Visa tokens. We're focused on checkout. You know, I mentioned in my prepared remarks the enormous progress we've made reducing guest checkout, but it's still 16% of Visa e-commerce around the world. That means 16% of the transactions, our customers aren't as delighted as they could be if those were as simple as a a tap or a biometric authentication using a Visa token. So we're working with those merchants to try to put in place the the the Visa token solutions to to improve those user experiences. We're also focused on new markets. You know, bringing tokens to new markets, both with issuers and acquirers in places like Europe and CEMEA and Latin America. So we're we're excited about the progress, but we still have a lot of work ahead of us, and we're very focused on it. Jennifer Como: And with that, we'd like to thank you for joining us today. If you have additional questions, please feel free to call or email our investor relations team. Thanks again, and have a great day. Operator: Thank you all for participating in Visa Inc.'s fiscal first quarter 2026 earnings conference call. That concludes today's conference. You may disconnect at this time. And please enjoy the rest of your day.
Operator: Good afternoon and welcome to Arthur J. Gallagher & Co.'s Fourth Quarter 2025 Earnings Conference Call. Your lines will be open for questions following the presentation. Today's call is being recorded. If you have any objections, you may disconnect at this time. Some of the comments made during today's conference call, including answers given in response to questions, may constitute forward-looking statements within the meanings of the securities laws. The company does not assume any obligation to update information or forward-looking statements provided on this call. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the information concerning forward-looking statements and risk factors sections contained in the company's most recent 10-K, 10-Q, and 8-K filings for more details on such risks and uncertainties. In addition, for reconciliation of the non-GAAP measures discussed on this call, as well as other information regarding these measures, please refer to the earnings release and other materials in the Investor Relations section of the company's website. It is now my pleasure to introduce J. Patrick Gallagher, Jr., Chairman and CEO of Arthur J. Gallagher & Co. Mr. Gallagher, you may begin. J. Patrick Gallagher: Thank you. Good afternoon, and thank you for joining us for our fourth quarter 2025 earnings call. On the call for you today is Doug Howell, our CFO, and other members of the management team. We had an excellent fourth quarter and a terrific year. Our two-pronged revenue growth strategy, that's organic and M&A, delivered revenue growth of more than 30% during the fourth quarter. That includes organic growth of 5%. Adjusted EBITDA growth was 30%, marking our twenty-third consecutive quarter of double-digit growth. So a great quarter, highlighting our durable value creation strategy that drives consistent double-digit growth in revenue and profits. Moving to results on a segment basis, starting with the brokerage segment. Reported revenue growth was 38%, Organic growth was 5%, in line with our December commentary. Adjusted EBITDAC margin was 32.2%, and ahead of our expectation with underlying margin expansion of 50 basis points. Let me provide you with some insights behind our brokerage segment organic. America's retail PC organic was up 5%. UK and EMEA up 7%, APAC up 3%, specialty and wholesale up, US wholesale up 7%, reinsurance up 8%, and benefits up 1%. So we continue to deliver organic growth across retail PC benefits, wholesale, and reinsurance. And Doug will further unpack organic in his comments. Next, let me provide some thoughts on the global PC insurance pricing environment. Fourth quarter insurance renewal premium change, which includes both rate and exposure, continued to increase in the low single digits. Once again, property decreases were more than offset by increases across most casualty classes. Let me break that down further. Property lines were down 5%. Casualty lines, which includes general liability, commercial auto, and umbrella, up 5%. Overall, with US casualty lines up 7%. Package up 3%, D&O down a point, workers' comp up a point, and personal lines up 5%. So many lines are still seeing increases outside of property. In fact, excluding property renewal premium change, we would be up about 3% during the quarter. With that said, premiums are ultimately determined by loss experience, and good accounts will get some premium relief. While accounts with poor loss experience will see greater increases. Moving to reinsurance. Let me provide you with some thoughts on the one-one renewal season. With the strong underwriting results posted by carriers during 2025, which was helped by a quiet US wind season, there was plenty of reinsurance capacity to support client demand. The property reinsurance market saw rate decreases in the teens with lower layers holding up better than the top end of reinsurance towers. We saw some continued demand for more cover and increased purchasing by clients. In fact, despite double-digit price declines for property cat globally, property reinsurance premiums were down only mid to high single digits relative to last year. Within specialty lines, marine and energy experienced increased carrier competition. Pricing across casualty lines continued to be broadly stable because most reinsurers remain very cautious of US-focused casualty risks. Looking ahead, we expect the buyers' market will persist through 2026 absent any outsized current year or prior year loss activity. While clients are comfortable with their purchased reinsurance programs at one-one, we believe it is likely that some carriers will explore buying additional protection to further reduce earnings volatility or support growth throughout 2026. Moving to employee benefits. We continue to see strong demand for our services as clients manage rising health insurance costs. Medical costs are expected to be up high single digits again in '26 driven by increased utilization, provider consolidation, and newer high-cost treatments and therapies. We are engaging with employers to help them implement innovative solutions such as telemedicine programs, wellness initiatives, and tailored benefits packages to alleviate these cost pressures. Additionally, talent retention strategies remain top of mind for many of our clients given the resilient US labor market, so we're expecting another strong year of growth. Moving to some comments on our customers' business activity. Our proprietary data, which has been a valuable indicator of the economy, continues to show solid client business activity. Fourth quarter revenue indications from audits, endorsements, and cancellations remain nicely positive and were more favorable compared to both fourth quarter 2024 and third quarter 2025. And through the first three weeks of January, these favorable trends continue. We're watching our customers' business activity daily, and we are just not seeing signs of economic weakness. Regardless of market and economic conditions, I believe we are very well positioned to grow. Our global resources, data and analytics, expertise, and unique product offerings put us in a spot to compete and to win. So as we sit here today, we continue to see brokerage segment full year '26 organic growth of around five and a half percent. Moving into the risk management segment, Gallagher Bassett. Fourth quarter revenue growth was 13%, including organic 7%. We saw another quarter of strong new business growth and excellent client retention. Looking ahead, we are well positioned to drive new business production and believe full year '26 organic growth will come in around 7%. Fourth quarter adjusted EBITDAC margin was 21.6%, a bit better than our December expectations. Looking ahead, we see full year '26 margins in the 21 to 22% range. Shifting to mergers and acquisitions, starting with some comments on Assured Partners. We are already seeing a lot of success with the AP team leveraging our products, data and analytics, insights, and tools. Our teams are hard at work integrating the 300 plus tuck-ins, agency management system conversions, and training of our middle office will be in full swing during 2026. Additionally, a little more than a week ago, all of our US retail operations were rebranded Gallagher. When it comes to our back-office integration, we are ahead of plan, including going live on our general ledger, HR, payroll, treasury, and T&E system. So we remain firmly on track with our integration plans and are confident we will be able to deliver on our synergy targets. Moving to fourth quarter merger activity, we completed seven new mergers representing around $145 million of estimated annualized revenue. This brings our full year '25 annualized acquired revenue to more than $3.5 billion. That's fantastic. For all of our new partners joining us, I'd like to extend a very warm welcome. Looking ahead, there are thousands of brokerage firms across our footprint, and Gallagher is a great home for entrepreneurs looking to grow their business, add more value to their current clients, and further advance their employees' careers. Our M&A strategy is about being better together, so that one plus one can equal three, four, or even five. Shifting to let's see. Today, our pipeline is showing more than 40 term sheets signed or being prepared, representing around $350 million of annualized revenue. Good firms always have a choice, and it would be terrific if they chose to partner with Gallagher. With a strong close to the year, let me reflect on our full '25 financial performance for brokerage and risk management combined. 21% growth in revenue, 6% organic growth, 26% growth in adjusted EBITDAC, and more than $3.5 billion in acquired annualized revenue. Another fantastic year driven by our talented colleagues and our Bedrock culture. Frankly, our culture is unstoppable. And it drives our success year after year. That is the Gallagher Way. I'll stop now and turn it over to Doug. Doug? Douglas K. Howell: Thanks, Pat, and hello, everyone. Today, I'll first walk you through our earnings release and provide some brief comments on organic growth and margins by operating segment, and also on our corporate segment results. Next, I'll move to the CFO commentary document we post on our IR website. I'll walk you through our typical modeling helpers and our outlook for '26. Additionally, this is where I'll spend a little more time on organic and margins. Then I'll conclude my prepared remarks with my usual comments on cash, M&A, and capital management. Okay. Let's go to the earnings release, to page three. Brokerage segment fourth quarter organic growth was 5%. That's right in line with the information we provided you at our December IR day. Since then, we've received really positive feedback from the investment community for levelizing for the quarterly noise caused by the timing of large life sales and deferred revenue accounting assumptions. That's a fantastic reflection of our sales culture to post 5% in this quarter and 6% for the year. Flipping to page five of the earnings release to the brokerage segment adjusted EBITDAC table, the top half of the page. We told you in December that our fourth quarter '25 headline margin would not be comparable to fourth quarter '24 because, as the footnote to that table explains, we are no longer earning investment income on funds we were holding to buy Assured Partners, and there would also be a rolling impact of 130 basis points. So the quick math shows levelizing for that gets you to 50 basis points of underlying expansion. Right at the midpoint of our 40 to 60 basis points of expansion we estimated during our December IR day. That's really terrific work by the team. So I'll give you some more information on brokerage margins when I get to page eight of the CFO commentary document, because there's headline noise will happen in the '26 again. Sticking on page five. Fourth quarter risk management segment organic growth was 7%, right in line with our December expectations. That reflects strong new business revenues and excellent client retention. Looking to full year '26, we continue to see organic around 7%. And then when you flip to page six, the risk management adjusted EBITDAC margin of 21.6% was a bit better than our December expectation. And as we look forward, we see full year '26 margins in the 21 to 22% range. So turning to page seven of the earnings release and the corporate segment shortcut table. For the adjusted interest and banking, clean energy and acquisition lines, all were very close to the midpoint of our December expectations. The adjusted corporate line was a couple pennies less than our midpoint estimate partly due to a noncash unrealized FX remeasurement loss and a small tax item. Also, while we adjusted out, we wind down and annuitization of our long ago frozen pension plan. Creates a noncash gap expense here in the fourth quarter and will again in Q1 '26. But those reverse through OCI, so it nets to zero. But more importantly, we hit the market just right and didn't have to inject any cash into the plan. Alright. Let's leave the earnings release and go to the CFO commentary document. Starting on page three, these are typical modeling helpers. Most of the fourth quarter '25 actual numbers were close to what we provided back in December, so there's nothing new here. Looking at '26, as you build your models, please use these helpers. In particular, the estimated impact from FX, and the forecasted depreciation and earn out payable expense. Turning to page four of the CFO commentary document. This page breaks down organic performance by business and it's like what we provided for the first time at our December IR day. This view helps you see four things. First, it removes the quarterly comparability impact caused by the large life sales. And second, removes the comparability income impact caused by revenue estimates. These two items were causing a lot of quarterly noise. But as we've said it as we said in December and you can see here, they are really a no never mind on a full year basis. Third thing this view does is it shows you the quarter seasonality of our business. And four, that gives you organic growth another level down. In the table. Two callouts in this page. First, in total, our fourth quarter and full year actuals in blue were in line with our IR day thinking as shown in the gray column. Second, when you move to the pinkish column, we've wrapped up our full year '26 organic budgeting, and our outlook is unchanged. We continue to see '26 brokerage segment organic growth of around 5.5%. That would be another fantastic year. So when you turn to page five in the corporate segment, just two small items. Our full year '26 estimate is unchanged from six weeks ago. And we're now providing a first look at our quarterly estimates. That said, we do have a little more work to do on the corporate segment quarterly budget but full year is done. So maybe a tweak here or there between quarters, and we'll update you during our March IR day. Turning to page six, the investment income table. Three comments here. First, our '26 forecast reflect current FX rates and changes in fiduciary cash balances. Second, our forward estimates continue to assume two future 25 basis point rate cuts over the course of the year, one in April and another in September. Third, the second line of this table shows you the amount of interest income we earned on funds that we are holding to buy AP. Clearly, that has gone away, and you can see it won't repeat here in '26. More on the impact of this on our headline margins when I get to page eight. Staying on page six, but shifting down to the page to the rollover revenue table. The fourth quarter '25 column subtotal of $145 million for brokerage came in pretty close to our December estimate. Looking forward, the pinkish columns to the right include estimated '26 revenues for brokerage M&A closed through yesterday, but you'll see that clearly excludes Assured Partners. We provide a separate page on page seven for Assured Partners. And finally, you'll see the same info for our risk management segment below that. And then to this, you must make your picks for what you think might be unknown M&A that hasn't closed yet throughout 2026. Moving to page seven, this is the same page that we have provided several times before. It shows you how we view AP. Both now it includes third and fourth quarter '20 results and our full year '26 outlook. A few comments here. AP's fourth quarter revenues were in line with our expectations. For the fourth quarter, while expenses came in a little better than expected. Some of that is a little timing between now and throughout '26. Next, the second item, there could be some small refinements in the '26 numbers because we're still a week or so away from having AP budgets locked down. That said, we don't expect anything significant and, of course, we'll update you in the March IR day. Third, be careful when rolling an AP into your '26 models. You can use first and second quarter columns as is, but for third and fourth quarter, it is the delta between the pink numbers and the blue numbers. Fourth, I'll also ask you to closely read the footnote. You're gonna read three things in there. This table reflects the midpoint of our estimates and does not include any revenue or expense synergies. The noncash figures shown on this page, which reflect depreciation and earn out payable, are included within our estimates on page three, so don't double count there. And finally, you'll read that we still see annualized run rate synergies of $160 million by the '26 and then up to $260 to $280 million by early '28. I'm also more and more comfortable there could be upside to these numbers. But give us a little more time before we update our estimates. So this is a page of really, really good news. Moving on to page eight. This is a new page to help you better understand items that impact the comparability of our brokerage segment adjusted EBITDAC margins. In the past, I've done a bridge in my verbal comments to get you past the noise from the impact of FX, changes in interest income, income from cash we're holding on Assured Partners, and then when M&A, that naturally runs lower margins rolls into our numbers. We think these tables paint a better picture than all the words we're using before. Hopefully, this will be more helpful when you build your '26 models. Since this is the first time we've provided this page, let me make a few comments. First, the upper blue table. The punch line is we improved fourth quarter by about 50 basis points. That's all due to the incredibly hard work by the team to control our costs. The lower table gets you started on modeling '26. Blue section first level sets '25 by removing the investment income on funds, we were holding to buy Assured Partners. And also resets for estimated FX at current rates. FX will likely change, but at least it gets you something as of today. The pink section of this table has ranges and margin impact commentary from what we see today. The punch line is nothing has changed since our December IR day, we still see underlying margins expanding 40 to 60 basis points in '26. And we will also begin to benefit from synergies by being better together with AP. You'll also see that we've added a line called unknown M&A with no estimate provided. This is more of a placeholder for you to just think about other factors that could impact margin comparability. Alright. Let's go to page nine to our tax credit carry forward page. At December 31, we had $73.013 billion of tax credit carry forwards. And you'll see in the footnote there that says that we have another billion dollars of future tax benefits related to our purchase of AP. The punch line from this page is the same. It creates a nice cash flow sweetener to fund future M&A. As for some modeling thoughts, when you're modeling cash flows, just assume our cash taxes paid will be about 10% of EBITDAC for the foreseeable future, and that should get you close. Alright. Let's move to cash, capital management, and M&A funding. When I look at available cash on hand, expected free cash flows, and future investment-grade borrowings over the next two years, we might have close to $10 billion to fund M&A before using any stock at attractive multiples. And this was an important point. Well, we talk about our organic a lot. It's worth a reminder that our M&A strategy creates immediate shareholder value through a nice price arbitrage. And it also creates long-term shareholder value through additional sales talent, niche expertise, and further scale. So those are my comments. An excellent '25 for our combined brokerage and risk management segments. Organic growth of 6%, more than $3.5 billion of estimated acquired revenues, adjusted EBITDA growth of 26%, adjusted EBITDAC margin of 35%, up 70 basis points this year on an underlying comparable basis. Now it might be worth a reminder that since COVID hit us, every year our margins have marched higher. We're up over 400 basis points since then. And we still see many more opportunities to improve. Those are fantastic results. So we're on to '26. We have unstoppable momentum driven by an amazing culture. I see '26 being another terrific year. Okay. Back to you, Pat. J. Patrick Gallagher: Thanks, Doug. Operator, let's go to questions and answers. Operator: Thank you. The call is now open for questions. If you have a question, please pick up your handset and press star 1 on your telephone at this time. If you are on the speakerphone, please disable the function prior to pressing star 1 to ensure optimum sound quality. You may remove yourself from the queue at any point by pressing star 2. Additionally, we ask that each participant limit themselves to one question and one follow-up question. Again, that is star 1 for questions. Our first question is from Rob Cox with Goldman Sachs. Please proceed. Rob Cox: Hey, thanks. Good afternoon. J. Patrick Gallagher: Hey, Rob. Douglas K. Howell: Hey. First question for you. You know, there's been a lot of talk about digital infrastructure. And, you know, I think some industry participants have commented that growth in the economy, excluding digital infrastructure, like data centers, is not all that inspiring. Could you just talk about how you're positioned to take advantage of digital infrastructure build-out and somewhat related, I'm just curious how your construction practice has been performing recently. J. Patrick Gallagher: Well, first of all, our construction practice is our largest practice. And as you know, we emphasize our vertical capabilities at every production opportunity. We have very strong vertical capabilities, and about 90% of our new production around the United States, actually around the world, falls into those niches. As Doug made in his comments, when we do an acquisition, one of the benefits of that is we pick up people that add to our vertical capabilities. And, of course, one of those, everybody's focused on data centers as we are as well. We have the ecosystem to do the job for clients across the entire span of what needs to go into a data center construction site. You've got real estate issues. You've got supply chain issues. You've got energy issues, etcetera, etcetera. In fact, our head of construction, Brian Cooper, was just recently quoted in Leader's Edge, which is the broker's magazine, about all the things that we're pulling together in that ecosystem to be able to take advantage of that opportunity. And a great bit of that opportunity is just the subs and all the activity that has to go into the whole process of building it. There's a huge drain on capabilities locally just for the construction expertise. And so I think every one of us that has contact with those types of clients that are gonna be building those centers out, leasing them, renting them, whatever, is gonna need an awful lot of cover. You're gonna need an awful lot of capability in simply placing the huge amounts of cover needed, and we're right there in the middle of that mix. Rob Cox: Thank you. That's helpful. And then I just had a follow-up on casualty pricing and your outlook for RPC. Embedded in, you know, your organic growth outlook for 2026, which is unchanged. It just seems like, you know, the RPC for casualty has dropped a little bit here versus the high single-digit levels earlier in the year. Just curious if you think that's a trend. I know there's been some companies out there talking about loss trend behaving a little bit better in more recent periods? J. Patrick Gallagher: I think that, basically, we're not—I mean, I'm talking from a street perspective now. I'll let Doug comment on what we're seeing in our actual data. But no, we're not seeing, you know, people jumping on the casualty bandwagon here like they are. Property is softening. There's no question about it. I think that casualty still has a heavy focus from the underwriting community, both on the re side and the primary side. I'm not so sure that they're confident in past years' reserves. And so I'm not seeing the same kind of activity there that we see on the property side at all. Douglas K. Howell: Yeah. Rob, if I read across my page on casualty renewals, you know, maybe at '22 or at 8.4 and 2023 is somewhere between 8.4 and 8.7. '24 was 8.05. This year is 8.01. So, I mean, this is—we're just not seeing in our numbers any big pullback in casualty pricing. And all the systemic factors that are out there that are naturally pushing casualty rates higher, like Pat said, some and all of them that you read about, I just don't see softening coming in the casualty. So what do we assume for next year as we're thinking about it? We're assuming that category rates will be up in that 7 to 8% range. Rob Cox: Appreciate that. Thank you. J. Patrick Gallagher: Thanks, Rob. Operator: Our next question is from Andrew Kligerman with TD Cowen. Please proceed. Andrew Kligerman: Good evening. First question is around talent retention. We've all been hearing about the coaching and, you know, it seems to be a big challenge for a lot of brokers out there. Could you talk about Arthur J. Gallagher & Co.'s ability to retain its producers in particular? And, you know, how you see that playing out on your organic revenue both this year and— J. Patrick Gallagher: Well, I think—yeah. I'm happy to talk about that. I mean, I'm very pleased about the fact and just our retention of producers is not changed against historical norms in any way literally over the past number of years. If you take a look at the machine that we built that does acquisitions, I think we bring people in. Last year, we've recruited through the acquisition process over 2,000 new production talents. And we're lighting them up with tools and capabilities. We like to tout the fact, frankly, that we're a brokerage firm run by brokers. We understand the sales process. Everybody from myself on down is involved in that sales process. People know that they can reach out and get that kind of support. Everybody understands how important production is. And, frankly, we pay our people to produce and they get a piece of that. We're very happy with that. I'd have to tell you that our retention rates remain strong. Do we ever get poached? Of course, we do. And I think that there are right ways to hire people, and there's wrong ways to hire people. We're very defensive and we'll litigate where we feel somebody has done it the wrong way. And we also do recruit from other competitors. And we always try to do it the right way. So I think that my answer to your question is I would simply say, number one, very stable. Number two, adding to that capabilities with headcount from acquisitions. As well, let me mention, let's not forget, about 600 young people in our internship every single year will recruit half of those or even sometimes more. That internship continues to grow. It has a huge impact on the sales firepower that we bring into the company and has been a very big part of our success as an organization. So I'm pleased where we are. I'm not naive to the fact that there are people in the field trying to wave a magic wand that somehow their deal's gonna be better and bigger? I would caution any of those that are enticed by that to take a hard look before they make the jump. Douglas K. Howell: Yeah. Just on a number basis, the percentage of producer retention is exactly dead flat. It has been that way since I've got it here going back to 2019, and it's dead flat on it. So we're not having any real change in our producer retention statistic. And, also, you're right at the nub of it. This still is a business that needs producers to grow it and to sell it. So we think that being a broker run by brokers and having a sales and marketing mentality inside of our company is critical to maintain. We wake up every day. We work on it. We also invest a ton of money in sales tools, illustratively. Within two weeks, our cutting-edge Gallagher Drive program, which is the digital experience that our producers can use with our clients on the desk of every single salesperson at AP. They're using it. We're winning together already. So the answer to this is we need people to sell, need people to produce, and we need to keep fueling them with tools and capabilities to make them better at the point of sale. And I gotta tell you, if you look at who's trying to poach people right now, they just don't have it. We do. And I think you'll see some headlines that come out about it. That's a drop of water in the Pacific Ocean. It doesn't even cause a riff. So, we're pretty proud of our culture. We're pretty proud of the hundreds of millions of dollars that we're investing every year in technology and data and analytics to make our folks realize that this is the very best place that they can toil and work and produce better than any other place. So we're gonna lose a few people that can't see that, but we haven't seen any change in our retention. J. Patrick Gallagher: I agree on the culture, Andrew. I mean, every chance I get an opportunity to talk about the culture, I do. It's, I think, one of the most important aspects of our success. And, again, it's a sales culture driven by salespeople who honor the fact that selling insurance and risk management services to people is a very honorable profession. Andrew Kligerman: That's very helpful color. My follow-up question is around AI. And disintermediating the intermediaries. I've been getting that a lot. And it's around kind of small commercial. Could you talk to what your thoughts are out on the horizon, how that might affect your small business production? And one thing I wanna layer on to the last question, Assured Partners. I'm assuming that Assured Partners is aligned with everything you just answered in my first question, retention is very similar. Right? Very stable. Coming aboard. J. Patrick Gallagher: Very happy. We've probably met in person now, 90% of the population of Assured Partners. We've done an outreach. We're about 20 of our executives traveled the field, visited offices, did town hall meetings. We attended their sales meeting in Indianapolis before the close and met over a thousand people there. And we've had six sessions in Rolling Meadows with three to 500 of their people at each session. And I'm telling you the excitement. There wasn't one of those where I didn't meet someone who came up to me and said, Pat, I can't tell you how I'm excited. We wrote an account together because I had this and you had that. I'm like, there it is. That's the magic. So, yes, I think it clearly played. In fact, the nice thing about AP is that all these toys are now new things still. They're shiny objects. And it kinda builds a lot of excitement and momentum. So let me go to the AI question because I'm the old man in the room. Yeah. Andrew Kligerman: Okay. Address the same thing when we had the dawn of the Internet. J. Patrick Gallagher: Goodbye, intermediaries. This is all gonna be done by me at home on my computer. And that showed just not to be true. Well, why is that? And in particular, in the small end and in personal lines, guess what? Everybody has a need for some really good counsel. And they want to talk to a person about what they should do. And I could turn the question right back to the investment community. Why would anybody use you guys? Why don't they just go to AI and say, pick my portfolio? Because guess what? People make a difference. So when that person who's a small account with five trucks and he or she is trying to make sure people are on the job and someone got sick and they're replacing that person, but they've got a commitment to build this building by a certain date. You think they've got the confidence to pick their insurance online? Even if ChatGBT says, this is the way to go, it's just not happening. The trusted adviser is more important today because of AI than it was before AI because everybody's confused because AI tells that it knows exactly what you should do and we all know it lies. So if you're comfortable doing that on your own, good luck. Douglas K. Howell: Yeah. I'll turn it another way on it. I think that we stand to benefit from it. Because if there is a product that can be sold with AI, we will likely be the ones that can put it out there. And then put it out there, have AI, get it to the point of sale, and then have a producer do the final piece of it. Second thing is, remember, onboarding a customer is different than servicing a customer too. So it might tell you what the best product to buy is, let's just say that works. But then you gotta service that policy. And then you've gotta handle the claims on it. And then you've gotta interface with the carrier. I doubt that there's an AI tool that will sell a policy to somebody who has a serious issue in their bar or restaurant and then AI is going to tell AIG to pay the claim. It just doesn't work that way. There's gonna have to be an adjuster there. There's gonna have to be a counselor called the producer that helps them how to claim to pay. Maybe they can put some policies on the books, but the service load that will come along with that. Now on the other hand, we see AI as being a terrific benefit for us to get better, faster, at lower cost. We have spent twenty years working on standardizing our processes, centralizing them in our low-cost centers of driving the quality very high. AI is going to help us automate a lot of that. So the service layer, I think that we're going to be able to deliver a better, faster, and less expensive service offering. But when it comes to actually onboarding the customer, maybe a little bit actually servicing the customer long term, that product's got a long way to go if you don't have a customer service rep between the technology and the customer. So we're spending a fair amount of money on AI, we're getting some really terrific results, especially, like, in our Gallagher Bassett unit for on the claims adjusting side, the claims resolution side. Seeing some nice speed to market that we can do. You know, just a lot of our back-office functions could really benefit for us. And honestly, there's only three or four of us in the industry that are gonna be able to devote the money into this that will actually deliver benefits. So it's a terrific tool. It's not a replacement for production. Will improve service, and I think that service will help us improve our retention rates. So, you know, but actually selling insurance, I think it's gonna be a long time for that to happen. Andrew Kligerman: Thanks for the helpful insights. Operator: Our next question is from Mike Zaremski with BMO Capital Markets. Please proceed. Mike Zaremski: Hey, great. Good evening. For Doug first, on page three of the press release, you know, you showed $882 million and $171 million of M&A divestitures and other, you know, for 2025 versus last year. Think that includes life sales, assumption changes, etcetera. I mean, do we need help breaking this out for us to help model the life sales and changes in future periods? Or I know that's something maybe we could take offline, unless you wanna think it's worth helping us here. Douglas K. Howell: Yeah. I think maybe since this is more of an annual impact, and there is, but this quarterly impact is the bigger thing. Maybe we do take it offline, but maybe the punch line on this is we think about all this change from the life sales and then our deferred revenue assumption changes. When you boil it all down, and you look at it, what does it all mean? What does it all mean is that had we had exactly the same level of life sales throughout '25 as we did in '24. And if we had had the same level of service quality improvement in '25 as we did '24. We've improved our service considerably, just not as much as we had done in '24. It's all gonna boil down to $25 million of EBITDA. So on, you know, $4.8 billion of EBITDAC this year, that's the kind of magnitude of what we're talking about. In here in a lot of these quarterly ones. So we've tried to put that in a bucket, try to exclude it from our organic growth because it was clouding the true underlying organic growth, but because of these things bouncing around, especially on a quarterly basis. So as you unpack it with Ray after this call, you're gonna find that all nets down to a very small number. Mike Zaremski: Okay. Understood. Thank you. I guess, my follow-up is, just on the pricing environment and how it impacts your organic. I think you guys have some good charts showing, you know, the industry's pricing levels versus your organic, you know, going back thirty plus years, you can see that when pricing goes to very high levels, there's kind of like a decoupling. Right? Your organic doesn't go to, you know, fifteen or twenty, but, you know, it improves. But I think more importantly, when pricing falls like it is today, your organic actually decouples and it stays, you know, usually positive. So I'm just curious in a market that you're describing of properties very soft and casualty might stay harder. Is there any—does that dynamic still hold, or is there any nuances to kind of given with this it's a tale of two markets, property versus casualty as we think about 2026 and further. J. Patrick Gallagher: Well, I'm gonna try to get a better head around that. So if I don't, please give me some help. But, first of all, as prices are running up, you're exactly right. Of course, our revenue tracks directly with that. Our job, what we sell to our clients, is mitigating that increase. So that's where we counsel them on when they should opt in on coverage and opt out. And, you know, our background and our history is the whole concept of risk retention. That's the birth of Gallagher Bassett. And when you see rates go up, the alternative market, I guess we still call it that, is one of the fastest-growing aspects of the market where people like ourselves counsel our clients and don't pay the premium. Take the risk yourself. And then, of course, when it comes down, we don't tend to migrate the other way as quickly either because there is a portion of opting in. Our prepared remarks, we talked about the fact that in the reinsurance side, we are likely to see this year off-cycle some additional purchases of reinsurance. That's exactly the kind of thing I'm talking about. That translates into the retail market as well. So in this cycle, I do think what we've been saying for the last number of years, which I think is holding true, is that you can't talk about the cycle. We're very clear on what's happening in the property line. By the way, our clients deserve that. Property went up through the roof, and underwriters needed the premium. And now they're getting a decrease on that because it's been a benign loss year. But if you take a look at the other side, casualty, we're still seeing increases there. Because maybe the capital that's been deployed isn't necessarily adequate at this point to give discounts. So what we're seeing is cycles within the cycles. So D&O, as you might recall, over the last three or four years, came down quickly. Capital flowed into those rates three or four years ago and brought the price right down. And now you're seeing it maybe bottom out and start to increase again. Workers' comp, interestingly enough, has been pretty flat for a decade, which I find very interesting given that medical indemnity is such a big part of that product. Shows you what managed care has done for the line. And then you have casualty separately and property. So I don't know if I actually got my head around your question, but you add all those together, and what you've seen in the past will probably reoccur this time as rates go up and down and all these lines. Mike Zaremski: Okay. You know, I think you helped. I was just trying to see if maybe this cycle could play out differently. But sounds like it will be similar to— J. Patrick Gallagher: It will play out differently because you gotta look at the individual lines. So every quarter, we report pay attention to what we're seeing in casualty, we're seeing in comp, in property. And sometimes the property will break between the cat-exposed property and just general property. We'll break that out when that happens. Douglas K. Howell: Yeah. We tend to talk a lot about cat property rates. If you throw it all in a bucket with all the other property rates and let's not discount the impact of fire and convective storms, etcetera, our property book is down. The pricing is down four or 5% overall. So this isn't a 20% down market. When you look at what was happening and but when carriers didn't have the deep insights into their loss cost trends as they do now, you add a little more volatility. I believe that this sales folks that have the tools that we do if they're going in and trying to talk to your customer about a 30% rate increase, now I'm gonna talk to you about kind of a flat renewal. You can see our wares. You see what other services you get from here. You get more from Gallagher. So I think that our customers will be wise. They'll opt back in for more covers and that coverage, and that will stump the decrease a little bit in property rate declines. Mike Zaremski: Thank you. Operator: Our next question is from Elyse Greenspan with Wells Fargo. Please proceed. Elyse Greenspan: Hi, thanks. Good evening. My first question is on margin, right? I know, Doug, you went through the new page in your CFO commentary. It seems like the margin, if I add up the pieces, it right. Around, you know, 60 basis points in '26. Appreciate, like, the underlying component has been unchanged. Obviously, a lot of pushes and pulls. When we think beyond '26, obviously, M&A and interest rates, I'm pretty sure you could always come into play. But is it right to think that just from a forward modeling perspective beyond that, that we kind of be back into the thinking of, right, like, 4% plus organic and kind of, you know, that 50 basis points of underlying margin expansion or something within that ballpark? Douglas K. Howell: Yep. Your recollection is right. That's what we've said, and we still believe that. We believe that you can start seeing some margin expansion at 4%, and then, you know, you go up five, six, 7%, you get more margin spent. The other thing too is that I think you'll really see we're gonna have noise in the first two quarters of next year with the lost interest income on funds we're holding for AP. So that's gonna cloud the headline story. So a little patience with us so you can, you know, cull that down and not really get to the underlying expansion. But, also, we're gonna start seeing the synergies come through from that AP acquisition. And that's going to also—we'll break the pieces out. Probably can do that pretty well in '26. By the time we get to '27, it might be hard for me to tell you whether that savings and did we get better because of legacy Gallagher? Did we get better because of legacy AP coming together? To your question about looking out for '27, the numbers there get you to a pretty good spot. But just remember, could be another $100 million, $120 million of cost savings that we get out throughout '27 so that by the time we get to early '28, we're kind of at that $260 to $280 million additional profits or additional EBITDAC on it. So you're looking at it the right way. Your recollection is this that. We still see that this is the same environment that we can improve margins starting at 4%. So answer to your question, I think is yes to your question. But with all that background, I think that we've got two levers that are gonna be pulled. Or just the natural increase, as we grow more, then also the role in synergies of AP. Elyse Greenspan: Thanks. And then my second question, I guess, goes back to organic and maybe a slight follow-up on Mike's question, right? So you guys, you know, change the definition, right, to tie to what you outlined in December. But I think, like, the two pieces, right, the life and revenue assumption changes probably would have been a negative three. In the fourth quarter, which feels large. I guess it would have been kind of net breakeven in the other three quarters. So it feels like from what you've said, Doug, it's like $25 million of EBITDA. So things are like $70 million of revenue and maybe more pronounced in the Q4. Just want to make sure I'm thinking about this correctly, and I guess maybe it was the higher end of you guys had guided in December. And I guess if these things bounce back, right, they'll stay in the core commissions and fees and be backed out, and there shouldn't be backdate of, I guess, overall EPS and revenue noise. Douglas K. Howell: Yeah. Let me see if I can unpack that a little bit for you. But first of all, you know, the life sales in the fourth quarter came in at negative one and we were guiding zero to one. And then the deferred revenue came in at negative two versus a negative one to two. So, we were—it was kind of within the range of estimation that we had there. Think it's important to understand that, you know, the 2% for the deferred revenue assumption changes. If we updated our deferred revenue assumptions pro rata throughout the year versus doing it on a quarterly basis, kind of like annual reserve reviews that the carriers do. It's a very laborious process. Takes a long time. There's lots of surveys. You'd spread that, you know, the 1% for the full year across four quarters, and it would have been 25 basis points of impact. So the way you have to think about it, this table plumbs and gets you to what do we believe our underlying organic growth is. What's the business running? And we saw it running 5% in the fourth quarter, and we see it running in about the 5.5% range for 2026. 6% for '25 in total. So you have to think about this as a quarterly discussion, not an annual one. Elyse Greenspan: Okay. Thank you. That's helpful. Operator: Our next question is from Tracy Begley with Wolfe Research. Please proceed. Tracy Begley: Thank you. Good evening. Sticking with organic revenue, there were some areas within brokerage on the fourth quarter where you were ahead or below your plan, even though Investor Day was in late December. Can you add some color on your experience within specialty U.S. Wholesale? You're somewhat ahead in reinsurance, where you were behind. And sticking with reinsurance, if you could add commentary on how one-one renewals may play into organic revenue for 2026. Douglas K. Howell: Alright. Let me tackle that. First of all, when you talk about the reinsurance number, we were forecasting about 10% or, you know, organic growth, and it came in at eight for that fourth quarter. It's an extremely small quarter in terms of dollars. The difference between that 8% and that 10% is $1.5 million. So when you think about the degree of estimation that can change on a percentage, that's what's causing it. I think you had another question about specialty, that came in a couple points better. You know, I think that we had a really good wholesale month and it came in strong at the end of the year as we were putting some placements to bed. So, you know, again, it's probably another $45 million of revenue or something like that. So the degree of estimation risk around a percentage point on some of these is pretty small. I think notably, though, you know, we thought we were gonna do 5% in the retail P&C. Well, that's a $3 billion business. And we came in at 5%. So what we thought on the big business, there's not—the law of large numbers helps us get those numbers a little bit more accurate, so to speak. Tracy Begley: And just to follow-up as well, I think the one-one reinsurance renewals were a little bit worse than what was expected at Investor Day. So, like, how does that play into your guide for '26? Douglas K. Howell: I don't know where you picked that up in our commentary. Is there something you heard? That's wrong. Yeah. I don't think it gets softer, but I don't think our performance is weaker. Okay. Are out in and buying some more coverage. That's—I just wanna make sure we said it right. Tracy Begley: Okay. So that piece is helpful. You reiterated your prior remarks $10 billion to deploy towards M&A without the need to issue stock. So what I thought is I looked at the bottom of the top 100 brokers, and we estimated that it would take more than 65 deals to get to exhaust that full $10 billion of funds. And that number rises if you focus on real micro targets with than $20 million of annual revenue. So that's just a lot of deals. The playbook is great, but I'm wondering how feasible it is to close on a large volume of deals. And if that doesn't transpire, how would you deploy any dry powder? J. Patrick Gallagher: First of all, let me address the deals. One of the things that I think we have that a lot of other firms don't is we've got people in the field who have done deals already. We now have hundreds of offices around the country organized in regions and zones, both on the property casualty side and the benefits side. And they're out talking every day to that exact population that you're talking about. And the ones that are a million, $2 million, we don't even announce them. And we bring deals to the table like that literally every week. And so what we've got in terms of the ability to vacuum up, hoover up a lot of these littler brokers, is, I think, a very unique opportunity as they begin to realize that they don't have the tools. They have one or two big accounts they wanna take care of, and we're a great place to build their career, their family's career. At an IR day sometime, I might be able to address actually the people that have taken advantage of that opportunity. And then we're ready and willing to talk to the big ones. And when you take about when you take that dry powder, having just spent $13.5 billion and realize that there aren't that many people in the marketplace that can do that, I think we've got both ends of the spectrum covered better than anyone else in the market. Douglas K. Howell: Yeah. Let me give you some other stats. So you go back to 2014, we did a total of 59 deals. 2014 when we were half as big as we are. You know, we can do acquisitions in Canada, in the UK, in all in every single line of business. So being able to do 60 deals, we did 59 in '14. We did 58 in '12. We did 46 in '18 and '19. So, you know, and these that doesn't include the million or $2 million, the smaller ones. We kinda target. But these are just on the sheet that I have here of anything that size. So I believe that we have substantial opportunity to continue to clip off 50 to 75 deals a year and not even blink. J. Patrick Gallagher: And Doug mentioned it's a global practice. Douglas K. Howell: A global opportunity. There's $7 trillion of premium floating around this globe spreading risk. Those are Swiss Re numbers. We touch about $250 billion. Do you think the opportunity is? J. Patrick Gallagher: Huge. The other thing too is, you know, so many of these agencies are owned by baby boomers. That don't have succession plans in place. I think that we're going to get our fair share 60,000 of these brokers around the world. We can clip off 75 a year. I have confidence in the team that we'll be numbers that are put out by—I can't do them all. J. Patrick Gallagher: Because I may have a note having—we're probably approaching over 900 acquisitions this year that have been announced. And pick those up from Marshberry and Optus Partners and others. Tracy Begley: Very helpful context. Thank you. Operator: Our next question is from Gregory Peters with Raymond James. Please proceed. Gregory Peters: Hey, good afternoon. So I ordinarily wouldn't do this focusing on the fourth quarter numbers. But I am getting some inbound emails on it. So I think it's worth spending a minute on it. And there's just some confusion over what the street consensus has if they're doing the old definition or the new definition. You know, the 5% looks great. We're just trying to—and I know is inside my numbers. I don't know what's inside the consensus and maybe the consensus has different numbers. I wouldn't ordinarily do this, guys, but I'm getting inbound emails asking me about it. So I thought I'd throw it out there for you to comment on it. Douglas K. Howell: Alright. Let me hit a couple things on consensus. Let's start with EPS. Consensus, I think, was around $2.68 or 69¢. For brokerage, we posted $2.74. Risk management was 21. We posted 22. And corporate segment, the midpoint of what we told the street was 56. I think the street may have had 55, and we were a couple pennies less than that. So when it comes to EPS, I can comment on the consensus. On it. When you look at down within the organic growth models, I think that I would hope that what's in the models would have been the 5% we told you in December. To compare when you ferret out the noise or the noise from life sales in that. So I don't know if I have it either, Greg. So I don't know—I'm kinda digging through some papers while I'm talking. Maybe I can come back to that question. But, I mean, if consensus listened—if the sell side we said in December, we posted exactly that. Gregory Peters: Well, it is consistent with what you said, but I don't have a—I don't have visibility on consensus. I wouldn't have asked you this unless I was getting questions. Have the information in front of me. I can probably dig it out what each different analyst has. But even our transparency into that isn't all that great. So— Douglas K. Howell: Yeah. Gregory Peters: That's fair. Hey. Can we—can you go to the page seven, the Assured Partners disclosure? And as you were walking through that table, you said, hey. Be careful about the '26. And what I'd like you to come back is reexplain that. When one of the line items that caught my attention in there is if I look at the fourth quarter '26 projected pretax income, from Assured Partners at a 194 down from the 201 in the fourth quarter '25. So I was just—I know there's a reason behind it, but there—do you—some other comments were on this table, and I just wanted to go back and revisit that, please. I got you. Right. I understand. Douglas K. Howell: First, when you build your models, we think you should be adding in rollover revenues from back on page six. Because of our acquisition program. We've talked about that for years. Right? Yeah. When you get to page seven, what I was fearful of is that you would pick up the pink section and you would add in $745 million of revenue out in fourth quarter '26 when the fact is we already have Assured Partners in our numbers for fourth quarter '25. So there is no rollover impact. So if I would've changed this table to be a rollover revenue table, it would say rollover revenues are $880 million in the first quarter, $755 million in the second quarter, $509 million. That's the delta between $815 million and $306 million and that would be $40 million in the fourth quarter. Right? So— Gregory Peters: Got it. Douglas K. Howell: What we're trying to do is the pink section here is showing what a full year would be, not necessarily the rollover impact. And so that's why I said careful. You can use exactly the first and the second quarter numbers, drop them into your models, but take the delta between third quarter '26 and third quarter '25 and drop that into your models for the rollover impact of Assured Partners. That doesn't have, you know, synergies in it. This is a midpoint of the range, so there could be some, you know, some numbers around that that go one way or another. You know, we're doing our budgets of Assured Partners here, and so it could change a little bit by quarter. But this gets you started as you're trying to project, you know, next year. I just was fearful you would add $775 million in the fourth quarter to— Gregory Peters: I got that. But they keep—can you go—can you just address—now I'm hung up on this fourth quarter '26 number, the 194 versus the 201 in '25. Why would that be lower in the fourth quarter '26 pretax than it was in the fourth quarter '25? I'm sorry to beat this one up. But a static table that we provided to you before— Douglas K. Howell: That number will likely change when we get to March. And also, maybe another way to think about it is 201 million. When I said there was a little bit of timing in that one, I wouldn't expect that timing to repeat when we get out to 2026. In a perfect world, it would say 201 over there. It says a 194 million versus 201, kind of the same number, but a fair question. Gregory Peters: Thanks for your time. Douglas K. Howell: Yeah. Hope that helps. Hope it helps everyone. Operator: Our next question is from Andrew Andersen with Jefferies. Please proceed. Andrew Andersen: Hey. Thanks. Maybe just back on M&A, if I think about some of the disclosures around term sheets and annualized revenues, it does seem to be coming in a little bit over the past few quarters, and I think part of the idea with AP was it would give you access to some new M&A pipeline. Is the right way to read this maybe that new pipeline just hasn't materialized yet or the quality of these term sheets is better than they were in the past? Douglas K. Howell: You know, here's the thing. I think there's a natural slowdown as we've been sitting here. You know, it took nine months for us to get this approved to the DOJ. That freezes people in their behavior. We've been together now. Let's call it arguably five months now. I think the teams are starting to gel. They're starting to understand that they have a two-pronged growth objective as a branch manager. They gotta grow their branch organically, and they gotta find good merger partners. What I really love about it is we got 300 more—90% of our acquisitions are sourced at the local level. It's not like we've got a team of bird dogs that are running around trying to call out 400 opportunities, but we've got a thousand different branches around the world now. Maybe more than that, that every day they're talking to their competitor down the street about how we can be better together. And that's where we get all of these, you know, and Tracy was asking me, can we do 75 of them? Boy, I would think that a thousand different voices out there will do a pretty good job sourcing out of 60,000 opportunities. I think that our M&A program will be alive and well. I also believe there's a—this may be a little systemic slowdown here as sellers come to the realization that maybe valuations are coming down, and it takes a while for people to realize there's a new norm in that. Andrew Andersen: Thanks. And then just on that margin table, as you think about the AP synergies in '26, is that including both revenue—I guess, that's included both revenue and expense synergies. But I would think the revenue synergies are coming online pretty quickly since it's just changing some contracts. And the contingents and supplementals. There. Is that the right way to— Douglas K. Howell: Actually, no. I think that they'll both be at a steady pace throughout the next two years and everything. But remember, revenue synergies can be from cross-sell. They could be trading with ourselves, wholesale, London markets doing that. Joint selling could be some of the revenue side. And then you got the carrier contract that still take—it takes us a couple years to get those rolled out and have the combined value proposition that, you know, the communicated with the carrier. So probably not as fast as maybe you have in your mind, but not in your mind. So—but I think expense and revenue synergies are gonna grow kind of at equal pace over the next two years. Andrew Andersen: Thank you. Operator: Our next question is from Alex Scott with Barclays. Please proceed. Alex Scott: Hi. Just wanted to go back to Assured Partners and see if you could comment a bit about, you know, how their growth is coming in. I know we can, you know, see some of the numbers you disclosed in revenue and so forth, but I'd just be if you talk about, you know, their organic growth and, you know, how that's progressing relative to your plans. And I—you know, what does sort of underline and underpinning your estimates. Douglas K. Howell: Alright. So let's go back when we bought Assured Partners. We merged—we thought that they were running organic about a point, point and a half less than us. Terrific sales culture, terrific producers out there. And I'm seeing that still about the same. Therein lies the opportunity. I think that us being able to deploy our tools across their terrific sales folks is going to get them back, their organic growth close to ours as we go forward. So I would say there'd be no dilutive impact to their margins we hit 2027 when they start being in our organic numbers. J. Patrick Gallagher: And I can tell you from the visits that we've had, as I mentioned earlier, we've had a whole bunch of them come to basically trade fairs in Chicago in Rolling Meadows. They are really turned on by the opportunities. And so it's put a big push behind them, a wind behind their back, if you will, to go out and talk to people that maybe they didn't write before. Stories change. We've got more resources. Let me bring something to see you. It's pretty exciting. Alex Scott: That's all helpful. Thank you. And on the M&A pipeline, could you comment a bit just around how you're seeing valuations and maybe if there's any difference between larger versus smaller acquisitions and just if there's been any move. Douglas K. Howell: Yep. They're coming down. J. Patrick Gallagher: I can't remember the last time I saw an ask for 16. Yeah. These are over 10 on the nice tuck-in acquisitions, and, you know, you're down in that, you know, 12 to 13 times when you're talking about the bigger ones now. Alex Scott: Got it. Okay. You. Douglas K. Howell: One heads up for everybody on the phone. We have got—you know, this is a great call. I'm gonna—we're gonna try to answer the next five or six questions a little faster. Just because there's a line of folks that wanna get some questions in. So if we seem like we're just giving you a yes, no, or whatever, it's just out of fairness to the other folks that are in the queue. Operator: Our next question is from Paul Newsome with Piper Sandler. Please proceed. Paul Newsome: I'll be a good citizen to just ask one question. And I apologize if I missed it, but Brown & Brown was talking about movement from admitted and non-admitted. Any thoughts on if that's happening in a material way for your book? As well? J. Patrick Gallagher: It's not. Paul Newsome: There you go. Next question. Douglas K. Howell: Short, Paul. What can I do? J. Patrick Gallagher: I'm really not seeing a movement, but I mean, I was trying to be funny here, Paul. But the fact is, no. We're not seeing a lot of it. We have the data on that. And the wholesale markets are doing a pretty good job of renewing their business, which is good for our clients and good for us, good for our PS. But we are not seeing the kind of movement in a softening market. Now part of that is you're dealing here in a softening market with primarily property. Well, guess what? That found its way to the E&S markets for a reason, and it sure it certainly wasn't about 5% increases or decreases. So, no, there's not a big jump back into the primaries at this point. Paul Newsome: Fantastic. I'll let somebody else ask a question. Douglas K. Howell: Thanks, Paul. Operator: Our next question is from Mark Hughes with Truist Securities. Please proceed. Mark Hughes: Yes. Thanks. Pat, you'd previously given pricing by customer size. You happen to have an update for that? J. Patrick Gallagher: Basically, across the book right now. Talked about that before we did this. There's no sense to put it in my prepared comments. So, really, what we're seeing on the large accounts and the small accounts is they're basically—you recall, we were seeing large accounts get a bit more discount as the market changed a bit. And now both big, medium, and small accounts, all three are getting about the same decreases. And increases, interestingly enough, on the casualty book. Mark Hughes: Thank you. Operator: Our next question is from David Motemaden with Evercore ISI. Please proceed. David Motemaden: Hey. Thanks. Good evening. Just had another question on the organic and the deferred revenue assumption changes that were 2% this quarter and 1% for the year. I know you guys have the new definition now of organic, but just on these assumption changes, is that something that, you know, you guys can sort of, you know, implement any sort of process improvements or anything in terms of, like, assumptions starting at the beginning of the year to just have less of a potential drag in the future? Anything there that you guys are looking at? Douglas K. Howell: Well, listen. When I look at it, when you look at the last three years of this, for the full years, it's zero and zero, zero and zero, zero and negative one. So doing a wholesale change in our process because of a 1% change. I understand the quarterly noise, and we—you know, that's why we spent so much time on it in December, and we're talking about it beforehand, and we're signaling it. That's why we're trying to do it. If this were just an annual, if we only reported results annually, you would never ask us a question about it. It would be so minor. And so I think that, you know, in a new process, and, of course, we'd take a look at it. But to have, you know, hundreds and hundreds of people update surveys and their time studies and everything, you know, every three months. I just think it adds a burden of cost that it's probably not worth it. So I guess my ask for you is to try to look past the quarterly noise, look at it on an annual basis and say, you know, we've done a good job of making sure that you didn't cloud the fact that we're running a 5% organic growth business right now. And we see that going forward. David Motemaden: Got it. So you would think that would be a zero for 2026? Douglas K. Howell: Well, I would actually like it to be a positive number year as we improve our service quality. If we can improve it a little bit more next year, but we've done a really great job of getting our service to the point where we just don't make mistakes anymore. Provide certificates of insurance over, you know, within 99.9% accuracy within twenty-four hours. You know, it's just that, you know, but years ago, that was taking a little bit longer, several days to do, and our auto ID cards and our policy review. So we're getting to the point where the chassis is so industrial strength right now. And the bigger we get, the impact would be much smaller on that. David Motemaden: Thank you. Operator: Our next question is from Meyer Shields with KBW. Please proceed. Meyer Shields: Great. Thanks so much. And I'll try to be quick too. To the extent that there is disruption in the London wholesaling market as one of the major players there builds a retail platform in the US. Is that an opportunity for RPS? Or does the fact that Gallagher has retail operations itself make that a tougher sell? J. Patrick Gallagher: It's a big opportunity. The answer is yes. Meyer Shields: Okay. Perfect. That's what I wanted to know. Thank you. Operator: Our next question is from Katie Sakys with Autonomous Research. Please proceed. Katie Sakys: Hi. Just one for me. I wanted to zoom in really quickly on the benefits brokerage and consulting outlook. You know, looks stable versus 2025 at 4%. Health inflation doesn't seem like it's incrementally changed this year relative to last, and maybe that's gonna be less of an uplift to employee benefits organic. Can you kind of walk us through what you're thinking on what's going to keep that 4% organic growth rate unchanged this year? Douglas K. Howell: You crackled at something there, 37 words before you finished. Can you just ask the nub of the question again one more time? Because we just got a crackle from somewhere. Katie Sakys: Yeah. Sorry about that. You know, it doesn't seem like health inflation might be as much of an uplift to employee benefits organic this year as it may have been last. Can you walk us through what you're thinking on keeping the 4% benefits brokerage organic growth rate stable? Douglas K. Howell: Yeah. Here's the thing is that, you know, truthfully, a lot of our services are priced on a per employee month basis. So as rates go up, it doesn't necessarily follow that like you would see in the P&C side. But what it does do is it does cause—it does present many opportunities for more advisory projects. That come in as they see increasing medical costs, increasing premiums of how do they change their programs, how do they change their deductible, gives us more pharmacy benefit review engagement. So we feel pretty good about the fact that as you have pressure on your labor force, benefit cost, it leads to more opportunities for us to go in and consult and give some advice. So that's why we feel pretty good about it. I also feel like it's gonna give our consulting operation a boost. J. Patrick Gallagher: Because I believe everyone is going to shop their employee benefits. I think everyone is fed up with employee benefit with health care cost inflation. And while they like the people they've been consulting with and it's a very sticky business, I think they're open to the kind of marketing efforts that we have now, the size, the scope, and our capabilities, even in the smaller side of the market, people are, I think, just a little bit more willing to listen right now. And we do have some creative solutions. There are things that we're doing in telemedicine, as I said in my prepared comments and what have you. That are different than what the small local broker. We just—when we closed on AP, what we found is we'd have over the last twenty years most benefits in PC people were housed together and embedded in the same P&L. And we, literally, thirty years ago, decided that we would break those apart certainly looking for cross-selling synergies working together, not changing it to not be Gallagher, but to work together in a truly separate benefits capability, separate benefits operation and company. I think that's been very, very successful for us, and it proves the point, I think, to the buyers that we do look at it as a different practice, as a different profession in the sense of its advisory nature. And they should be listening to us now. And I think there's a lot more opportunity to build our pipeline than there has been in the—even in the last few years. Katie Sakys: Thank you very much for the color. Operator: Our last question is from Ryan Tunis with Cantor Fitzgerald. Please proceed. Ryan Tunis: Hey, thanks. So, yeah, we got the Super Bowl next weekend. So in the spirit of that, Doug, I'll put you on the spot a little bit here. Was five-eight helpful? A little bit confusing. Can you just give us an over-under in 2026 EBITDA margins, what you're thinking about? Douglas K. Howell: Oh, alright. So you do have a little bit of a bad connection on it. And so let me see if I can repeat what you say. You're saying where do I think of EBITDA margins are going to land for full year '26. And taking over-under. Ryan Tunis: An over-under. An over-under. Douglas K. Howell: It's a guess. We're gonna be over. Ryan Tunis: Over one. What's not here? Douglas K. Howell: The numbers—you guys gotta—we're putting the reins. We're gonna try to tighten down these ranges there that are on page eight of the CFO commentary document. But I think that I feel—I told you, think we have some upside in synergies, and I think that our teams are gonna be really focused on continuing to get better at everything we can do. J. Patrick Gallagher: Get Doug off the hot seat and call FanDuel. We— Douglas K. Howell: No. No. No. So, yeah. So, like, my follow-up—I've been wrecking my brain. I'm on the numbers. And, I mean, Pat, you can help me. But should I give the four and a half? In the—you guys think? J. Patrick Gallagher: Four and a half and what? Broke up what? The box. Ryan Tunis: Yeah. Oh, I made a point to the CER. I know. Bears are out of it. We're not as focused on that as David should be. Ryan Tunis: Alright. Thanks, Dan. J. Patrick Gallagher: Thanks, man. Well, thanks, everybody. I think that's our last question. I wanna thank you again for being with us this afternoon. As we said, we had a great quarter and a great '25. We're very excited about '26. Our new colleagues that have joined us, just from Assured Partners, but Woodrow Sawyer and dozens and dozens of others around the world. Thank them. There's a lot of competition out there for acquisition and I think they made the right choice. We've got 71,000 plus colleagues. I wanna make sure I say thank you to them. I do believe we have the most talented team in the industry, and it shows. So we look forward to speaking with the investment community again in March. During our Investor Day, and have a good evening. Thanks very much for being with us. Operator: Thank you. This does conclude today's conference. You may disconnect your lines at this time.
Operator: Ladies and gentlemen, welcome to Roche's Full Year Results Webinar 2025. My name is [ Henrik, ] and I'm the technical operator for today's call. Kindly note that the webinar is being recorded. [Operator Instructions] One last remark. If you would like to follow the presented slides on your end as well, please feel free to go to roche.com/investors to download the presentation. At this time, it's my pleasure to introduce you to Thomas Schinecker, CEO of Roche Group. Mr. Schinecker, the stage is yours. Thomas Schinecker: Thank you very much, and good morning, good afternoon and good evening. I'm really, really excited to share with you the update for the full year because we had an amazing fourth quarter, not only in terms of financial results, but also in terms of pipeline news. So let me get started on the normal overview slide. So group sales in 2025 grew with 7%, Pharma at 9%, Diagnostics at 2%. Again, this was due to the China healthcare pricing reforms. Without that, Diagnostics actually grew with 7% last year with a very strong operating performance with a core operating profit of plus 13% and a core operating margin plus 1.9 percentage points and core EPS plus 11%. So you may ask what's the difference between EPS and OP? Why is there a deceleration there? This is basically mostly driven through higher taxes. On the full year LOE impacts, we had impact of about CHF 700 million. Now I come really to the exciting part. We had truly an outstanding Q4 when it comes to pipeline news. From a pharma regulatory perspective, the EU approval for Gazyva in lupus nephritis, U.S. and EU approval for Lunsumio as subcut solution in third-line plus follicular lymphoma. And U.S. filing for giredestrant in post-CDKi ER-positive HER2-negative metastatic breast cancer. Now come the many positive readouts that we had. Phase III, FENtrepid and FENhance, so 2 positive studies in fenebrutinib, 1 in PPMS, the other one in RMS, a positive Phase III study just already this year in Enspryng in MOG-AD, positive Phase III lidERA giredestrant study in adjuvant ER-positive HER2-negative breast cancer, a positive Phase III PiaSky in aHUS and a positive Phase III in Gazyva in INS and another positive Phase III Gazyva in SLE and positive Phase II in CT-388 in obesity. And I know Teresa will go through a lot of these details with you, but you can see with very, very busy newsflow, and I think there are more exciting things to come also this year. On the diagnostic side, regulatory approval of the Elecsys dengue test, Matt will talk about that, the cobas BV/CV test and also the mass spectrometry extension of our menu. So exciting launches there as well. There is significant newsflow ahead in 2026. We are awaiting the second fenebrutinib study in RMS. We are awaiting persevERA, so the giredestrant in first-line ER-positive, HER2-negative metastatic breast cancer. We have other studies reading out in -- for Itovebi, but also for our divarasib KRAS medicine and further in Lunsumio and Gazyva. So again, I think very exciting. And we have a number of Phase II readouts coming. So it could again be a very busy year in terms of transition from Phase II into Phase III. And of course, everyone is talking about it, our next-generation sequencing solution. And we promised it for many years. Now here it is. So I'm super excited also personally that we are now coming with this very exciting solution to the market. And yes, I think it will cause a couple of [ waves ] in the market. Now let me go through the growth rates. And I don't think I have to cover too much on the left-hand side. But what you can see on the slide is that we have consistently strong growth in the last 2 years. And even before that, when we had the washout of COVID-19 tests and the medicine, we had a good underlying growth. So we always said we will deliver and we delivered. Now on the 2025, Pharma kept growing at 9%. Diagnostics, we did have the healthcare pricing reforms impact in China. Without that, Diagnostics would also have been growing consistently at 7% over this time period. Again, here, we just look at the full year, 9% growth, again by Pharmaceuticals division, 2% by Diagnostics. Again, without the China effect, it's 7% and the Roche Group has 7% growth. And this is really driven across our entire portfolio. I think Diagnostics, I already explained, and I know Matt will go into that further. Vabysmo, we have continued strong global growth. We do expect that we will see even more uptake in the next year when it comes to the U.S. market now that we are also supporting more on the co-pay assistance foundations, and Teresa will go into that. Also Xolair keeps growing significantly. Gazyva, we have now launching in lupus nephritis, but you will see also the other indications really contributing to the growth in this business. Oncology growing well at 6%. For Phesgo, we are now at the global conversion rates above 50%. Tecentriq, returning to low single-digit growth, Alecensa growth driven by U.S. and Japan. On the Hematology side, Polivy strong now. We are reaching a U.S. patient share of 36%. Columvi/Lunsumio, growth driven by second-line plus launch and third line plus DLBCL, strong third-line growth in follicular lymphoma. So you can see also in the Ocrevus franchise, we see now a strong uptake of the subcut solution, as we also discussed, and Evrysdi is the leading SMA solution and medicine now with more than 21,000 patients on treatment. So overall, we've achieved the upgraded guidance. On mid-single-digit sales growth, we had 7%. And you may remember in the QR -- in the IR call in Q3, you asked why are we not upgrading the guidance on sales? And my answer was because 7% is still mid-single digit, and we delivered 7%. So we delivered on what we also communicated. On core EPS, we upgraded the guidance from high single digit to high single digit to low double digit. And why did we do that? Because we already knew that we would land in double-digit range. So we wanted to include it in that range, and that's why we upgraded it at the time. And we further increased the dividends in Swiss franc. So I can say we, for the second year, upgraded the guidance during the year, and we ended up on the upper end of these 2 guidances every time in '24 and in '25. Now what's super exciting is the growth outlook. And the growth outlook has fundamentally changed based on some of the Phase III readouts that we have seen in Q4. Giredestrant, our SERD has had 2 positive readouts, one with evERA and the second one with lidERA, lidERA reading out early. We expected the readout only next year. But based on the very significant results, it read out early already this year. We're now waiting for the persevERA data, but we clearly see that we have a very active and very good molecule in hand. Not only is it going to replace the standard of care and it's going to become the new backbone in this field but it's so safe and tolerable that we do believe that this will become the standard of care. Fenebrutinib in MS, we had 2 positive studies here in RMS and in PPMS, and now Teresa will go into that. We're still waiting for the second, the FENhance 1 study in RMS in order to be able to file this. You will see the data in not-too-distant future. But again, we are very excited with the data that we have seen. Gazyva, the same. We've had already positive data in lupus nephritis. Now we have 2 more additional Phase III data, again, something that will give us momentum in the midterm. On vamikibart and in Enspryng, we had 2 trials each. And each of the 2 trials, we always had 2 arms and 2 different doses. In one trial, in both of those, it was fully positive trial. In the second trial, one dose was positive, the other one was negative. Now this was always a very close call. And based on the conversations we had with the FDA, we do believe that the FDA will support filing here. So this is the midterm. And in the long term, what's also exciting is that we had 10 NMEs moving into Phase III. That's a record for us. We've never had 10 NMEs moving into Phase III. And these are all NMEs with substantial revenue and patient impact attached to them. Now we know the other part or a topic that's on your mind is our agreement with the U.S. government. Now the agreement we reached with the U.S. government is not an LOI, it's a contract with the U.S. government. And based on this contract with the U.S. government, which is terminated for the next 3 years, we get an exemption from tariffs, and we get an exemption of the demo projects. In return, we agreed to the Medicaid rebates in some of our portfolio. We agreed to the encouragement of other wealthy nations to reward biopharmaceutical innovation and to pay their share to contribute to innovation. And we also support the direct-to-patient medication access with our influenza portfolio, Xofluza and Tamiflu and also future medicines with which we can go direct to patients. Also, we agreed to invest in the United States $50 billion over the next 5 years. This includes R&D and PP&E investments. And for example, on the red dots on the right-hand side, you can see where these investments are happening. In North Carolina, Holly Springs, we are investing $2 billion in manufacturing for our CVRM portfolio. In Indianapolis, we're investing in CGM manufacturing. And in Boston, we're investing in our research hub as well as we're going to invest more in Genentech in San Francisco. But we already have a very strong manufacturing and R&D network present in the United States. Now it's all about delivering on the next innovation cycle. So I think we have good growth momentum. We do believe we can sustain the good growth momentum and how do we keep that beyond 2030. Well, one is we've made substantial progress on our initiatives in order to prepare the company for future success. For the last 3 years, we've been talking about high-performing organization, about delivery and about execution. And I do believe we've delivered on that. We've introduced the bar so that we focus on those medicines with the highest impact. We have an intentional focus in terms of TAs and also -- and disease areas. And we look at the portfolio as an overall investment portfolio with certain risk and reward profiles that we want to balance to have the right portfolio. We're expanding into new technologies, not only in Dia, but also in Pharma, and we're implementing AI across the value chain. And we've made good progress in R&D. Now more than 60% of the NMEs are post bar, 66% of the late-stage projects have best-in-disease potential. We want to get to 80% and 60% more average peak sales per pipeline project. If you actually take not end of '23, if you take end of '22, it's even higher. And the same for the total portfolio value. Since end of '23, it's about 45%. If you look at end of '22 as a comparator, we are more than 60% higher, and this is a risk-adjusted value. So we do believe we've made a significant move when it comes to our pipeline in terms of higher rewards and also manageable risk. We have a strong on-market portfolio. In the midterm, we have great readouts that are going to help us sustain our growth, but we have many, many NMEs that will read out before the end of this decade. And many of them can be significant contributors to the sales of our company. And here, you can see the prioritization that we have done over the years in our portfolio, really taking out high-risk, low-value projects and adding higher-value projects with very strong data as a foundation that gives us more confidence into Phase III. And this has resulted in a significant shift in our portfolio value. As mentioned, this is year-end '23 as a baseline. If you take year-end '22, it's even significantly higher. And on the Diagnostics side, as I mentioned, we have been experiencing the headwinds in China from the healthcare pricing reforms. These headwinds will become a lot less in 2026 and will be gone in 2027. We will continue to grow significantly. This year, we expect mid-single-digit growth, but then back to mid- to high single-digit growth. And these products that you see here can each contribute additional CHF 1 billion when it comes to sales per year. And again, very excited about the sequence of that's coming. Now let me go through the outlook. For 2026, we again have an exciting year when it comes in terms of pipeline readouts. But then after that '27, '28, '29, we will have many different NMEs that will have Phase III readouts. In '26, I just want to highlight a couple, persevERA for giredestrant and fenebrutinib, Itovebi, divarasib, a number that can also continue to drive our growth in the next years. And of course, we have a number of Phase II readouts in obesity, 2 of them already have been positive this year. So we had a very good start. So the year ended well in terms of readouts and the year started well in terms of readouts. So we are very positive in terms of the momentum that we have and that we can continue this momentum. And these are the 19 medicines that we can launch by the end of the decade. Now it's clear that not all 19 ultimately will make it. But these are really substantial contributions that they can deliver to the future business of our company and to patients out there. So I'm very excited about what's ahead for us. Now let me talk about the 2026 guidance. In group sales, again, we expect mid-single-digit sales growth; in core EPS, high single-digit core EPS growth, and we do believe that we can continue to further increase the dividend in Swiss francs. With that, I hand it over to Teresa or to Alan, yes. Alan Hippe: Yes, welcome from my side as well. As Thomas said, great pipeline progress. And that really then combined with great financial results. I think that's really -- that's a great setup, and thanks to the whole Roche team for delivering that. So let's go into the results right away. And here's the overview. And I will focus on the right-hand side, so really the changes in constant rates. Sales plus 7%. Matt and Teresa will go into this, 9% on the Pharma side, 2% on the Dia side. As said, I think on the Dia side with the impact from China. Matt will highlight this. The core operating profit, plus 13%. So you see really good cost containment, but at the same time, we have invested where it really matters. And I will lead you through this. And then Thomas mentioned it, slower momentum on the core net income and the core EPS, yes, driven by a higher tax load, roughly CHF 600 million, CHF 579 million more taxes that we had to pay, which brought the momentum a little bit down. IFRS net income up 58%. And you know where it comes from. It comes from a base effect from last year. We had 2 goodwill impairments accounted for CHF 3.2 billion negatively. If you adjust for that, I think it would be a plus 20%, which, in my opinion, mirrors very well the operational performance. Well, now I come to the cash flow. And we can now debate quite a bit about the cash flow. I think you see it, CHF 16.2 billion, down from CHF 20.2 billion. Let me say here, we had really a very strong December when it comes to sales and quite an increase in accounts receivables. They will convert into cash. So automatically, what I'm saying, I'm expecting quite a strong cash year 2026. The other piece here is in the net trade working capital inventories. We had the situation that we had to deal with the tariffs. So we brought inventories up a little bit. That contributed to this. And last but not least, we have invested more into intangible assets, roughly CHF 600 million. I come to this, but I think that explains the number very well. As I said, I think we will recover quite well on the cash flow side in 2026. Let me say, I will also highlight this net debt came down at the same time. I will lead you through this. Good. I think when you look really at the bridge here for the sales, in constant rates, 7% up, as you can see. When you go from the left-hand side to the right-hand side, it's a plus 2% because we have the currency impact in, which is quite significant with minus 5 percentage points. Let me focus on the middle. You see Pharma and the loss of exclusivity of minus CHF 745 million, in total, a plus 9%, as mentioned. And then you see the situation in Dia, where we have a 7% growth, excluding China. And we have then an impact of minus CHF 579 million coming really from the healthcare pricing reform in China, which means a minus 24% of sales in China itself. Good. With that, let's go through the P&L. I talked about the sales growth. Other revenue, I think on one hand, we had a lower milestone income compared to last year, minus CHF 87 million, but we also had higher royalty income. That's why this is very, very stable and really looks good. Cost of sales, both divisions increased their cost of sales by 7%, but with very different dynamics. I think we in -- from a volume point of view in Pharma, plus 13%. So very, very clearly, I think here a driver for the plus 7% growth on the cost side. I think that growth was also a little bit supported by royalty expenses. And the Dia division, plus 4% on the volume side compared now to a plus 7% growth on the cost side. So what is that triggered by? Well, very clearly, the healthcare reform plays a role here, so China once again, but also higher costs related to placing of machines, which certainly fuels our future growth of diagnostics, so well invested here. We had certainly investments into the new technologies like CGM, Lumira, et cetera. And last but not least, we had a tariff impact on the Diagnostics side of CHF 64 million half year impact. So it's also something we potentially have to deal with in 2026. Core operating profit up 13%, a nice margin increase. When you look at the margins itself, I think really in constant rates, overall, plus 1.9 percentage points for the group. You see a nice progression on the Pharma division. You see a decrease of minus 1.1 percentage points in CER on the Diagnostics division side, which is explainable given that here, a significant portion of the sales in China went away. When you look at the core financial results, and really here, interestingly, I think really in CER, we have an increase. When you look at Swiss francs, we have a decrease. And I think really what that speaks for is, well, the U.S. dollar is weak, hurts us a little bit in the P&L, but helps us with the financial result. That's one conclusion here. You see the equity securities with minus CHF 88 million. I think the market has recovered, but we have some investments in the Roche Venture Fund where we wait for data. So hopefully, a better year ahead. Net interest income, we had less cash available, led to less income here. Interest expenses was plus CHF 69 million; in concentrate, it would be rather flattish. But let me say here, certainly, the weak U.S. dollar helped. And then we have really here other, and these are predominantly less hyperinflation impacts compared to last year. So with that, let's go to the tax rate. And Thomas mentioned it, I mentioned it already. Let's focus on the middle of the slide. First, you see really the effective tax rate full year 2024, excluding the resolution of tax disputes, 18.1%. And then you see really the effective tax rate full year 2025, excluding the resolution of tax disputes, 19.5%. So you really see the increased momentum here. Both years were really mitigated by the resolution of tax disputes. In 2024, that was a positive of CHF 263 million, representing a minus 1.4 percentage points. And in 2025, it was a lower effect, plus CHF 185 million in constant rates, resulting in minus 0.9 percentage points, leading to the effective tax rate full year 2025 with 18.6%. Well, for 2026, I think we will hover more to a 20% tax rate. Core EPS. On the core EPS side, this is the bridge here. I think for me, the most important point to say is it's driven by operations. The increase in core EPS is driven by operations. And I think there's nothing better to say here. Look, I think the product disposals, you've seen in the P&L, I think less income coming from that. Financial income and expenses are negative in constant rates, the slides in constant rates, that's a negative. It's roughly CHF 60 million. And then effective tax rate changes, as said, this is the once again mentioned increase on the tax side that we have seen here. So operations was the major driver. All other effects on that slide worked against us. When you look at non-core, and the IFRS income, I've mentioned the IFRS income, see it on the right-hand side, plus 58%. Core operating profit, I've mentioned as well with plus 13%. Perhaps 2 points to mention on that slide. One is the global restructuring plans. You see really the restructuring charges have increased by roughly CHF 300 million. I would argue that's a positive because that gives us savings in the future. And then I think you see the impairments of intangible assets, as mentioned, not a lot of impact in 2025. In 2024, with CHF 4.6 billion negatively, an enormous impact, very much driven by the 2 goodwill impairments for Spark and Flatiron accounting both together, minus CHF 3.2 billion. With that, let's go to the cash. And here's the story. And look at the left-hand side, CHF 20.2 billion, I've mentioned that already in 2024. And then you see in constant rates, full year 2025 with CHF 17.7 billion. Well, you see really when you go back to the left-hand side, the operating profit, net of cash adjustments. I think that's the positive momentum coming from operations, really positive. And then you see the net working capital movement. And out of that net working capital movement's, minus CHF 2.2 billion comes from net trade working capital. And as I said, predominantly driven by accounts receivables. Let me mention here that has nothing to do with extended payment terms for certain products and nothing to do with Vabysmo. This is really we have for -- especially for Vabysmo payment terms for a longer period for the last couple of years, and we have not changed them. So this is really because we had a strong December and that brought the accounts receivables up. We have the higher inventories on the Pharma side. That explains the minus CHF 2.2 billion. We have the investments in PP&E, placements in Diagnostics for the positive site investments that we have done. And then we have the investments in intangible assets, the increase of CHF 645 million, very much driven by Zealand and the deal we have done there. Then foreign exchange kicks in with minus 8 percentage points quite significantly leads us to an operating free cash flow of CHF 16.2 billion. Well, I think when you look at the margins, I think that tells the same story here. When you look for it, I can just really point back to the fact that we will recover in 2026. Now when I talk about cash, I have to talk about the net debt development and debt in total as well. And as said, I think interestingly, when you look really at net debt at the end of 2024 with minus CHF 17.3 billion. If you compare that on the right-hand side with the net debt position at the end of 2025, we have reduced by CHF 1.1 billion. So you might ask yourself, okay, the cash flow was not so strong. How is that possible? Did they invest less, especially on the M&A side? No, we didn't. I think that the numbers are really on the lower part of the slide. As you can see on the right-hand side, you see what we've invested in intangible assets and in M&A is pretty equal, CHF 4.6 billion in 2024 and even more in 2025 with CHF 5.1 billion. One driver here is the weaker U.S. dollar. And you see it really when you look really on this bar, minus CHF 10.7 billion, dividends, M&A and alliance transactions and other, there is the currency translation point with plus CHF 1.8 billion. That is a major driver here and helps us on the debt side. By the way, we have decreased gross debt by CHF 3.1 billion. And certainly, as 70% of our gross debt is in U.S. dollar, the U.S. dollar helps in that sense to bring the debt down, at least when we report in Swiss francs. Good. With that, a quick comment on the balance sheet. Not too much to say. When you look really on the left-hand side, where we have the assets, I think cash and marketable securities went a little bit down. Nothing to mention here, paid the dividend, all of that. When you look at other current assets, well, higher trade receivables, as mentioned already, mostly coming from the Pharma side. And when you look really at the noncurrent assets, that was driven by higher intangible assets of CHF 4.1 billion, mostly acquisitions accounting for plus CHF 2.5 billion. On the right-hand side, you see the liabilities and the equity. The current liabilities increased mainly due to the higher accounts of payables and bank creditors, some loans here. And the noncurrent liabilities decreased slightly due to the decrease in long-term debt. I've mentioned the CHF 3.1 billion already. Leads us to an equity increase quite nicely and now an equity ratio of 38%. Good. Leads me to the currencies. Well, yes, I think really, the volatility is certainly disturbing. And the weak U.S. dollar is something we're fighting against. You see really the result for the full year, minus 5 percentage points on sales and minus 8 percentage points on core operating profit, a minus 7 percentage points on core EPS. To be honest, if you apply today's rates, that would be basically the same picture for 2026 if we keep all that rates from today until the end of the year 2026. So I think it would be basically the same impact. When you compare at year-end 2025 and you keep these currency rates stable until the end of 2026, you see it really on the box down low. The impact would be minus 4 percentage points on sales and minus 6 percentage points on core operating profit and core EPS. This topic remains in 2026. Good core EPS. I think really we want to set the base right for you for the core EPS and what is the starting point because we have currency effects in the core EPS. So let me lead you through this. You see on the left-hand side, the CHF 19.46 per share as reported. And then I think really, we adjust for CHF 0.37 to get to the CHF 19.83 per share, which would be the starting base for your calculations in -- or if you like, for the core EPS in 2026. So let me explain now the CHF 0.37. What you see here, these are the exchange rate effects. This is a result of dividing the 2025 currency losses of minus CHF 273 million as well as the 2025 losses on net monetary position in hyperinflationary economies of minus CHF 48 million. This is shown in Note 4 of the consolidated financial statements on Page 64. So on Page 64, you find these 2 numbers. Net of taxes and noncontrolling interest by the number of diluted shares of 803 million, and this number is outlined in Note 29 of the finance report on Page 126, just to confirm that, which is, I think, quite a positive because it sets the higher bar for us, so to say. So hopefully, a little bit of a positive for the projections for 2025. Here's the guidance again. Thomas has alluded to it. Let me mention to it, the loss of exclusivity impact that we have estimated or actually that we expect of roughly CHF 1 billion for 2026. So relatively narrow to what we had for 2025 and well in line between the CHF 1 billion and CHF 1.5 billion that we've indicated to you that we will have on an ongoing basis. And with that, I have the pleasure to hand over to Teresa. Teresa Graham: Fantastic. Thanks, Alan. So I'm going to hand it back to Alan. Alan Hippe: You hand it back to me. Teresa -- it's hard to bring it to you. But let me make a last comment here. We have a change in our income statement presentation for 2026. Let me say very clearly, has nothing to do with the group in itself. So really, when you look at sales, group core operating profit and the core EPS, the metrics are unaffected. This topic is between corporate and the divisions. And basically, what we're doing is we are centralizing the legal department. That's what we're doing. And that has quite an impact. When you look at Pharma, we reduced SG&A costs in Pharma by CHF 250 million, roughly, I think, certainly in constant rates, which represents roughly 0.5 percentage point in core operating profit margin. So you should adjust for that in your calculations. On the Diagnostics side, that's roughly CHF 50 million less for the SG&A costs, which represents 0.4 percentage points in the core operating profit margin in CR. Corporate equally then would increase by CHF 300 million. Just to point that out, as I said, for the group accounts, nothing changed. This is between the divisions and corporate. Just to remind you when you project your margins forward for 2026, especially for the divisions. And now, yes, I have the pleasure to hand over to Teresa. Teresa Graham: I'm going to move forward really quickly in case they try and take it away from me again. So let's jump right in. So as Thomas shared the group perspective with you a little earlier, I wanted to provide some additional color on the key priorities for the Pharma division, starting with our focus on delivering the on-market portfolio. Q4 2025 marks our eighth consecutive quarter of growth. So today's on-market portfolio continues to deliver strong performance with 16 blockbusters across our 5 therapeutic areas. We expect this momentum to continue until 2028. And thereafter, we expect that sales become stable to fully compensate for generic erosion. Importantly, we do not expect a patent cliff. As Thomas mentioned, though, in the near term, we are expecting to deliver multiple key launches, which come on top of today's on-market portfolio. This includes Gazyva in immunology, giredestrant in breast cancer, fenebrutinib in MS, vamikibart in UME and Enspryng with additional indications in both neurology and ophthalmology. We expect that these products are going to continue to extend our growth momentum until well beyond 2028. We are currently in the process of updating our mid- to long-term outlook, and we'll be sharing that with you a little bit later this year. And so while we're very excited for these upcoming launches, we are just as excited about the progress that we've made on our pipeline. As Thomas mentioned, through R&D excellence and rigorous application of the bar, we have successfully rejuvenated our pipeline. With our post-bar NMEs, we have the potential to enter new disease areas like Alzheimer's and obesity, and we aim to bring multiple new transformational medicines to patients. As I mentioned at Pharma Day, all of our activities are really driven by 2 key tenets: discipline in the business and rigor in the science. Discipline in the business, we remain committed to keeping our COP at least stable. And rigor in the science, optimizing how we spend our R&D budget and applying our bar criteria to each and every asset progressing in the pipeline or entering it, including from partnerships or acquisitions. I am truly excited and confident for the future of Pharma, delivering transformative medicines and sustaining our growth momentum. So now let's take a closer look at how this momentum played out in 2025, and we'll start with the full year sales. So as you heard from both Thomas and Alan, Pharma sales grew at 9% at constant exchange rates, reaching CHF 47.7 billion. All regions are delivering strong performance, led by our international region with 14% growth. And overall, our volumes were up by 13%. As Alan mentioned, COP increased by 13% versus that 9% sales increase with a COP margin of 49.2%, so a slight increase over last year. Clearly, COP grew ahead of sales, which we mainly attribute to effective cost management, particularly in R&D, but I am going to drill down on the individual line items in a little more detail. Other revenue slightly decreased by 1% with higher profit share income from the higher sales of Venclexta in the U.S., which was offset by lower income from our out-licensing agreements. As Alan mentioned, cost of sales increased 7% against a 13% volume growth. R&D costs declined by 3%. This was mainly driven by savings in Flatiron as well as some other operational efficiencies. But let me say that this reduction was very thoughtful and deliberate as it gives us the oxygen that we need for the upcoming CVRM Phase III trials. SG&A costs increased by 8%, and this is primarily for 2 reasons. It was driven by some investments in our growth drivers, particularly Ocrevus and Xolair, but also increased donations to multiple independent co-pay assistance foundations. As part of our broader corporate philanthropy strategy, Genentech doubled its donations to those independent co-pay assistance foundations in 2025 versus 2024. Our corporate giving strategy is focused on supporting the patients most in need across multiple therapeutic areas, including oncology, neurology, immunology and ophthalmology. And we continually evaluate the strategy to ensure that it remains aligned to patient needs. And finally, other operating income and expenses decreased by 43%, and this is primarily due to lower gains on the disposal of products. And so now let's look at our individual growth drivers. So as always, first, I have to comment on the graph. These are all absolute values and year-over-year growth rates are presented at constant exchange rates. At full year, our top brands, Phesgo, Xolair, Ocrevus, Hemlibra, Vabysmo and Polivy generated roughly CHF 3.6 billion in new sales at constant exchange rates. For the fourth quarter in a row, Phesgo is our #1 growth driver with 48% growth, closely followed by Xolair, driven by the continued outstanding uptake in food allergy. You'll also notice the strong performance of Xofluza. And I just want to talk for a minute about that here, which is driven by the strong flu season that we saw in Q1 of 2025 in China. This may create a bit of a base effect for Xofluza in 2026, especially considering that we haven't seen a similarly strong flu season in China this year. So now let's dive into our TAs, starting with oncology. Oncology sales increased by 2% to CHF 15.3 billion, primarily driven by our HER2 franchise. As I mentioned, Phesgo posted an impressive 48% growth and the global conversion rate keeps climbing. We're now at 54%, well on our way to our new goal of 60%. This, of course, also means that Perjeta conversion to Phesgo continues to impact Perjeta sales, which is to be expected. Kadcyla growth continues to be driven by uptake in adjuvant breast cancer. Looking forward to the HER2 franchise overall, and as I've said previously, we expect the HER2 franchise to peak this year at about CHF 9 billion at 2024 exchange rates, followed by a steady decline through the end of the decade with a solid tail of around CHF 4 billion. And that CHF 4 billion is primarily Phesgo, about CHF 1 billion for Kadcyla and a bit of HMP. We do not foresee a biosimilar in the U.S. for Perjeta until the end of 2027. And let me also confirm again that we do not expect a cliff situation for the HER2 franchise. For Itovebi, we see good launch momentum in our first-line PI3 kinase HR-positive breast cancer population, and we expect 2 Phase III readouts this year with INAVO121 and 122, which could enable further indication expansion. But of course, the highlight of Q4 was the positive Phase III lidERA result for giredestrant. I am going to cover this in more depth on the next slide, but let me give you a few quick updates on giredestrant in general. We presented the lidERA data at San Antonio Breast, and we have already filed the evERA results with the FDA that happened at the end of last year, and EU filing is expected for 2026. Therefore, we expect evERA U.S. approval later this year, lidERA results will be filed with the U.S. and EU regulators this year. In the first half of this year, we expect the readout of persevERA in first-line ER-positive, HER2-negative metastatic breast cancer. Moving on to Tecentriq. Tecentriq exited 2025 with 3% growth and actually quite a nice Q4. For 2026, we expect low single-digit growth for Tecentriq, driven by the positive studies that we shared last year, such as IMforte in small cell, IMvigor in MIBC and ATOMIC in dMMR colon cancer. And finally, before I move to the next slide, let me just briefly mention that we expect the first Phase III readout for our KRASG12C inhibitor, divarasib, later this year. So now let's take a closer look at the lidERA results for giredestrant. So here are the giredestrant-lidERA results in adjuvant ER-positive HER2-negative breast cancer, which we presented last December. As you can see, giredestrant demonstrated a statistically significant and clinically meaningful improvement in invasive disease-free survival versus standard of care endocrine therapy, achieving a hazard ratio of 0.7. Let me emphasize here that this is the first oral SERD to show superior IDFS versus endocrine therapy in the adjuvant setting. And in terms of overall survival, the data was still immature, but clearly, a positive trend for giredestrant was observed with a hazard ratio of 0.79. Giredestrant safety profile remains favorable as we've seen in previously -- previous studies. And importantly, we saw a lower discontinuation rate with giredestrant versus the comparator arm. This is a significant improvement in this setting, and it indicates the improved patient experience on giredestrant compared to standard of care. So taken together, these results further underline giredestrant's potential as a next-generation best-in-class endocrine therapy in ER-positive breast cancer. To expand on this, let me dive a little bit deeper into the giredestrant development program. So now given the positive evERA and lidERA results we just discussed and the upcoming readouts, we're very excited for the future of giredestrant. Giredestrant has the potential to replace standard of care endocrine therapy in ER-positive breast cancer and become the new backbone of choice in this setting. As you can see in the treatment paradigm on the left, our clinical development program for giredestrant covers different lines of treatment and risk groups with the readout of persevERA in first-line expected mid-first half of this year. Please note that the giredestrant plus CDK4/6 combination in lidERA relates to a single-arm substudy that's still being evaluated. That's in combination with [ abema ]. We have also started a sub-study in combination with [ ribo ] as well. As you would expect, we are working at speed to complete filings and collaborate with regulators to ensure that this transformational medicine gets to patients as fast as possible. And just to reiterate, we have already filed evERA in the U.S. and expect lidERA filing in Q1. Beyond giredestrant, we also have a strong pipeline of potentially best-in-class molecules in breast cancer that give us the opportunity for numerous future combinations. For instance, our highly potent CDK4/2 inhibitor, which may overcome some of the limitations of currently available CDK4/6 inhibitors. And as I mentioned, we believe giredestrant has the possibility to become the new backbone of choice in ER-positive breast cancer. And therefore, we're exploring many combinations with some of the internal assets, as I just mentioned. Additionally, our phone keeps ringing as we are getting calls from potential partners interested in combination studies with giredestrant. We look forward to sharing future updates on our breast cancer pipeline with you in the near future. But for now, let's move on to hematology. The hematology franchise delivered strong growth of 15% in 2025, achieving CHF 8.6 billion in sales. Hemlibra closed the year with strong growth, 12% (sic) [ 11% ] driven by increasing adoption in the non-inhibitor patient population. For 2026, we expect low single-digit growth, and that's partly driven by competitor launches, which are anticipated later in the year. Polivy's growth momentum continued in 2025, reaching U.S. patient sales of 36% in first-line DLBCL. But in fact, we reached 2 significant milestones with Polivy last year. First, it is now the most prescribed regimen for IPI 2-5 patients in the U.S. And second, we have officially hit more than CHF 1 billion in sale in the first-line DLB setting alone. Shifting to Columvi and Lunsumio, our CD20, CD3 bispecifics. Launch performance remains on track for Columvi in third-line plus DLBCL with second-line DLBCL launches gearing up. For Lunsumio, we're happy to report that the subcutaneous formulation has been approved in both the U.S. and the EU. And just a reminder that, that new formulation reduces administration time from hours down to actually under a minute. Additionally, we expect 2 key events for Lunsumio later this year. We expect U.S. approval for Lunsumio plus Polivy in second-line DLBCL based on the positive SUNMO results, and we expect the readout for the Phase III CELESTIMO in second-line plus follicular lymphoma. So now let's move on to neurology. Our neurology franchise achieved CHF 9.8 billion in sales in 2025 with a strong growth of 11%. Ocrevus continues to have good momentum, delivering 9% growth globally and crossing the CHF 7 billion milestone in annual sales. We're excited to see the increasing growth momentum of our subcutaneous formulation known as Zunovo in the U.S. In Q4, more than half of global Ocrevus growth was driven by the subcut formulation. And importantly, in the U.S. and many other early launch countries, roughly 50% of Zunovo patients are naive to an Ocrevus. This represents that acceleration that we've been talking about. U.S. uptake continues to be driven primarily by community practices, which emphasizes how Zunovo is actually expanding the addressable market and can help overcome healthcare system restraints like IV capacity limitations. Overall, we now have more than 17,500 patients on Ocrevus now globally, and that's roughly 5,000 more than we had at Q3. For 2026, we expect to hit high single-digit to low double-digit growth for Ocrevus. And as a reminder, we upgraded our peak sales expectations for Ocrevus for the Ocrevus franchise to CHF 9 billion by 2029. This includes CHF 2 billion of incremental sales from Ocrevus subcut. But of course, there's also going to be some switching from IV to subcut. Staying with the MS franchise, you've seen the exciting news regarding the positive 3 results for fenebrutinib. We're going to cover that more on the next slide. But for now, let's take a minute on Evrysdi. The global rollout of the tablet formation continues, and we see great pickup from that as well as very positive feedback from the patient community. As Thomas mentioned, this remains the leader in SMA. Quick note that Q4 performance for Evrysdi in international was boosted by a tender-related buying pattern, but we are still expecting double-digit growth for Evrysdi next year. Earlier this week, you saw positive data from Elevidys in DMD. We continue to believe in the positive risk-benefit profile in the ambulatory DMD population and more than 1,050 patients have already been treated globally in this setting. Furthermore, the latest 3-year data from EMBARK shows the durable efficacy and slowing of disease progression for ambulatory DMD patients treated with Elevidys. We are working with EMA continually to find a viable path forward for EU patient access here. Quickly stopping over prasi, a quick update here where we have achieved both FPI for the Phase III study as well as we have been able to materially accelerate site activation. So we're a number of months ahead of schedule with the prasi trial, which is great news for patients. And let me close quickly by speaking a little bit about Enspryng in MOG-AD. So MOG-AD, if you are not aware, is a rare antibody-mediated autoimmune condition of the central nervous system, which causes inflammation of the brain, optic nerve and spinal cord. The Phase III study METEOROID read out positively. And we're looking forward to presenting that data at an upcoming medical conference later this year. We expect to file these results with the U.S. and EU regulators in 2026, and this additional indication could unlock an upside of approximately CHF 500 million for Enspryng. So now as promised, let's take a little bit of a deeper look at fenebrutinib. We are very excited about the positive Phase III readouts for fene. This includes FENtrepid in PPMS and FENhance 2 in RMS with the FENhance 1 readout expected mid half of this year. These results make fenebrutinib the only BTK inhibitor with positive Phase III results in both RMS and PPMS, and it has the potential to be both first and best-in-class in RMS and PPMS, which would also make it the first and only high-efficacy oral treatment for both relapsing and progressive multiple sclerosis. We see fenebrutinib as an opportunity to increase high efficacy treatment rates amongst MS patients and expand the footprint of our franchise. Ocrevus and now Ocrevus subcut have brought transformational impact to people living with MS, and we believe fenebrutinib has the potential to be that next transformational medicine for these patients. Let me also briefly remind you that fenebrutinib is differentiated by design from other BTK inhibitors. It is the only noncovalent binding BTK in Phase III development for MS and has a highly optimized PK profile that allows it to reach its target, including in the brain. So stay tuned for the FENhance 1 readout in half 1. And until then, we look forward to presenting the FENtrepid results in PPMS at ACTRIMS, where we are also inviting you to attend our IR event on the 9th of February. And so with that, let's move on to immunology. Our immunology franchise grew at 12% at constant exchange rates and reached CHF 6.7 billion in sales. Xolair's strong growth momentum continues, driven by uptake in food allergy. In 2025, we achieved 32% growth in sales of CHF 3 billion. We are also happy to celebrate a key Xolair milestone in 2025, which is more than 100,000 patients have now been treated for food allergy since launch. Regarding the 2026 outlook for Xolair, we expect around 20% growth, and this includes the impact of an expected first biosimilar entering the market in the second half of the year. You will have seen that Xolair was selected for the latest rounds of IRA negotiations. So let me provide a little bit of extra information on this. Xolair's inclusion on this list, as you know, does not change patient access or pricing at this time. Any potential pricing impact, if applicable, would not take effect until 2028 at the earliest. But CMS' final guidance provides that a selected drug will no longer be subject to negotiation and will cease to be a selected drug if CMS determines that a generic or biosimilar has been marketed by November 1, 2026, and we do expect that a biosimilar for Xolair will be launched before that date. Actemra sales declined by 2% in 2025. As predicted, we are now seeing increased biosimilar impact in the U.S., which resulted in a 10% decline in growth in Q4. This is aligned with all of our previous communications of an accelerating biosimilar impact in the second half of 2025, which will obviously continue into 2026. Just like in Q3, Gazyva is one of our key highlights for the quarter. Following the FDA approval in Q3, we achieved EU approval in lupus nephritis, and we announced positive Phase III readouts in both SLE and INS. In both indications, Gazyva has first-in-class potential. SLE results have been submitted for presentation at SLE Euro in early March, and the INS results have been submitted to WCN in late March. Both indications, as I mentioned, I think, previously, will be filed in the U.S. and EU later this year. And I'm also very happy to share that the FDA has granted breakthrough therapy designation for Gazyva in childhood onset idiopathic nephrotic syndrome, which is INS based on the positive ENSURE results. And we are not quite done with Gazyva just yet. There's one more Phase III trial, which is expected to read out in 2026, and that's MAJESTY in membranous nephropathy. And as a reminder, we see up to a CHF 2 billion opportunity for Gazyva in kidney disease. And just finally, I'd like to mention the upcoming Phase III readout for sefaxersen in IgAN, which is expected later in the year. Now let's move on to ophthalmology. Ophthalmology grew by 10%, achieving CHF 4.2 billion in sales. Vabysmo performance, as you know, was impacted by the contraction of the U.S. branded market. It landed at 12% growth for the year, which is still quite strong. We had mentioned this contraction previously. And through 2025, we saw a decline in the branded IBT market in the U.S. of about 15%. Nevertheless, Vabysmo continues to gain market share in the branded IBT market in the U.S. and across early launch countries globally. In the U.S., we now see that more than 60% of Vabysmo patient starts are from treatment-naive patients, and this further solidifies Vabysmo's position as the standard of care. Looking forward, we would expect the U.S. branded market to gradually recover in 2026. And taking this into account, we expect a growth acceleration in 2026, driven by the ex U.S. continued growth and U.S. recovery. In fact, as Thomas mentioned, there is a lot to look forward to in ophthalmology this year. We have 2 potential new medicines entering our ophthalmology portfolio. That's the vamikibart in UME, which is expected to be filed in both the U.S. and EU. Enspryng in thyroid eye disease will be filed in the U.S., and we are currently considering ex U.S. filings with the appropriate regulators. Now let's jump into our CVRM pipeline. This is one slide with a whole bunch on it, but I am very happy to share with you the key developments in our pipeline as well as provide a perspective on a very newsflow-rich 2026. So earlier this week, we shared positive final Phase II top line results at week 48 for the once weekly CT-388 in people with obesity. This is study 103. For the efficacy estimand, we achieved a placebo-adjusted weight loss of 22.5%. As a reminder, the efficacy estimand includes patients who dropped out from further analysis, so the effect size measured represents the true efficacy of the medicine tested. For the treatment regimen estimand, we achieved a placebo-adjusted weight loss of 18.3%. The treatment regimen estimand reflects a more real-world outcome, acknowledging the fact that not all patients will be able to adhere to treatment. In this case, data after treatment discontinuation, either in the treatment [ or ] placebo arm are included in the analysis. So for example, it includes data from patients who discontinued treatment early and have regained weight. Now this is a question we received a number of times over the last week. So I'm just going to take another minute here to reiterate. Generally speaking, the difference between the efficacy and treatment regimen estimands is usually driven by treatment discontinuation, either due to patients on the active treatment arm who regained weight after discontinuing treatment or patients on placebo who go on a weight loss therapy after discontinuation. There are many ways to potentially address this phenomenon in our future Phase IIIs from a more flexible dosing regimen, which allows patients to stay on lower maintenance doses in case of tolerability issues to the incentive of a long-term extension to retain more placebo patients. But these kinds of measures should serve to improve the discontinuation rate and eventually reduce the gap between the 2 estimands. In that context, I should also point out that in most of the recent Phase III trials in obesity, marked differences between the estimands greater than 5% have been observed. Let me also highlight 2 other key points in terms of the efficacy achieved in the study. First, we saw a clear dose-dependent relationship on weight loss. And secondly, and most importantly, we are pleased by the absence of a visible efficacy plateau at 48 weeks for the highest dose tested, which was 24 milligrams. Taken together, this clearly indicates that further weight loss can be achieved after 48 weeks, and it gives us confidence in CT-388's potential to deliver best-in-class efficacy for obesity. In terms of safety and tolerability, CT-388 was well tolerated and the tolerability profile was generally consistent with incretin class. The majority of gastrointestinal-related events were mild to moderate and total treatment discontinuations due to AEs in all arms were low at 5.9% for CT-388 versus 1.3% for the placebo arm. Let me also highlight here as we received this question a number of times as well, the discontinuation rate due to AEs at the highest 24-milligram dose was similar to the total discontinuation rate observed. We look forward to sharing more detail on the Phase II results with you at an upcoming medical conference later this year. Similarly to 388, we saw positive results for CT-868 in the Phase II 004 study in type 1 diabetes. And just like for CT-388, we will share the final results at an upcoming medical conference in 2026. So speaking of the outlook for the rest of the year, let's start with our Phase II and Phase III study initiations. As a reminder, we announced for both CT-388 and CT-868 that we will move them into Phase III development in 2026. For CT-388, we can now provide a first update. The Phase III trials for CT-388 named Enith1 and Enith2 are now scheduled to start in Q1. In addition, you can see that we plan to initiate the first Phase II studies for petrelintide in CT-996 as well as a Phase II combination study for CT-388 with petrelintide. In addition, we have a number of other CVRM readouts scheduled for 2026. There are multiple Phase II readouts to look forward to. For CT-388, we have data for patients with obesity and with type 2 diabetes, which will come later this year. We also expect the first Phase II readout for CT-996, our oral GLP-1 and for petrelintide, ZUPREME 1 and 2 trials in obese overweight patients with and without type 2. And finally, emugrobart and tirzepatide combination data in obesity are expected towards the end of the year. So as you can see, we continue to progress our CVRM pipeline at pace, and we are excited to share updates with you throughout the year. So last but not least, let's go to the next slide to bring us home. Here, we have the 2026 pharma key newsflow. We start the year with 4 green check marks, certainly a good omen for the year ahead. And we have discussed everything else on previous slides, so I won't go into more detail here. For any of you who are feeling the lack of the 2025 newsflow table, we have moved that to the appendix. And with that, I would say, I'll give it back to Alan but I'll be crazy and I'll give it over to Matt. Matthew Sause: That's wild. Teresa Graham: Wild. Wild times. Matthew Sause: All right. Thank you, Teresa. Good morning, good afternoon, everyone. It's my pleasure to present the full year 2025 Diagnostics division financial results. So with sales, as you heard from Alan and from Thomas, sales in diagnostics were CHF 13.8 billion. We grew 2% or CHF 292 million compared with 2024 at constant exchange rates. But as you heard from both Thomas and Alan earlier, excluding the sales in China, which I would reiterate is our second largest market, was impacted by health care pricing reforms. The growth of the diagnostics business was 7%. So now let me walk you through these results by each of our customer areas. So sales in our largest customer at Core Lab were flat, again, driven by this previously mentioned health care pricing reform. Excluding this effect, sales were plus 10%. Sales in the Molecular Lab increased 4% due to growth in our blood screening business. Now this was partially offset by reduced sales growth in the infectious disease segment, which grew at 1%. This was impacted by the USA funding stop in Q1 that caused a corresponding decrease in HIV testing, which I covered last year. Sales in our Near Patient Care customer decreased at minus 3%, mainly driven by the decline of our blood glucose monitoring business at minus 2% due to the market shift to continuous glucose monitoring as well as a decline in respiratory molecular point-of-care testing due to the late start of the 2025 respiratory season. And again, back to what you heard earlier from Thomas, we expect the CGM product to really be a driver for this customer area in the future and we continue to invest in expanding and preparing for this. Finally, sales in the Pathology Lab grew strongly at plus 14%, mainly driven by sales of advanced staining at plus 10% and our companion diagnostics business, which grew at plus 25%. So now I'd like to show the geographic performance that's behind these results. Taking through the regional view, North America, the business grew at plus 9%, well ahead of market. You saw good growth in EMEA at plus 6%, again, ahead of market. Latin America, strong growth at plus 11%. Now Asia Pacific, again, as we discussed, minus 12%, driven by the minus 24% decline in China. Excluding the effect of China, APAC grew at plus 4%. Now as you heard earlier, our consistent ambition in the Diagnostics division is to grow our sales at mid- to high single digits. However, given that we anticipate diminished but continuing headwinds in China for 2026, we would set our ambition this year at mid-single digits for 2026. Again, our consistent ambition is to grow this business at mid- to high single digits. Now I'd like to walk you through the P&L line by line. As previously mentioned, sales grew at plus 2%. Cost of sales, as you heard from Alan, grew at plus 7% but this was mainly driven by that unfavorable impact of the China health care price reforms, half a year impact of tariffs and the production ramp-up of our new technologies such as CGM and sequencing and the placement of a significant number of instruments in 2025. And I would highlight that we saw growth of some of our key platforms like our immunoassay at strong double-digit increase. And for example, our molecular workstation, the 5800 grew at over 40%. So very strong placement of instruments. R&D costs decreased at minus 2%. Now this is a result of significant and focused cost containment measures across the organization in response to China impact. As mentioned previously, we are ensuring delivery on all our key priorities, especially our investment in the key new product areas such as CGM and our AXELIOS Sequencing Solution and LumiraDx. SG&A decreased by 2%, again, reflecting focused cost containment measures across the organization. This resulted in a core operating profit of approximately CHF 2 billion, declining at 4% at constant exchange rates, which reflects the cost control initiatives. So now I would like to transition to some of the innovation that we launched in last year and really specifically focus on our cobas Mass Spec 601, which as you heard from Thomas, these are CHF 1 billion opportunities that we're very excited about and their potential to really deliver growth to the Diagnostics division. So as I mentioned before, current mass spec primarily relies on lab-developed tests and lack automation, are highly manual and require highly skilled labor. With the launch of our mass spec solution in 2024, we've introduced the first fully automated IVD platform for clinical mass spec. So throughout 2025, we received CE mark for all of our wave 1 menu composed of 39 analytes spanning the key parameters used in mass spec testing, including therapeutic drug monitoring, steroid and hormone analysis as well as vitamin D testing. These comprise the majority of parameters used in a routine clinical mass spec lab and we are going to follow that with a second wave of additional parameters. I would add that this system, which integrates with our existing serum work area platforms, strengthens our leading position in the Core Lab. And now I'd like to talk about some of the high medical value content that we launched last year for our serum work area, specifically our dengue antigen test, which received CE mark in October. Dengue is the most common mosquito-borne viral disease globally and represents a major global health burden. It accounts for an estimated 390 million infections per year. It has shifted from being a seasonal illness to a year-round risk with locally transmitted cases shifting from historical geographies such as South America to now in Europe and North America. Diagnosing dengue can be challenging as patients are often misdiagnosed due to overlapping conditions with other febrile illness. With our Elecsys antigen test, we will enable health care systems to diagnose dengue more reliably and efficiently by providing all 4 dengue virus serotypes differentially diagnosed with a rapid test that takes only 18 minutes. This will add one more test to our leading immunohistochemistry platform -- or excuse me, immunochemistry platform, which comprises of approximately 120 different parameters. So now I would like to move on to a customer who're very near and dear to my heart, the Molecular Lab and switch to discussing our cobas BV/CV assay, which we received CE mark in December. Sexual health diagnostics market is valued at CHF 1.1 billion with a yearly growth rate of 11%. Vaginitis is the primary growth driver within this segment showing a yearly growth rate of 26%. With our cobas BV/CV assay, we will provide a multiplex assay designed for the direct detection of bacterial vaginosis and candida vaginitis and expand our molecular STI offering. With the addition to our STI portfolio, we will continue to enable testing the most commonly sexually transmitted infections using a single tube and a vaginal swab. In the future, we plan to continue expanding our offering in this area with home collection solutions as well as novel molecular point-of-care assays. Transitioning to our point-of-care portfolio, I would like to discuss our recent CE mark and FDA clearance with a CLIA waiver for our liat Bordetella panel. Pertussis is a highly contagious disease that causes more than 24 million estimated yearly cases, resulting in 160,000 deaths with the majority of those in children. Diagnosing pertussis can be particularly challenging as its symptoms often overlap with those of common colds, leading to underdiagnosis. Our liat Bordetella panel offers a reliable point-of-care solution, delivering results in just 15 minutes between 3 Bordetella pathogens and again, delivers lab-like performance. This will enable health care providers to act quickly and prevent severe complications, especially in vulnerable populations such as children. As you can see from this slide, this launch, we further expand our cobas liat menu of lab equivalent point-of-care testing and we will continue to expand this in the future. And with that, I would like to transition to our key launches in 2026 and call out a few highlights. Again, I would really want to emphasize that 2026 is the year that we will launch our AXELIOS Sequencing Solution. This is a groundbreaking high-throughput solution that will deliver high accuracy, high throughput and flexible sequencing based on our proprietary Sequencing by Expansion technology. And would also again highlight that this represents a potential blockbuster opportunity for us with sales potential and above the CHF 1 billion range. I would also like to call out the expansion of our neurology menu, including the Elecsys pTau 217, which is a blood-based diagnostic for Alzheimer's disease and Elecsys Neurofilament light chain for detection of disease activity in Multiple Sclerosis, greatly expanding our offering in neuroscience. Additionally, I would like to -- I would really like to particularly mention our TB IGRA test, our assay to detect latent tuberculosis infection, which remains a global health care challenge and a significant commercial opportunity and I'm very convinced that we will offer a very differentiated, highly competitive solution here. And overall, this 2026 is going to be a very exciting year of launches and I look forward to keeping you updated over the course of the year. Thank you and now I hand it to Bruno. Bruno Eschli: Thanks, Matt. And with that, we open our Q&A session. The first question goes to Sachin Jain from Bank of America. Sachin Jain: Two, please. So firstly, on Vabysmo, I don't think you've guided to growth for this year beyond acceleration. So any color on what you're assuming within the guide? And perhaps, Teresa, you could just provide a bit more color on your funding comments. What does that doubling in '25 versus '24 mean relative to historic levels? Like where is that funding relative to sort of a 3-, 4-year average? And any color on how that flows back to patients? When we should see an impact on sales? The second question is on persevERA, if I may. It's a topic that I think has come up on prior calls but just to reiterate as we approach data. If the study hits, is any hit clinically meaningful for you, would you need to see a certain hazard ratio or absolute PFS benefit -- you used that wording in the press release. The reason for the question is, there's been speculation since your San Antonio call around passing an interim. Those are my 2 questions. Teresa Graham: Yes. Great. So in terms of Vabysmo, I'm not going to give you specifics on the amount of money that we contributed because as you have heard me say many, many times before, our charitable giving is not in any way related to our commercial expectations for the product. So those 2 things are and have to be completely separate. I can tell you that we doubled our donations last year and that was a significant increase for us over the last couple of years as you sort of alluded to. We do believe that 2025 represented sort of a rebaselining of the branded market in the U.S. And so what we are hopeful is that 2026 will now allow the underlying growth of Vabysmo to actually be more visible. And so we would expect an acceleration in 2026. I don't believe we've been more specific than that. In terms of persevERA, so clearly, the fact that we've now seen positive data from giredestrant in a number of important settings, both neoadjuvant, adjuvant and in a complex late-stage population, sort of underscores our belief in this molecule and that clinically, it is potent, it's active and it's combinable, it's tolerable. It's given us great confidence that we do have the opportunity to be really impactful for many different patients and to really become a new standard of care in hormone receptor-positive breast cancer. Reading through though, to different settings is complex. And so thinking about how we would read through to persevERA, happily, we don't have too long to wait to actually get the answer to that question. In terms of what would be clinically meaningful, we have designed the study to yield a clinically meaningful result. And so generally speaking, a 20% reduction would be considered clinically meaningful. Did I answer your question? Sachin Jain: Perfect. Bruno Eschli: Okay. Very good. Then we move on. Next one in the row would be Peter Verdult from BNP Paribas. Peter Verdult: Pete Verdult from BNP. Two questions. Teresa, just on obesity. We understand from Zealand that the amylin data is in-house and the market seems to have set the bar at sort of being low to mid-teens weight loss. Forget the market for a second. Can we just focus on Roche? What is the minimum target profile you are looking to demonstrate for amylin in obesity? And then secondly, on BTK, you sound very confident about the approvability despite recent CRLs elsewhere in the BTK class. You know the efficacy in the first relapsing-remitting study in PPMS, which we don't. Just wanted a sense or kick the tires with you. Is your confidence based on a highly skewed benefit risk profile? Or is it more because you think the 2 cases of Hy's Law that you've seen in the data set can be attributed to other or nondrug causes? Teresa Graham: Yes. So I'm going to start with your second question first because I think we've gotten a lot of questions over the last couple of weeks about tolebrutinib and read-throughs to fenebrutinib. And I think we have to be very, very cautious here. If you actually read that CRL, it is incredibly specific to the risk benefit that was seen with tolebrutinib. And unfortunately, they had a number of failed trials. They had a number of Hy's Law cases. So I think it is very difficult and inappropriate to actually take the language that was applied to tolebrutinib and actually put that forward on to fenebrutinib. Let me be really clear because I think there have been some -- there's been some confusion about what we've actually seen in terms of Hy's Law cases for fenebrutinib. We had 2 cases of elevated liver enzymes with bilirubin, which was what put us on clinical hold with the FDA. Both of those cases were in FENhance 1, which currently is a study that still remains blinded. When we looked at those 2 cases, only one case was deemed by the FDA to be a Hy's Law case. The other one was confounded due to alcohol use by the patient. And so right now, in fenebrutinib, we have only one case and it is in FENhance 1. So we are sort of blinded to any more detail. It's also really important to note that since we put liver monitoring in place in the clinical trials, we have not seen any more cases. And so I think we feel very good about the overall benefit risk profile that we have with fenebrutinib, particularly when you consider the other half of that coin, which is the benefit. When you look at the Phase II trials for fenebrutinib, you saw a significant amount of clinical benefit to patients. And the data that we've seen are sort of very consistent. And so I think when you look at that very high efficacy with a very -- what looks to be a very manageable safety profile, I think we're just in a totally different situation than what you saw with tolebrutinib. So hopefully, that kind of provides a little bit more perspective there. So in terms of petrelintide, so as a monotherapy, we believe that petrelintide holds the potential to be a foundational therapy for weight management. We are looking forward to being able to deliver a weight loss that the vast majority of people are actually looking for, which is something more in that sort of 10% to 20-ish percent with the potential to be a much more improved tolerability profile compared to the GLP classes as well as just a better patient experience in terms of titration, quality of weight loss, et cetera. So obviously, we don't, again, happily have long to wait. We'll see that data soon. You mentioned the data being in-house. We remain blinded to that data. So we have not seen it but we do -- we expect to see it very soon. Bruno Eschli: Peter, did this answer your questions? Peter Verdult: Yes. Bruno Eschli: And we move on then. Next one would be Simon Baker from Redburn. Simon Baker: Two, if I may, please. Firstly, just continuing on Pete's question about fenebrutinib. I just wonder if you could give us some idea about how we should be thinking about the relative tolerability profile of fenebrutinib versus Ocrevus ahead of the ACTRIMS data? And how do you see in light of that fenebrutinib being positioned relative to Ocrevus? And then secondly, a question for Matt. It's a little while since you unveiled to us the new sequencing offering. I just wonder if you could update us on the market feedback you've had in terms of levels of demand and where that demand is coming from, whether it's smaller scale or larger scale applications or indeed both? Teresa Graham: You want to go first? Matthew Sause: I would be delighted to go first. Teresa Graham: And I would be happy to yield the floor. Matthew Sause: Super. Wow. So yes, and I would maybe give a plug for our Dia Day in May, which will talk quite a bit more about this and Bruno will mention that at the close. Maybe I'll just say that first. But yes, we've seen a high level of demand for the sequencer, I would say in, more than we had originally anticipated ahead of launch. We're already starting commercial activities with select customers. And the feedback from our early evaluators has been extremely positive. So when you talk about applications, we're really seeing interest in a broad variety of applications from translational, such as single cell but then on to more focused clinical applications such as whole genome sequencing and germline. So what we're really seeing is the potential of an instrument with that kind of flexibility, throughput and accuracy and a dual assay format with the longest reads of Simplex as well as the very high accuracy Duplex format to have a broad applicability really across the spectrum of sequencing applications. And I think we're very confident in the potential for this technology as well as the launch. Does that answer your question? Bruno Eschli: Simon? Simon Baker: Perfect. Teresa Graham: Yes. Great. So when we think about where fenebrutinib sits, I mean, we believe that it has best-in-class potential. And together with OCREVUS, OCREVUS subcut and potentially further on -- down the line, OCREVUS high concentration, we believe, ultimately, we are going to have a range of highly efficacious and very tolerable therapies that meet every patient with MS exactly where they're at. Right now, 30% of patients are on a less efficacious oral therapy. And so that's sort of an easy place to imagine fenebrutinib starting. But I think ultimately, we believe that this is -- the combination of these 2 therapies gives us the opportunity to really sort of revolutionize the entire patient journey for MS patients. And I think we're feeling very confident about our ability to do that. Simon Baker: [indiscernible] Very clear. Bruno Eschli: Next questions go to Matthew Weston from UBS. Matthew Weston: Hopefully, you can now hear me. The first one on giredestrant. Teresa, there's a lot of debate about how the commercial potential in the adjuvant setting could be impacted by the data from persevERA. Can you give us your thoughts as to whether or not you see adjuvant as independent of that frontline metastatic result? And also, there's a lot of debate about the peak sales potential of giredestrant.. So when do we -- when should we expect to hear what Roche thinks the potential of this medicine is? And then secondly, if I can just pick up on biosimilar erosion. So Q2, Q3 of last year, you made a number of comments about delays to the entry of Xolair and now similar comments about potential delays to the entry of biosimilar Perjeta. Clearly, there are multiple patents, so you can do deals with biosimilar companies. But do you think investors should get used to a more gradual erosion of some of these biosimilars at the beginning of generic entry? Or should we still continue to expect to see like a minus 40% that has been kind of the underlying trend so far when we actually see biosimilars enter the market? Teresa Graham: Yes. So I'll take -- thanks, Matthew, for your questions. I'll take your second one first and I have a very definitive answer for you, which is that it absolutely depends. So it depends on the therapy. It depends on the part of the world. I mean, I think it -- this is one of those things where biosimilar impact is not a one size fits all. So in some parts of the world, with some therapies, you are going to see an immediate decline. With some others like Xolair, we just do expect that to be a smidge more sticky because you're dealing ultimately with a very allergic patient. And so physicians might be a little bit more tentative about switching so quickly. And so I think this is one of those areas where we are constantly monitoring the environment. We're constantly talking to treating physicians to get a sense of how they may think about the utilization of biosimilars and we give to you our best knowledge of how we believe those erosion curves will happen. But it's very difficult to give you one answer because I think it is actually quite variable, again, by therapeutic area and by geographic area. When it comes to giredestrant, so this market is somewhere between a $20 billion and $30 billion opportunity. Adjuvant is about 2/3 of that between initiation and maintenance therapy. We do think that adjuvant and first-line is pretty separate. And we think that giredestrant has the opportunity, as we said, to really be establishing itself as a new standard of care. When are you going to get a better read-through from that? Q1 is a very data-rich -- here, so the first half is a very data-rich time for us. We're in the process of updating our own assumptions. And as soon as we have a clear read-through, we will share that with you. Thomas Schinecker: Maybe just to answer your question on Perjeta as well because you had this question. So we don't expect the biosimilar for Perjeta until '28 in the U.S. and '27 in the EU. Teresa Graham: Correct. Thomas Schinecker: Just to clarify that. Bruno Eschli: Matthew, did we answer your questions? Matthew Weston: That's perfect. Bruno Eschli: Then we move on. Next one would be James Gordon from Barclays. James Gordon: James Gordon from Barclays. Two questions, please. One would be on giredestrant, actually 2 subparts. One would be, the slight delay in persevERA readout timing and I think it's now more likely to be Q2. Is that because the event rate is a little bit slower? Or could you be getting a few more events in and could that actually help the [ powering ], which has been a concern some people have had? And also on giredestrant, the lidERA Study, the [ side ] study of about 100 patients, I think they're getting on top of the CDK. How will you communicate that? And it sounds like you're filing ahead of that because you're filing the data in Q1. So is that something that then gets added to the filing package and you hope to have on the initial label? Or how does that work? And then the other one was on fenebrutinib. So you sound very confident talking about the Vabysmo upcoming launch, which is great. And there's been some talk about liver already. But in terms of other tolerability issues, I saw the comment in the original release about additional safety data that is further being evaluated. So could there be some other off-target BTK side effects you need to think about? And just on the side effect point, though, if you're comparing it to something like Ocrevus, so you've got the advantage of oral but could you have to have liver monitoring or something like that? Could that be a barrier to becoming a very big drug? How would you think about that? Teresa Graham: Great. Okay. So we'll start with the second question first. So we intend to assess the safety of fenebrutinib when we have the -- all of the studies read out and we look at -- when we look at the pooled safety. So obviously, we only have 2 of the 3 studies. So we need to wait a little bit in order to be able to step back and look at that. The data that we've seen so far, we haven't seen anything that is different than what you would see in the background rate of the overall MS population. In terms of liver monitoring, as is typical, when you get your label, usually for things like monitoring, you get what you studied in your label. So we would anticipate that we would have the same liver monitoring in our label that we had in our clinical trial. And again, I think when you look at the efficacy and the risk-benefit profile that fenebrutinib has, I think this still -- this is going to be a meaningful medicine in MS. So more to come as we get FENhance 1 data. For persevERA, just to be really clear, the timing on that has not changed. We have consistently been messaging, the first half, mid-first half of this year and that has not changed. So that is remaining consistent. And again, we do plan to file the lidERA data first. We get the [ abema ] data, I believe, the substudy data comes, is that also in Q1? Guys, someone is going to have to remind me of that. And then the [ ribo ] study, which is a 200-patient substudy is just kicking off, so that will come later. So those are data pieces that clearly, as soon as they are available, we will be making public. But the adjuvant filing is going in -- into Q1 as planned and it looks like end of 2026 for the substudies. Bruno Eschli: James, all questions answered? James Gordon: That's great. Bruno Eschli: Yes. Then next one is Sarita Kapila from Morgan Stanley. Sarita Kapila: So you addressed the study approval risk and I guess others have touched on it. But what is underscoring the confidence in the commercial potential? What's the initial feedback from the physician community being? So we've seen orals with LiverTox launch post CD20 approval, which have struggled to reach 1 billion. So I guess why is fenebrutinib different? And how are you viewing risk from Novartis' remibrutinib in RMS data in Q2 and they've had no signs of LiverTox so far? And then the second one is just on persevERA. It's also been touched on but how confident are you that you have enough patients in the trial to hit stat sig? And how should we think about the [indiscernible] study and the potential read across to persevERA? Teresa Graham: Great. So let's start with fenebrutinib. So obviously, the data have not yet been presented. So the PPMS data goes to ACTRIMS shortly, and then the RMS data will be packaged together when we have FENhance 1 as well. That having been said, we've obviously shared it with those physicians who are part of the trial. And I think people have been really impressed with the data that we've seen. And in particular, people were really impressed with the Phase II data that we've seen. So what we're talking about is the ability to get OCREVUS like efficacy in an oral treatment. And for many patients for many, many different reasons, that's a very attractive option. So again, I think in this market, a lot of it comes down to the overall efficacy that we're able to deliver. And based on the Phase II data, we believe we have a highly efficacious molecule on our hands. In terms of the Novartis data, I mean, it's important to remember, we haven't really seen anything in MS from Novartis yet. This is a dose that I think is about 4x higher than the existing dose. They had sort of second mover advantage and they started their trial with liver monitoring. So I think it's very difficult to compare because we just really haven't seen anything. We have first-mover advantage here. We've had robust Phase II data. And yes, I mean, I think we're -- it's very difficult to say anything until we actually see data. It's also, I think, important to remember that fenebrutinib is a non-covalent molecule. And in a chronic indication, that noncovalency really matters because it means that even though you're taking it chronically, if you need to stop for whatever reason, it does leave your system more quickly. And I think that really in a chronic care environment is a benefit. So in terms of read-through for persevERA, it's clear when breast cancer is dependent on the endocrine receptor for viability, giredestrant can perform very well. And we've seen that in a number of settings. So all of these patients are, by definition, dependent on ER signaling and it's worked really well here. So clearly, in the front line, the likelihood that it's successful hasn't gone down. And we should always be really cautious with cross-trial comparisons. And so I think we are -- again, as I mentioned, the benefit is, we don't really have long to wait. So we'll know really soon. And yes, persevERA is designed to show improvement over palbo plus letrozole. Bruno Eschli: Sarita, all questions answered? Sarita Kapila: Yes. Bruno Eschli: Yes. And the next one in the queue is Richard Vosser from JPMorgan. Richard Vosser: Two questions, please. First question, just to go to diagnostics for a little bit. Margins obviously hit by ramp-up of mass spec sequencing and the machine placements. Could you give us a bit of color on how to think about the margins from here? Those placements seem likely to continue as you ramp those 2 businesses up. So how should we think about '26 and then the improvement in the margins from there? And then second question back to pharma. Just going back to Vabysmo -- thanks for the comments on the foundations. Could we go a little bit further out and think about the future competition potentially from less frequently dosed injectable products? I think ocular has one half yearly. How you think about that sort of competition? And also closer to today, the biosimilars are really starting to come. They're having some impact in Europe as far as we can see. So just what's the thoughts globally, U.S., Europe on biosimilars from Eylea on Vabysmo? Matthew Sause: So in this case, maybe... Teresa Graham: No. Go ahead. I can use a break. Matthew Sause: Thank you. So maybe starting with diagnostics. So we talked about a couple of effects. There's the new technologies. There's the tariffs of which Alan said we had half the year and we'll have a full year this year. But the biggest effect on what hit us last year on the margin was really the China effect. And as you heard from Thomas, we expect to see this meaningfully diminish this year. 2027, again, we expect to decline but it will be small enough that it won't really be meaningful. And then we expect to see a recovery. In terms of specific ambition on margin this year, I think I would refer you back to the group position that Alan mentioned earlier. But I would say our consistent ambition is to grow profit faster than sales. And that is once we really get ourselves to the headwinds this year, that is our ambition going forward. And it's also our continuous ambition to improve the margin in diagnostics. That's something that is a goal for the entire organization. What I would call out, though, in 2025 is you had our second largest market with a 25% reduction. So obviously, there was an impact but that's something that you can see with our discipline on the cost line that you can also expect to see continue again in 2026 but we expect the gradual washout of that. Anything you would add to that, Alan? Alan Hippe: Well, I think for '26, I think, well, we expect kind of a stabilization. I think that's a little bit here. But we will give that additional information. Matthew Sause: Absolutely. Yes. So I would maybe just refer to what Alan said. Our goal really this year is going to be that we stabilize the margin. Thomas Schinecker: And I think on a group level, you have seen that our intention is to expand margin in 2026. And what I've said in the past still holds, which is that also going forward, we will at least keep margins stable also for the coming years. Matthew Sause: Perfect. Does that answer your question? Bruno Eschli: I think so. Matthew Sause: You go ahead. Teresa Graham: Yes. Great. So I'd like first just to start by talking about Vabysmo. So I mean, Vabysmo is highly efficacious therapy with a very well-defined safety profile where patients and physicians do have a lot of good experience in extending doses. And so -- and it is designed to do just that. When you look at -- you asked specifically about ocular, I mean, this drug is going into Phase III with a very small safety database and really no known data on long-term safety. And when you talk about something that's going to be used intraocularly over a long period of time, I think long-term safety is incredibly important. So I think it's very difficult to think about how these -- how something like that is a threat to something that has such good efficacy, such good safety and where you do actually have the ability to extend doses. So I think from a future competition perspective, just like in other disease areas, sort of the bar is high here to unseat Vabysmo. And you had one other question. Oh, biosimilars. So far, what we see is that the Eylea biosimilars are taking from Eylea. And so for those patients who are really benefiting from a new and novel treatment, Vabysmo, they were just less impacted. So yes, I mean I think we saw Lucentis take from Lucentis. We're seeing Eylea biosimilars take from Eylea and we're seeing high-dose Eylea take from low-dose Eylea. So there's a lot of trading within that space. But I think for new patients who are going on therapy, physicians are picking the best available therapy out there available to them and that is Vabysmo. Thomas Schinecker: And on ophthalmology, I would like to add that we have an amazing pipeline in ophthalmology. So when you look at all the different validated targets, I think we're the only company that actually has all the different validated targets in-house. And so if you look at our pipeline, we have trispecifics, tetrapecifics, [indiscernible] et cetera. So if I look at our ophthalmology pipeline, I think the one that's going to succeed surpassing Vabysmo, is then hopefully us. Bruno Eschli: Very good. Richard? Richard Vosser: Yes. Perfect, everyone. Bruno Eschli: And next one in the queue is James Quigley from Goldman Sachs. James Quigley: Hopefully, you can hear me. Just a couple of quick questions from my side left over. So firstly, again, on giredestrant and revisiting lidERA. What's the KOL reaction been from your side? So some of the KOLs we spoke to have been a little bit more cautious than the presenter at your SABCS event, given the more limited follow-up versus the CDK4/6 class. So how do you think this could impact the giredestrant trajectory, of course, assuming approval? Would it be more of a step up -- stepwise ramp or more a stepwise ramp as more data comes? Or do you -- or do your feedback suggest the potential for a faster, more optimistic ramp on giredestrant? So that's the first one. Second one, more a financial question. So underlying pharma growth has been pretty strong in recent years, driving operating leverage. So how is Roche balancing R&D investment with profitability? So how long can R&D expenses stay flat? This half seem to show that Roche has a strong ability to reallocate costs in R&D. But how long can this go on to support operating leverage? Teresa Graham: I mean I think what we're hearing from the KOL community regarding where they would use lidERA is pretty bullish. I mean I think what we hear from -- the lidERA population is 55% of the adjuvant breast cancer population. That's 10% more than what we saw on the NATALEE trials. So I think you are really seeing physicians believe that this could have very broad applicability in their practice. And so I think that would -- that's what leads us to be fairly bullish about the opportunity. There's a 74% overlap with the population in NATALEE and monarchE. And so I think we're very -- yes, I think we're very confident that we have something on our hands here that is quite a game changer based on the data that we've seen. Thomas Schinecker: Yes. Let me answer the second question. But first, something to add on giredestrant. I mean you look at the hazard ratio of 0.7. You can see that, that's, I would say, highly competitive to also some of the CDK4/6 trials that you've seen. But what you have on top of that is the tolerability. If you look at CDK4/6, you have quite a high amount of patients that actually stop using it simply because they cannot take the tolerability. So I think these are all the right arguments for SERDs to be used. So I do believe that the pickup will be strong. Unfortunately, I wasn't at the Congress in San Antonio but I heard there was standing innovation from the clinicians there. Then the second question on R&D. So we're working very hard to be a high-performing, very cost-efficient organization. There are still opportunities, in my view, to continue to work on that. AI, by the way, plays a big role in that. We're using AI throughout the entire development process where we want to, on the one hand, speed up using AI but also reduce costs doing that. Regarding R&D expenses, also for 2026, I would say it will be broadly flat. Again, really focusing very hard on making sure that we put the money to work in the best possible way for the sake of patients in our company and for our investors. Alan Hippe: And it all goes back to the margin point that you've made before. Thomas Schinecker: That I made before, which is, it's clear for '26, expand margin. And as previously always said, at least stable for the long term. Bruno Eschli: James? James Quigley: Thank you very much. Bruno Eschli: Okay. Then we move on to Graham Parry from Citi. Graham Glyn Parry: So one on lidERA. Thanks for clarifying the filing time line as being Q1. Just wondering if you could comment on whether you expect priority review or to use a priority review voucher or not. And when exactly do you think you would expect to see the [ ribo ] combo substudy data, 200 patients, how long does that take to recruit? And could we see something by the end of this year? Is that a next year event? And then on fenebrutinib, could you just confirm how important you think confirmed disability progression is versus annualized relapse rate reduction in showing a risk-benefit profile and differentiation versus Ocrevus to the regulator, just given the -- it's a very brain-penetrant molecule and has potentially, therefore, the ability to work on disability progression where CD20 doesn't? And then the final question is, you're technically still on clinical hold with FDA. So does that have to be lifted before you can actually file or receive approval? And what are the steps to doing that? Teresa Graham: Okay. So we expect the [ abema ] substudy by the end of the year. We would expect [ ribo ] in 2027, that is really only starting now. So we've got a little time. That's 100 patients in the [ abema ] arm. And in [ ribo ] it's 200 patients. The FDA hold will be addressed as part of the planned [indiscernible] filings, but we've obviously been in consistent conversation with the agency over time. So there -- we've been in very close contact. I won't comment on our filing strategy only to say that we plan to bring lidERA to patients as quickly as possible. In terms of confirmed disability progression, I think we are -- the annualized relapse rate is also a very good endpoint here. And we are confident that, that is giving us what we need in order to proceed. Bruno Eschli: Graham, any additional questions or -- all good? Then we move on. And I hand over to Rajesh Kumar from HSBC. Rajesh Kumar: Two questions, if I may. First, on CT-388, thanks for clarifying discontinuation rate in the highest dose was similar to the overall group. You also mentioned that you could consider a flexible dosing in Phase III trials as an option. So could you give us some color on how you're thinking about Phase III progression? Would flexible dosing or an active comparator be something you might consider? Or is it at the moment, too early to comment on that? Second, just on giredestrant, quick follow-up. You highlighted the overall TAM this class is targeting to be quite a large number. You are filing with a few -- some persevERA data is about to read. So just in terms of the market segmentation, how much of the market you think it have been risked -- derisked to some extent and how much we still depend on the data in your assessment of the market would be very much appreciated. And because I'm an analyst and I cannot count, the third question would be just on the clarification on Vabysmo. Appreciate the working capital impact has gone up and that sort of reflects a very strong December. So should we consider the exit rate of December close, the indication of how you're thinking about growth in 2026? Or should we take an overall slower growth rate going forward on Vabysmo? Teresa Graham: So I would just go back to my earlier comments. For Vabysmo, we expect to see an acceleration of growth in 2026. So more to come on that. In terms of the dosing for CT-388, so what we have disclosed is that CT-388, it will be administered once a week and we're aiming to develop it at 3 maintenance doses. We are not disclosing at this time the details of that dosing strategy. But just to avoid any misunderstanding, we have not indicated that we will be doing flexible dosing within the trial. So -- but right now, the details of that Phase III design, that specifically have not been disclosed. And then in terms of giredestrant and the market segmentation, so -- and how much do we feel like has been derisked? Well, 2/3 of the market is adjuvant and we have a positive adjuvant trial. So I mean, I think a significant portion of the -- we have a significant portion of the market that has been derisked. Bruno Eschli: Okay. And then next questions are from Michael Leuchten from Jefferies. Michael Leuchten: A question for Matt, please. Abbott said last week that the Chinese may be pursuing VBP for Core Lab oncology. Just wondering whether you've heard that and how that may or may not have been reflected in your outlook and the margin commentary you made earlier? And then sorry, Teresa, just going back to Vabysmo, just your comment about 2025 in the U.S. being reset. Q4 was still soft. It didn't really improve upon Q3 sequentially. So when you say you think that's now stabilized and it can grow from here, just wondering how you look at that Q4 versus Q3 dynamic in the U.S. Matthew Sause: Okay. 3. Wow. I know what 3 is [indiscernible]. So what I would first start off by saying is, as you may know, there was VBP for Core Lab oncology reagents last year. And so that was what you see, our China effect last year significantly represented a decrease in our Core Lab oncology reagents, which were down about 50%. So some of that effect is still pulling through this year. But I can't speak for what was said on that call but we are seeing the effect of the VBP last year and the national reimbursement reduction. So we don't anticipate additional Core Lab oncology VBP this year. Teresa Graham: So in thinking about Vabysmo, Q4 -- so 2025, we saw a big reset in the branded market in the U.S., right? With the closure of the co-pay foundations, fewer patients were put on branded drugs, more patients were put on Avastin and biosimilars. And you saw a big just sort of reset in how many new patients and continuing patients were actually going on a branded therapy and that constricted the market by about 15%. That constriction went all the way through Q4 because normally, when donations are given or grants are given, they're given 4 years' worth of therapy. What's happening right now in the oncology world is something called the blizzard. It's where every retinal specialist in the U.S. goes and reverifies the benefits for every single one of their patients. And it's at that point in time that patients actually determine what -- will they be continuing on their current medication, will they be switching, et cetera. And so over the course of the next couple of months, I think we're going to get a real sense of what is the trajectory of the branded market going to look like in 2026. But because that underlying base effect of 2024 is now washed out, you should be able to see the actual branded growth of people going on to new therapies actually come through. So I think there's a reason why we didn't see Q4 look any different than what the rest of the year looked like. I think we had sort of hoped that we might see some early signs of recovery but I think those signs of recovery really are going to come -- become a little bit more evident as we get towards the end of Q1. So Michael, I hope that addresses your question. Thomas Schinecker: Yes. And I mean, we -- the co- assistance foundations, they are separate, right, so nothing that -- in terms of influence. But what we can say is in general, that our donation was towards the end of Q4. Teresa Graham: Yes. And then again, we don't link those 2 things. It is interesting to know though that in Q4, we did see a 4% growth. So we saw... Thomas Schinecker: Quarter-over-quarter. Teresa Graham: Yes, quarter-over-quarter growth. We did see a 4% growth. So we did see a little bit of an uptick. Bruno Eschli: Michael, any follow-on? If not, then I would hand over to Paul Kuhn from Cowen. Paul? Paul Kuhn: Thanks, Bruno. This is Paul on for Steve Scala. Two questions, please. What feedback have you heard from U.S. oncologists and how they plan to initially use giredestrant in the adjuvant setting? And secondly, how did the change in Xolair biosimilar entry from end of 2026 to before November 2026 come about? Was this a change in the settlement with generic manufacturers? Teresa Graham: So with regards to Xolair, I think we have long said sort of second half of 2026 is when we expected the first biosimilars to come in for the U.S. So I don't actually think that that's a change. Bruno Eschli: I think mentioning November was just related to IRA. So that is really, we need to have a biosimilar place -- a payer in the market before the 1st of November. So then we cannot get negotiated. Teresa Graham: That is correct. So my reference to the 1st of November was purely around CMS guidance that says if you have a marketed biosimilar by November 1, 2026, then you will be removed from the negotiated basket. So that's where that date comes from. But we've always said second half of 2026, we would expect to have a biosimilar in the market. And then feedback from oncologists on where they intend to use for adjuvant. I mean, again, just to continue to reiterate, 55% of the adjuvant population was covered by the lidERA trial. And so I think you see a high degree of confidence in an oncologist to use in a very significant portion of their patients. And again, what we saw here was a very efficacious, seemingly combinable and well-tolerated therapy that I think has the opportunity to really become a new standard of care in this setting. So what we're hearing from oncologists in general is that they're pretty excited to have this in their hands and we're excited to get it to them. Bruno Eschli: Paul, if we answer all your questions? Paul Kuhn: Thank you. Bruno Eschli: Then next one would be Justin Smith from Bernstein. Justin Steven Smith: Two, please. Pharma, #1, NXT007, just wondered if you could share some thoughts on when the Phase III design head-to-head versus Hemlibra will hit ct.gov. Second one, diagnostics, Matt, just wondered if you could talk a little bit about CGM and when the finger prick recalibration will be removed and the impact that might have? Matthew Sause: Wow, 4 is new territory. So I want to first thank Teresa for generosity. But -- so starting with your question on auto calibration, which is the comparison of the CGM device with a blood glucose lancet, what we are planning to do is have that launch happen this year. I won't say exactly which quarter but that is an improvement that we expect to deliver this year. Teresa Graham: And with regards to NXT007, we would expect those trials to start in Q1, Q2 with clinicaltrials.gov entries at around that time frame. And again, these are 2 studies, one, head-to-head and one, versus [indiscernible] and one Hemlibra. Bruno Eschli: Justin, all questions are answered? Justin Steven Smith: Yes. Great. Bruno Eschli: Then I would maybe read here loud 3 questions, which I got from Luisa Hector. She had to drop off and I promised her I will go through them. There is one question on Ocrevus [indiscernible]. So the split of naive versus switch patients that we are capturing and what is the target switch rate for 2026 and at peak? What I think we have been communicating that we have 2 billion in incremental sales for Ocrevus but this is true incremental sales. And on top, basically, we would have revenues coming from switching. So we have not yet provided a detailed outlook on what the ratio, IV to subcutaneous would be at around 29%. We might do that at a later point in time. There's then a second question I found interesting on the pipeline. 66 NMEs now on the pipeline. Is this rightsized? And what we have seen now with the turnover in the fourth quarter with 4 molecules added, 5 going out -- so 5 added, 4 going out, is this now -- is there still cleansing ongoing of the pipeline? Is this now the regular run rate and the turnover? Or would we target more NMEs overall? Thomas Schinecker: Yes. I mean I can answer that question. So overall, you apply the bar not only once, you apply the bar constantly based on data that you generate but also data that you get from the outside. So clearly, I think we are at a point where we'll continue to bring in additional NMEs. We have actually -- when you look at the very early stage of our research organization, we've actually doubled the amount of molecules moving ahead there. So we do believe that we'll continue to expand on the amount of NMEs that we have in our portfolio beyond the 66. But this kind of, I would say, prioritization is just something that you have to do constantly based on just availability of data. Bruno Eschli: And then the final question here would be on capital allocation. Given your positive pipeline progress, pharma deals with the U.S. administration and with competitor developments in obesity, are there any changes to your M&A objectives and R&D investment plans? Thomas Schinecker: No, I can say there is no fundamental change. I think what we have really shown over the last couple of years that we've been very disciplined, very disciplined in terms of financials but also in terms of really screening the market for interesting molecules with good data. If you look at the amount of money that we spent compared to other companies and the kind of pipeline we've built doing that, I think we've been pretty efficient. And our intention is to continue to do the same and just continue to be quite disciplined on that. The good thing is, we are not in a situation where we have a huge patent lift, right? So we are not in a situation where we have to do late-stage deals, which are very costly. I think we are in a very good position when it comes to our late-stage pipeline. But obviously, I mean, if you look at the amount of innovation that's ongoing outside, you look at what's happening in China, we need to continue to screen the market and look at everything that's out there. I mean I looked at a statistic, for about 1,000 companies that we look at we do 1 deal. And I think that's also what I expect of our organization that we know exactly what's going on outside so that we can make data-driven good decisions. Bruno Eschli: Very good. I think with that, actually, we are at the end of our Q&A session. Let me just remind you of the 2 upcoming IR events we already have flagged. I assume there might even be more. There's on February 9, our neurology call, we will cover up the PPMS data for fenebrutinib presented at ACTRIMS. And then on May 12, we again will have our Diagnostic Day as a live event in London, where we will take you through the entire portfolio and highlight this year, I think, will be SBX sequencing. As we are now in the global launch phase, I think there is the next steps to come with pricing and so on. So I think it will be an exciting event. And with that, I hand over to Thomas for the final remarks. Thomas Schinecker: Thank you very much, Bruno and huge thanks also to the team. I would say, quite exciting times. I mean, if I see all the discussions that we've had as a team over the last 3 years and the progress we made, I think it's significant. And it's not only that, it's also a lot of fun because we get to talk about what we like to talk about, which is science, which is about progress for patients. And with people like Alan and myself who like math, also we can talk a lot about financials. So I think there's a lot of good things that are going on. And we have a good momentum both on financials and pipeline. So very proud of the team. And I do believe we've always done what we said that we are going to do and you will continue to see that going forward. We continue to move with focus. We continue to move with speed. And as always, you can count on us because we will deliver.
Andrew Angus: Good morning. My name is Andrew Angus. I look after Investor Relations for Fluence Corporation. Welcome to the Fluence Corporation Q4 FY 2025 Quarterly Results. With me today are Ben Fash, CEO and Managing Director; and Osvaldo Llanes, CFO. Ben, over to you. Benjamin Fash: Yes. Thank you, Andrew. Good morning, everyone. As Andrew said, my name is Ben Fash, CEO of Fluence. And I'd like to welcome everyone today to our Q4 and fiscal 2025 business and financial update. As always, thank you for your time today and your interest in Fluence. With me, I'm pleased to introduce Fluence's new CFO, Osvaldo Llanes. At this time, I would like to give Ozzie a moment to introduce himself as this is his first quarterly business update, and then I will be providing an update on our business activities for the fourth quarter and fiscal 2025. Ozzie, the floor is yours. Osvaldo Llanes: Sure. Thanks, Ben. Good day, everyone. I'm Ozzie Llanes. A little bit about myself. I spent most of my career in senior finance leadership roles, partnering with management teams and boards to support profitable growth, capital allocation and cash flow discipline. A significant part of that experience has been in the global water industry, working with project-driven businesses and recurring service models. Water is also important to me personally. It's a sector defined by long-term demand and reliability, where the work we do has a tangible impact on our communities and customers and where strong financial stewardship is critical to delivering sustainable outcomes. That combination is what attracted me to Fluence. I'm excited to be here, and I look forward to supporting the team as we continue our journey to execute and create value for our shareholders. Back to you, Ben. Benjamin Fash: Thank you, Ozzie. Three years ago, I sat in front of all of you as the newly minted CFO of Fluence, knowing that we had a challenge in front of us to turn this business around. I believe Tom compared it to turning around an aircraft carrier. Fluence was always a business that had tremendous potential, an undeniably strong portfolio of water and wastewater treatment products and technologies that also had a unique geographic footprint and operated in some of the highest growth regions in the world. Yet the company was never able to turn that potential into results. I believe Q4 2025 shows that, that aircraft carrier has finally been turned around and the financial results reflect the progress that we have made as a company. You may recall that in fiscal 2023, we decided to make a strategic shift and realign the Fluence business to focus on our SPS and Recurring Revenue products through 4 core business units, as shown here. In fiscal 2022, SPS and Recurring Revenue represented only 38% of our total revenue. Fiscal 2025, that number is now 65%. Further, our gross margins have grown from 23.9% in fiscal 2022 to 29.9% this year, and we expect that, that will continue to expand. Our realignment also allowed us to rationalize and cut SG&A costs by approximately 25% in fiscal [Technical Difficulty]. We also determined that Fluence needed to operate like the global company that it was, leveraging our existing enviable geographic footprint as well as focus on growing its presence in North America. Our One Fluence approach initially led to a significantly expanded sales pipeline, which is now converting into record SPS and Recurring Revenue orders. Our core business units started selling into new markets to them, but they were existing markets for Fluence overall. Today, our global teams are now regularly working together to secure and execute orders that cross borders and product lines, and that is leading to expanded growth opportunities. We've built a strong, experienced global management team that is laser-focused on execution, improving cash flow, contract management, controls and costs, all of which helped to lead to the strong results in Q4 in fiscal 2025 that we are delivering today. I will leave you with this before launching into the financial results. While the job is not done, I truly believe that Q4 2025 represents an inflection point in the business and that Fluence has moved beyond many of the historical challenges it has faced to embrace the potential and take advantage of the growth opportunities that lie ahead. With that, I will turn to our results. Following a strong Q3, Q4 did not disappoint and delivered even stronger results consistent with our forecast. The combination of double-digit growth in SPS and Recurring Revenue, progress on the Ivory Coast Addendum project that contributed meaningfully to revenue, continued expansion of gross margins and strong cost controls resulted in Fluence delivering fiscal 2025 EBITDA of $4.0 million on revenue of $78.4 million, meeting the midpoint of its EBITDA guidance. As noted, fiscal 2025 revenue was $78.4 million, which was $26.9 million or 52% higher than fiscal 2024. Q4 itself contributed $26.0 million in revenue, which was 22% higher than Q4 of 2024. SPS plus Recurring Revenue continued to show healthy growth of 15% compared to the prior year. However, contributions from the Ivory Coast Addendum were the largest contributor to the increase as revenue from that project was $20.4 million higher than fiscal 2024. The growth achieved in our SPS and Recurring Revenue products and services is having the intended effect of improving gross margins. Those margins finished in fiscal 2025 at 29.9%, which was flat compared to 2024. That in spite of the fact that we had significantly more revenue contribution from the lower-margin Ivory Coast Addendum project. This was really a result of strong execution by our teams and outperformance of bid margins on projects across our core business units, with all the Southeast Asia and China delivering meaningful increases in gross margin. More specifically, Municipal, Industrial Water & Reuse and Industrial Wastewater & Biogas all exceeded gross margins in fiscal 2025 by an average of more than 6% compared to the prior year. As a result of the revenue growth and margin expansion in our SPS and Recurring Revenue segments, EBITDA was $4 million, as we noted earlier, which was a dramatic increase of $8 million compared to the loss of $4 million in 2024. And all business units saw EBITDA increases in fiscal 2025, which we were the most proud of. Just to run through a few, the Ivory Coast Addendum contributed $3.4 million of EBITDA compared to $0.2 million in 2024. Industrial Wastewater & Biogas saw an EBITDA increase of $1.8 million based exclusively on revenue growth of $5.0 million as well as gross margin improvements. Municipal Water & Wastewater saw revenue and EBITDA growth of $1.4 million and $0.9 million, respectively. Southeast Asia and China revenue growth was $2.8 million in fiscal 2025, and it was able to reduce its EBITDA loss by almost $1 million compared to 2024. Industrial Water & Reuse saw an EBITDA increase of about $0.5 million, and that despite modestly lower revenue, but driven by significantly higher gross margins from positive project variances. And lastly, we were able to achieve corporate cost savings of about $0.5 million that also contributed positively EBITDA. On the cash flow side, the company had another strong quarter. Fluence ended the year with $16.6 million in cash and $4.1 million in security deposits. Operating cash flow in Q4 and fiscal 2025 was $3.8 million and $10.9 million, respectively. This is certainly higher than forecasted, and it was due to a number of Ivory Coast payables not getting settled prior to year-end. As a result, the company anticipates negative operating cash flow in Q1 2026, but forecasts resuming the trend of positive cash flow in Q2 through Q4 of 2026. It's also notable that Fluence repaid $2.5 million in debt during fiscal 2025 as a result of that strong cash flow generated by the business. And here's another good story. New orders in Q4 2025 were $24.5 million, which is an increase of $15 million or almost 158% compared to Q4 of last year. More importantly, I check back in the records, and we believe that this was Fluence's largest order quarter on record for SPS and Recurring Revenue. For fiscal 2025 overall, new orders were $64.2 million, which was an increase of $14.2 million or 28.5%. Municipal North America and Industrial Wastewater & Biogas certainly led the way with increases of 98% and 76%, respectively. Backlog closed the year at just under $75 million, of which approximately $53 million is forecasted to be recognized in fiscal 2026. The core business units of Municipal Water & Wastewater, Industrial Water & Reuse, Industrial Wastewater & Biogas in Southeast Asia and China saw an increase in backlog of $14.8 million or well over 40%. Combined with our expectations for Recurring Revenue, this gives us a very strong foundation for growth in fiscal 2026. Given the strong performance and positive momentum of the company, Fluence will not be issuing discrete guidance for fiscal 2026. Nevertheless, the company expects double-digit revenue growth even with the significant reduction in revenue from the Ivory Coast Addendum project, driven by continued momentum in SPS and Recurring Revenue segments in our core markets. Additionally, we expect continued expansion of gross margins, all of which will contribute to strong growth in EBITDA and EBITDA margins. I also want to give a brief update on the Ivory Coast project given its contribution to the company in 2025 and beyond. Through Q4 of 2025, the company continued to make progress on the addendum works. A number of activities were advanced around road construction, earthworks and drainage works. Pipeline installation has progressed to approximately 2.2 kilometers. Overall, the Addendum Works are progressing well through Q4 and revenue was in line with our forecast for the year. The project is expected to be completed in Q3 2026 with no significant deviations at this time from budget. As noted in prior updates, the Addendum Works are critical for connecting the Main Works water treatment plant to the broader distribution system, enabling treated water to reach the population of Abidjan. Fluence continues to pursue a long-term O&M contract for the plant and preliminary steps have been taken, negotiations are expected to begin soon after the technical proposal and business plan, which we have provided are reviewed by the government. Fluence is currently maintaining the plant on an interim basis, which positions us very well to be awarded the long-term O&M contract. And on the cash flow side, as of December 31, 2025, the company has collected 6 milestone payments under the Addendum contract totaling EUR 35.4 million or approximately 73% of the total payments. I also wanted to provide several additional updates on the business, including developments in our Egypt business and enhancements made to our executive management team. Just a little bit of background on Egypt itself. IWS was established in 2018 as a joint venture with several Egyptian partners, whereby Fluence was and remains the 75% majority owner and leads the business operationally. Minority partners were set up to support project acquisition, government relations and operational support where required. Since 2018, IWS has successfully executed a number of municipal and industrial water treatment projects, including the $20 million New Mansoura water treatment plant that was commissioned in 2023. IWS continues to support the New Mansoura project through an ongoing O&M contract. Unfortunately, despite efforts of local and executive management, IWS has not been fully successful in collecting outstanding amounts owing on accounts receivable across a number of accounts, most notably at New Mansoura water treatment plant. And the accounts receivable remain substantially in arrears despite the plant being operational for more than 2 years. Fluence's minority partners have provided limited support with local and national government support to support collections. As a result, Fluence has determined at this time that it is necessary to take a reserve of $4.5 million of accounts receivable at IWS. This reserve will be taken as an extraordinary item in other losses and is not expected to impact cash flow as management has not been forecasting collections from these accounts for some time. However, we will continue to take all actions available to us to collect those amounts owing. Fluence management continues to review the future of the IWS operations, including the attractiveness of the market opportunity relative to other markets where Fluence operates. Fluence is considering all available alternatives for the IWS business. Now a few updates on enhancements made to our executive management team. Earlier, you met our new CFO, Ozzie Llanes, who started with Fluence in December. We're very fortunate to have been able to attract such an experienced finance executive that brings very relevant industry experience with him from his time at Xylem. Ozzie will work directly with me to drive capital efficiency, Investor Relations and the integration of global financial processes to support Fluence's long-term growth and profitability objectives. Additionally, we bolstered our business unit leadership group when Anda Cao joined us in December. Anda brings significant water industry leadership experience from his time at De Nora, Xylem and Energia with a focus on delivering sustainable double-digit growth through operational excellence and driving a performance-driven culture, which fits perfectly with Fluence's strategy. Rick Cisterna and Spencer Smith are also taking on refined and expanded roles within the business as Chief Growth Officer and Chief Talent and Legal Officer, respectively. Rick's key areas of focus will be global key account management, rep and agent management, marketing and ensuring consistent reporting and incentives for our global sales team. We will also be responsible for establishing a global water services business unit. We'll be focused on driving growth of operations and maintenance, parts and consumables, build-own-operate and rental service models across all Fluence's product lines and geographies. And he will also take ownership of the Ivory Coast project as we look to transition it from a CES project to a long-term O&M project. Spencer will now be responsible for defining and driving Fluence's global people and culture strategy in addition to responsibility for legal affairs, compliance and risk management. This role will be a strategic enabler of growth through leadership development, organizational design, talent acquisition, training and total rewards to ensure that Fluence attracts, develops and retains the best global talent in the water industry while fostering a One Fluence approach across all our regions. Lastly, I'd be remiss if I didn't express my sincere gratitude to Tom Pokorsky, Fluence's recently retired CEO. Tom's extraordinary leadership was on full display during his time with Fluence, and he helped set the foundation from which we can now grow responsibly and profitably. He will remain on as a trusted adviser to the company and to the Board, and we will lean on his tremendous experience on a regular basis. However, we will try to allow him to enjoy his well-earned retirement after a pretty remarkable 50-year career in the water industry. To conclude, the strength of Fluence's Q4 and fiscal 2025 results demonstrate the progress that the company has made over the past few years. More importantly, while delivering a strong year was a critical step in demonstrating the revised strategy has gained traction, record orders in Q4 and a strong backlog have positioned us for an even stronger fiscal 2026. Combined with expanding gross margins, a lower cost base and better cash management practices, management is optimistic about the ability to build sustained profitability and positive cash flow into 2026 and beyond. At this time, I think we can open it up for questions from webcast participants. Thank you again for your time and your continued interest in Fluence. Benjamin Fash: So I will read out some of these questions and try to answer them as best I can. A question came in. As Applegreen is the only USA project mentioned in the recent wins, could you elaborate more on Applegreen and if there is further significance to this win? Nothing really further to elaborate on the Applegreen win. We continue to make progress as we've discussed in our organic growth strategy in Municipal USA. It was one of the stronger growth areas in terms of orders in fiscal 2025, as mentioned, with growth -- order growth of almost 100%. So we continue to make progress, and this is just another example of that. Congratulations on the Q4 results. This is just a comment on the result with Q4 EBITDA at $2.6 million and a contribution from IVC at $800,000. Does this show that we are now positive EBITDA even without the contribution from Ivory Coast? I think that's a really good question. And the answer is yes. If you look at the entirety of the year as well as in Q4, what we demonstrated was profitability even without the contribution of the Ivory Coast Addendum project. The growth -- that has really come from the growth in our SPS and Recurring Revenue from our core business units and expanded gross margins combined with a lower cost base, all of which has really contributed to a business that can and will be profitable even in the absence of the Ivory Coast Addendum project as we demonstrated in 2025. There's a question on Fluence's operating -- the plant -- the Ivory Coast plant on an interim basis. What is the ongoing revenue from this on an interim basis? At this moment in time, there has not been any revenue recognized on the interim maintenance work that has been done. We have been incurring costs through this period. We have a commitment from the client -- from the government to be reimbursed at standard market rates during -- for the maintenance work that's been done during that period. But during fiscal 2025, we did not recognize revenue as we did not have a contract in place. Question to clarify, the company expects double-digit growth on total revenue of $78 million. The answer is yes. Are we expecting more legacy write-downs in addition to IWS? Will PDVSA be any issues? So those are 2 very different questions. We do believe that IWS likely represents the -- I'll say, the last of the major legacy write-downs. We don't expect any additional ones from existing operations at this moment in time. PDVSA is a different issue altogether and obviously has become -- brought back into the limelight with the current geopolitical situation with Venezuela. At this moment in time, there has been nothing that has changed with regard to the sanctions environment and OFAC and their position on our ability to negotiate with PDVSA. So at this moment in time, there are no changes to that situation and none envisioned at this moment in time until there's more clarity provided. You have target EBITDA margin for 2026, noting your medium-term targets are noted at 10%? We are not providing specific EBITDA margin guidance at this time. Any update on the rental division? This is a good question. We are working diligently on building out our rental strategy. There'll be more updates that we can provide through the course of 2026, but there are no specific or material updates that we need to share at this moment in time. Any traction on Dow City, MABR pilot with regards to approval from the Iowa DNR. No specific updates on that other than we are leveraging that pilot and have been able to generate some opportunities around that in the Iowa area. So Iowa has sort of become one of the states that we have now put on our approved list to be able to market and develop new business. There's a question around -- there's a lot of discussion around the water usage by data centers under construction. Is this an area of interest or opportunity for Fluence? This is an excellent question. And obviously, there is a lot of buzz around AI and the water needs for data centers. And I would say both directly and indirectly, we are interested in this market and are tracking it very closely. However, what I would say is in the early days right now, the biggest opportunity that we see available to us is actually in the power generation market. You've seen that through several recent orders over the past 12 to 18 months in areas like Saudi Arabia, South America, where power generation is becoming the, I would say, the leading edge of that AI boom. The demand for power is actually going to be what leads the way, I think, in the AI build-out. And those power plants require significant amounts of water. In fact, significantly more water treatment required in those power plants than in the AI data centers themselves. There are some questions around how -- what the water need truly is in these AI data centers. There's some good research that's been -- that's come out recently on the true water requirements, which we are evaluating and have numerous commercial discussions ongoing. But I'd say where we're having some early success right now, where we're seeing the most growth is actually in the power generation market, which is kind of following on those -- the AI growth boom that we are seeing. Okay. There were a couple of questions on that around data centers. So I believe I've answered that, and there were a few other questions on guidance for fiscal 2026, which I believe I've answered. So I think at this time, I don't see any additional questions coming in. So I think at this time, we will move to conclude the Q&A and the presentation at this time. I truly appreciate your interest and tuning in, as always. If you do have any additional questions, please feel free to send them along to Andrew Angus, and we will do our best to address them. Thank you, and have a great day.
Operator: Good morning. This is Laura, welcoming you to ING's 4Q 2025 Conference Call. Before handing this conference call over to Steven van Rijswijk, Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements such as statements regarding future developments in our business, expectations for our future financial performance and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward-looking statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent annual report on Form 20-F filed with the United States Securities and Exchange Commission and our earnings press release as posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities. Good morning, Steven. Over to you. Steven van Rijswijk: Thank you very much, operator. Good morning, and welcome to our results call for the fourth quarter of 2025. I hope you're all well, and thank you for joining us today. As usual, I'm joined by our CRO, Ljiljana Cortan; and our CFO, Tanate Phutrakul. And today, I'm proud to walk you through another year of outstanding commercial growth and financial performance driven by [audio gap] and I will also share our updated and upgraded outlook for 2027, which further underlines the strength and resilience of our business. After that, Tanate will give you more insight into our income and cost expectations for 2026 and present the quarterly financials. And as always, we will be happy to take your questions at the end of the call. And with that, let's now move to Slide 2. This slide highlights the continued commercial momentum we saw in the fourth quarter with outstanding growth across all key markets. We added more than 350,000 mobile primary customers during the quarter, bringing total growth for the year to over 1 million, fully in line with the ambitious target we set at our Capital Markets Day. Loan growth was also robust with absolute growth doubling versus the prior year and resulting in an 8.3% increase since the start of the year. In the fourth quarter alone, Retail Banking delivered EUR 10.1 billion in net core lending growth, driven mainly by residential mortgages. Wholesale Banking added EUR 10.3 billion, supported by strong demand in lending and working capital solutions as our clients' financing needs increased. We also saw healthy deposit development. Core deposits rose by EUR 38.1 billion for the full year or 5.5%. In the fourth quarter, Retail Banking contributed EUR 11.3 billion, benefiting from targeted campaigns and normal seasonal inflows and Wholesale Banking recorded a small net outflow, mainly due to lower short-term balances in our cash pooling activities. Fee income also continued the positive trends. For the full year, fees grew by 15%, supported by continued customer growth and increased cross-sell, essentially doing more business with more customers. And the fourth quarter also included a one-off benefit of EUR 66 million. All of this translated into very solid financial results. Our return on equity for 2025 was 13.2%, well above the guidance provided at the start of the year. And finally, we remain fully committed to supporting our clients in their sustainability transitions. Our total sustainability volume mobilized reached EUR 166 billion for the year, representing a 28% increase versus 2024. Now let's move to the next slide to look at how the commercial momentum drove our financial performance. On Slide 3, you can see that commercial NII remained very strong at EUR 15.3 billion. This result was supported by the significant increase in customer balances, both on the lending side and in liabilities. The volume growth largely offset the expected margin normalization. Fee income was also strong, increasing 15% compared to 2024, and they now account for 20% of total income. And this reflects structural drivers such as customer growth and increased cross-sell. Investment products performed particularly well with strong increases across all metrics, the number of customers, assets under management and the number of trades. And taken together, the strong NII and fee performance fueled total income growth, which reached a record level for the third consecutive year. And with that, let's now move to Slide 4. On this slide, we highlight actions taken to strengthen operational leverage, reinforcing our disciplined approach to cost management. We continue to invest in growth and diversification while increasingly leveraging new technologies. We were able to offset these investments by enhanced operational efficiency as the model becomes more scalable. In 2025, for example, we reduced customer friction by increasing the share of customer journeys handled without any manual intervention. We also introduced our chatbot in several retail markets, providing customers with faster and more accurate answers in their questions and resulting in annual savings as a large part of the chats are resolved without any human support. These improvements have contributed to a customer experience that is highly appreciated as reflected in our strong NPS positions across all markets. In retail banking, we maintained our #1 position in 5 out of 10 markets. And in Wholesale Banking, we achieved an NPS of 77, demonstrating both the quality of our client service and the value of our continued investments in expertise and sector knowledge. And our investments in scalability are also translating into higher efficiency, and this is visible in our FTE over customer balances ratio, which has improved by more than 7% since 2023. Then we move to Slide 5, where we show how our robust commercial growth, strong development of total income and proactive cost measures have resulted in strong capital generation. Over the past year, we delivered more than EUR 6.3 billion in net profit, contributing almost 2 percentage points to our CET1 ratio. And of this EUR 6.3 billion, 50% is distributed as a regular cash dividend, offering shareholders an attractive and predictable cash yield. Around 50% of the capital we generated has been used to fund profitable growth across our markets, and this percentage would even have been higher without the steps we took to optimize capital efficiency in Wholesale Banking, such as the 2 SRT transactions completed in November. Finally, we announced additional distributions to a total amount of EUR 3.6 billion, which also helped bring our CET1 ratio closer to our target level. And on the next slide, I will show how these distributions have resulted in a higher, highly attractive shareholder return. And then we move to Slide 6, where we summarize the total distributions to shareholders, and I will build on what I just discussed. In line with the distribution policy, we have consistently paid cash dividends and have been executing share buybacks for several years. Together, these actions have consistently delivered a highly attractive yield, including in 2025, a year in which our share price increased by almost 60%. The share buyback program we announced in November is currently underway and is expected to be completed in April 2026. And in addition, we paid out EUR 500 million in cash earlier in January, which helps us to meet the cash hurdle for this year, now finalized at EUR 3.3 billion. Looking ahead, we remain fully committed to delivering strong shareholder returns, and we will provide an update on our capital planning with our first quarter 2026 results. And now starting on Slide 8, I will guide you through how our strategy continues to accelerate growth, increase impact and deliver value. Now on this slide, I'm talking about Slide 8, we highlight our key strategic priorities supporting our Growing the Difference strategy, building on our successes over the past years. Firstly, we will continue to grow and diversify our income by adding more customers and doing more business with them. And a good example is the further expansion of our investment product offering. We have also introduced a subscription model for retail clients in Romania, and we will roll out this concept in other markets as well, which will help grow income from daily banking services. Our affluent customer base continues to grow rapidly, and we see further growth potential, and we're targeting this with dedicated propositions designed specifically for their needs. We're also stepping up our engagement with younger generations. For example, we introduced new products for Gen Z, including an investment fund focused on improving financial awareness within this group. And in business banking, we successfully launched our propositions in Italy and Germany, where we are seeing strong and ongoing customer growth. And in Wholesale Banking, we are expanding our range of fee-generating capital-light products to support sustainable and diversified revenue growth. Now secondly, we will further improve our operational leverage by scaling processes, people and technology while maintaining strict cost discipline to further utilization and scale of Gen AI will enhance efficiency and will help us to reach our FTE over customer balances target ahead of schedule. Finally, we remain firmly focused on generating strong capital going forward, and our allocation priorities are well defined in that regard. We will maintain an attractive shareholder return supported by a 50% payout policy. Secondly, we will continue to invest in value-accretive growth, diversify income streams as fund the loan book and a capital-efficient way and consider M&A opportunities that meet our criteria. And thirdly, we will return any capital structurally above our CET1 target to shareholders. We will also further increase the capital we allocate to retail banking and optimize the capital usage in the Wholesale Bank and note that we have already increased the capital allocated to retail banking to 54%. And with our strategy, we are confident in our ability to become the best European bank. And with this confidence, we have raised our expectations for the coming years. And then we move to Slide 9. And then I'll present our outlook for '26 and '27. And for 2026, we expect total income of around EUR 24 billion, and this outlook is supported by continued volume growth and an anticipated 5% to 10% increase in fee income. Total operating expenses, excluding internals -- sorry, incidentals are projected to be in the range of EUR 12.6 billion to EUR 12.8 billion. We will continue to manage our CET1 capital ratio at a target of around 13%. And in addition, we will transition from a return on equity metric to return on tangible equity. And for the full year 2026, we expect an ROE of 14% and ROTE to be higher than 14% and note that the delta between the 2 metrics was around 40 basis points, 40 basis points in 2025. Then looking ahead at 2027, we are introducing a new outlook for total income. We now expect it to exceed EUR 25 billion, which is at the upper end of our previous target range. This income number includes a higher fee income outlook, which we now expect to exceed EUR 5 billion in 2027. And we've moved away from the cost/income ratio and instead provide a clear hard outlook for operating expenses, again, excluding incidentals of around EUR 13 billion, 13. And this reinforces our continued focus on cost discipline and operational efficiency. And taken together, this outlook translates into a return on equity of 15% and a return on tangible equity of more than 15%. And now I'll hand over to Tanate, who will give more insight on our outlook for 2026 and who will walk you through the fourth quarter financial results in more detail, starting on Slide 10. Tanate Phutrakul: Thank you, Steven. As this is the last time I'll talk you through these numbers as the CFO of ING, I'm very pleased that I can close on such a strong result and provide you with an upgraded outlook. On Slide 10, let's start with commercial NII, which will benefit from increasing support from the replication portfolio. We also assume continued customer balance growth of around 5% per year, above the guidance that we gave at Capital Markets Day and reflecting the commercial momentum in our franchises. The liability margin is expected to be at the lower end of the 100 and 110 basis point range, while the lending margin is assumed to remain stable compared to the fourth quarter. Fees are expected to grow by a further 5% to 10%, building on the strong performance we achieved in 2025. All other income is expected to be around TRY 2.8 billion, excluding incidental items. This is driven by continued strong performance in financial markets, while in treasury, we expect less income from foreign currency hedging given the current lower interest rate differential between the euro and other currencies such as the U.S. dollar and the Turkish lira. Based on the current rate environment, taking 2024 last quarter as a run rate would be a fair starting point. Taken together, total income is expected to reach around EUR 24 billion in '26. And then on the next page, I'll walk you through the drivers behind the expected cost development. We expect total annual cost to be in the range of EUR 11.6 billion to 11.8 billion, excluding incidental and regulatory costs. The main driver of the increase remains inflationary pressure, which will again predominantly impact staff expenses. We will also continue to make selective investment to support business growth and further improve efficiency, as Steven highlighted earlier. These investment costs will be more than offset by operational efficiencies driven by increased scalability of our processes, people and technology, further utilization and scaling of Gen AI and continued optimization of our footprint. Given the strong income outlook, this modest cost growth results in a positive jaw for the year. Now let's move to the quarterly financials starting on Slide 13. On Slide 13, you can see that our commercial NII increased driven by very strong volume growth and a slightly higher lending margin, while the liability margin remained stable. Fee income continues its upward trend, driven by customer growth and strong performance in investment products and insurance. This is more than offset by lower fee income in wholesale lending. As a reminder, fee income in the fourth quarter included a EUR 66 million one-off in Germany. All other income was supported by continued strong results in financial markets, although seasonally lower compared to the previous quarters. As a whole, total income came in 7% higher than the same period last year. Now moving to Slide 14, where we will show the development of customer balances. As you can see, we delivered another quarter of strong loan growth across both retail and wholesale banking. Net core lending increased by EUR 20 billion. Retail banking contributed EUR 10.1 billion, driven by continued mortgage growth. increases across both business lending and consumer lending portfolios. Wholesale Banking also posted strong growth of AED 10.3 billion, reflecting strong performance in lending and somewhat elevated client demand in working capital solutions. On the liability side, core deposit increased by 9.5 billion. Retail banking drove the bulk of the growth, particularly in the Netherlands, Spain and Poland, which benefited from targeted campaigns and seasonal inflows. Wholesale Banking saw a small net outflow as increased deposit volume in PCM were more than offset by lower short-term balances in our cash pooling business. The other category of deposits were impacted by seasonal reductions in treasury. On Slide 15, you can see that the commercial NII grew by more than EUR 100 million quarter-on-quarter and was almost 5% higher than last year. Lending NII was up EUR 75 million in the fourth quarter, driven by volume growth and a 1 basis point improvement in lending margin to 126 basis points. The liability NII also increased by EUR 30 million, supported by sustained volume growth in retail banking and higher net interest income from our cash pooling business and PCM in Wholesale Banking. Turning to Slide 16. Fee growth remained strong, increasing 22% year-on-year. Excluding the EUR 66 million one-off retail banking fees in Germany, fees grew by 17% compared to last year. This was driven by structural factors such as continued customer growth, significantly higher insurance fees and increase in daily banking fees. Investment products also performed really well across several metrics. For example, 9% growth in customers, 16% growth in assets under management, of which roughly half came from net inflows and 22% more trades. Although wholesale banking fees decreased sequentially, wholesale still delivered a strong quarter, supported by solid results in Financial Markets and Corporate Finance. Slide 17 shows the development of all other income. Income in Financial Market is mostly driven by client activity. We continue to support our clients through volatile market conditions, mostly with foreign exchange and interest rate management. Treasury was impacted by lower results from foreign currency hedging. Next, Slide 18. Expenses, excluding regulatory support growth. The decrease is mainly driven by structural savings from previous restructuring and VAT refunds recognized in the fourth quarter. These effects more than compensated for wage inflation and ongoing investments in customer acquisition and product development, including expanding our offering for new customer segment. Regulatory costs include the annual Dutch bank tax, which is always fully recognized in fourth quarter and then allocated across segments. Incidental item related mostly to restructuring provision for planned FTE reductions in corporate staff and retail banking. Once these are fully implemented, these measures are expected to generate approximately EUR 100 million in annualized cost savings. When excluding these incidental items, we ended the year with expense below the outlook range we provided earlier. Now let's move on to risk costs on the next slide. Total risk costs were EUR 365 million in the quarter, equivalent to 20 basis points of average customer lending. This is in line with our through-the-cycle average. Net addition to Stage 3 provision amounts to EUR 389 million, mainly driven by individual Stage 3 provisioning for a number of new and existing funds in the wholesale bank. This was partly offset by releases of existing provision due to repayments, secondary market sales and structural improvements. As a result, the Stage 3 ratio increased slightly. For Stage 1 and Stage 2, we recorded a net release of $24 million, reflecting a partial release of management overlays and updated macroeconomic forecast. Overall, we remain confident in the strength and quality of our loan book. On Slide 20, we show the development of our core Tier 1 ratio, which declined compared to last quarter. Core Tier 1 decreased, reflecting the 1.6 billion distribution that was partly offset by the inclusion of our quarterly net profit. Risk-weighted assets increased by USD 4.5 billion this quarter. Credit risk-weighted assets rose by 1.5 billion, excluding FX impact, driven by volume growth. This was offset by the risk-weighted asset relief from 2 SRT transaction executed in November. Operational risk-weighted asset increased by EUR 2.2 billion, while market risk-weighted asset increased by EUR 0.5 billion. We'll pay a final cash dividend of EUR 0.736 per share on the 24th of April 2026, subject to our Annual General Meeting's approval. Now I hand back to Steven to wrap up today's presentation. Steven van Rijswijk: Yes. Thank you, Tanate. And for the ones who have been here longer with us, this is Tanate's last analyst presentation. We have been knowing each other today for more than 25 years, and we've been in the Board together already for 7 years and more. So thank you very much for working with us all these years. Tanate will still be with us until the AGM of 2025, which will take place in April. But I just want to take the opportunity also here to thank Tanate, also for the friendship, also for the leadership and the sharp mind that you have here with us. And I'll come sure visit you when you're back in Thailand at some point. So prepare for that. Now we move to Q&A, but let me recap the key takeaways from today's presentation. We have delivered another strong quarter end year, successfully executing our strategy, accelerating growth, increasing impact and delivering value. We achieved a record total income for the third consecutive year. We maintained cost discipline and operational efficiency gains, and they more than offset our investments in business growth. And we delivered another strong year of capital generation and returns, enabling continued attractive shareholder distributions. And with our strategy, we remain confident in our ability to stay on track to become the best European bank. And with this confidence, we have upgraded our expectations for the coming years with a very strong outlook for 2026 and a more ambitious but realistic outlook for 2027. And with that, I would like to open the floor for Q&A. Operator, back to you. Operator: [Operator Instructions] We will now take our first question from Benoit Petrarque of Kepler Cheuvreu. All the best. I guess you will not miss the Dutch winter, but in Thailand. Benoit Petrarque: So it's an interesting time to live actually. It's the first quarter I actually see the volume growth benefiting fully the commercial NII as the negative effect of lower interest rates is getting smaller. I was wondering on the guidance of EUR 25 billion total income, what type of assumption do you take on growth? I think you've put somewhere in the slide 5% volume growth. I was wondering if that's the right number, given you are growing actually more than 5%. And also second question is on liability margin assumptions in your more than EUR 25 billion total income. Wondering where you stand on '27 on liability margin. And then maybe on Wholesale Banking, where are you on the risk-weighted assets growth plan for the wholesale? I think you were planning some optimization there. But I do see wholesale growing quite sharply again in the fourth quarter. So where do you see growth in wholesale going forward? Steven van Rijswijk: All right. I'll take -- thanks, Benoit. And yes, Tanate, for sure, will not miss the Dutch winter. Neither would I, by the way, if I would go to Thailand. But in any case, I'm here. If we look -- I will talk about the question about RWA and Wholesale Banking and also -- and then Tanate will talk about the NII and the growth for '26 and '27. So if you look at Wholesale Banking there we have been seeing good lending growth in the second half of this year, and the pipelines are also filled well now. So we want to continue to grow there as well. At the same time, to your point, we did 2 SRTs in November that had an impact of around 12 basis points on our CET1. For '26 and '27, by the way, we want to continue to do these SRTs. So we have just started with our more improvements that we have been making. So the first ones we did at the end of last year. This year, we continue to do SRTs, and we expect that to have an impact -- a positive impact on CET1 of 15 to 20 basis points, so a bit higher than we realized over 2025. Tanate? Tanate Phutrakul: Yes. Thanks, Benoit. I think in terms of the major assumptions we use in terms of giving out outlook, we have assumed 5% balance growth, and you say that, that is potentially conservative given what you see in Q4. I think what Q4 shows us is it gives us more confidence in achieving our target. That would be the first answer. The second one is really what curve did we use in terms of our projection. We use the December curve to do that projection, which is quite constructive in our view. And then the third margins. I think the 3 impacts that you see is really the continued reduction in the short-term replication negative impact on our results, the continued positive accretion because of long-term replication and the effect of deposit rate cuts that happened in 2025 that affects '26 and will continue to be accretive going into '27 as well. Our forecast for liability margin is on the lower end of the 100 to 110 basis points. Benoit Petrarque: This is also for '27? Tanate Phutrakul: I think we don't give that outlook there. But I think if you see the replication on Page 30 that we show, the momentum continues to accrete in '26 and '27. Operator: And we'll now take our next question from Benjamin Goy of Deutsche Bank. Benjamin Goy: My first question is on loans versus deposit growth. So another strong quarter of loan growth in particular, and I think it's the third quarter where your core lending growth has clearly outperformed core deposit growth. Is that something that you need to work on to be more balanced? Or are you happy to increase your loans faster as there are opportunities? And then secondly, on the costs, for the underlying cost guidance, but there has been historically a bit of incidentals every year. Should that now be smaller than in '25 going forward? Or what's best to assume for the incident that come on top of the cost guidance? Steven van Rijswijk: Yes. I think that on the loans versus deposit growth, I mean, if you look at 2025, the loan growth was about 8%. The deposit growth was about 6%, so EUR 57 billion against about EUR 38 billion. We've also seen years where that was the other way around. In the end, you want to balance the balance sheet. So long term, we want to approximately have same growth over a longer period with loans and with deposits. But 1 year can be a bit higher in loans and 1 year can be a bit higher in deposits. I think on both sides of the balance sheet, we see continued good growth with people continuing saving. Also, if you look at the deposit growth projections macroeconomically in the markets in which we are active, we continue to see that. And we do see significant loan growth in the different segments in which we're operating, most notably mortgages. But there, in the end, we want to balance the balance sheet, and we will always work on that. When we talk about the incidentals, yes, look, we will -- we continue to work on our cost discipline as we do. So on the one hand, we want to grow our customers, and we want to grow and diversify the activities in which we are active. And you've seen us doing that. We invest in more specific segmentation in existing retail segments. We have been rolling out business banking, for example, in Germany and Italy. We have been investing in diversifying our capital-light income in wholesale banking and transaction services and in financial markets. At the same time, we have seen since 2023, our FTE over balances decreased with 7%, and we believe we can reach our target that we gave in the Capital Markets Day in '24 of a decrease of 10% earlier than we anticipated what we then said in 2027. So we'll work towards this year. So we will work on both levers. But we always do this in a buy-side thing. So what you've seen, for example, with restructuring costs in 2025, those restructuring costs should deliver us a benefit of EUR 100 million in 2026. And each time that we have a process or area where we can realize better servers, better process optimization, better digitization, better use of Gen AI, then we will announce it because I just want to make sure that front to back, once we announce it, we can execute and we can execute while continuing to grow, and that's how we have been operating for the past 5 years, and we will continue to do so. Operator: And we'll now move on to our next question from Giulia Miotto of Morgan Stanley. Giulia Miotto: Thank you for your patience answering our questions and all the best for the life after ING. But now I have 2 questions, please. So the cost outlook beyond '26, '26 looks quite a bit better. I think it's encouraging to see operating jaws being able to grow the costs much less than the revenues. Should we expect this trend to continue also in 2027? Consensus has got 3% year-on-year growth. I guess, I don't know what we are seeing could suggest something better than that. And then separately, Steven, I wanted to pick your brain on M&A. We have seen some headlines on Romania, but also Spain and Italy have been in focus in your comments, although we don't see much actions. So any comments on what you're thinking strategically on the M&A front? Steven van Rijswijk: All right. On M&A. So look, we show good growth. You see that both in existing activities and also in diversification on the various fronts, both in lending and in fees, by the way, on investment products and insurance. Still, and I've said this before, we've also started with filling in the blanks in countries where we don't have all activities, such as business banking and private banking and certain types of investments in asset management in certain countries. Still, if we can accelerate that growth by means of acquisitions, then we will look at it. You've seen us taking a financial stake in private banking of [indiscernible] last year. In the fourth quarter, we announced buying the majority and thereby in the end 100% of an asset manager in Poland, integrating that asset manager into ING, we bought that from Goldman Sachs, the 55%. And we continue to look. We don't comment on individual markets. Also in Romania, what I can say is that the business is successful. We have been increasing the numbers of customers that we serve. We have been growing, again, also lending deposits and fees. And we have a very strong return on equity there. We consider ourselves one of the most successful, if not most successful bank in that country. But also there, if we can have opportunities to increase scale or add segments that we do not have, we will look at that as in any other market. And then the caveat, it needs to fit. It needs to add to that local scale and diversification, and we want it also to be accretive for shareholders, and that's the construct in which we're working and which we are willing to consider M&A. Tanate, the jaws. Tanate Phutrakul: Yes. I think given the outlook, we have now turned the corner in terms of positive jaw for '26, and we're confident that we'll continue that positive jaw in 2027. If you look at the 3 drivers of our cost growth in '27, the first one is inflation impact, which we expect that the stickiness of inflation impact should moderate in '27 compared to '26. We will continue to invest in our franchise in client acquisition. In fact, if we can do more, we would do more in terms of accelerating our client acquisition. We have some big programs in terms of investment, financial market infrastructure, payment capabilities, investing in segments that we are not currently present, as Steven has mentioned. And if you have seen in our '26 guidance, we upgraded our ambition in terms of cost reduction from 2% to 3%. So that trend is expected to continue into 2027 as well. Giulia Miotto: So I take away that probably growth will be more modest than what is to be expected in '27? Tanate Phutrakul: You can do your analysis, Giulia. We've given our guidance. Steven van Rijswijk: Tanate Didn't even blink when he asked that question. Operator: And we'll now move on to our next question from Tarik El Mejjad of Bank of America. Tarik El Mejjad: Tanate, thanks for the very interesting interactions we had all these many years and good luck for what's to come. Just from my side, 2 quick questions, please. With a follow-up one on the liability margins more in 2027. I mean just trying to back solve a bit what market expects, assuming asset margin are quite stable or growing a bit the volumes, we can put your assumptions with even some extra buffers and replicate portfolio, we kind of understand now how it works and so on. It's just the -- in my view, is it fair really to think that the gap between -- I mean the downside potential risk is for the market expect consensus is too optimistic, perhaps, assumptions of rate cuts or no rate raise in the core saving deposits in '27? Because if you use the forward curve as of December, clearly, you would also take a view on what's your ability to navigate the core savings deposits in Netherlands and other markets. And the second question is on costs is more really to want to understand how you think about the investments because, I mean, you have some headroom now created on the revenue side, higher growth and very comfortable to reach your targets. And then on the cost, the pressure from salary negotiation should come down with inflation. So that extra headroom, I want to understand how you think about the next 2 years in terms of investments in AI and tech. I mean, yes, you have the machine learning and with the compliance aspect, the Gen AI that you've already started to roll out with some early benefits we see. But what about the next step in AI and tech? And how much of more investments needed to deliver your ambition on that front? Steven van Rijswijk: Let me take the question, Tarik, on AI and then Tanate will talk about the margins. Look, I mean, we do clearly see benefits of AI coming through. I mean we have been working with AI already for a decade and then with Gen AI, we work with that in the last couple of years. But there, you see both on, let's say, the -- on the client side and on the operational leverage side benefits coming through. And let me give you a few examples. If you look at [ PI ] onboarding, the STP increased last year from 66% to 79%. So that means that close to 90% of our private individual clients were onboarding through STP. We do end-to-end [indiscernible] delivery. We increased that approvals with 11% last year. So the time to [indiscernible], therefore, improved. We do about 60 million in customer lending without manual intervention. So you see a number of customer benefits coming through. When we talk specifically about GenAI and also in chatbot, we have better scores, CSAT scores, which are sort of satisfaction scores for our customers. So we do see benefits coming through for GenAI, both on the revenue side, doing more with our customers and having more satisfied customers and on the operational leverage. We do that in 5 areas at current. So we took the 5 big wins that we see starting with contact centers, in IT, coding, in lending, in personalized marketing and in KYC. So those are the big areas. We do these benefits, we see them coming through. Every quarter, you see announcement, you've seen announcements whereby we say, okay, what impact does it have on our staff, what impact does it have on our operations? And you see it also coming through in FTE over balances. And we're actually quite optimistic on the impact it will have on our operational leverage going forward for '26 and also in 2027. And we will make announcements as we move along and when we can say this is now the next step that we will take, including, of course, good reskilling of our staff and making sure we can grow and continue to grow our franchise sustainably. Tanate Phutrakul: And Tarik, to your second question, I think we also see based on the December curve that the accretion and replication in '26 going to '27 and '28 are quite strong. The real debate is what -- how do you balance that additional revenue in terms of margins and in terms of mix, right? And what we see is that we are looking at the dynamics of maintaining growth in customer growth in volumes and making sure that we take into account the level of competition we see in the market. And if you look pre negative rates environment, ING operated on a liability margin of around 90 to 100 basis points. We have updated our guidance to 100 to 110. And we think we're comfortable with that rate given the balanced dynamics of growth, competition and to be remaining competitive while at the same time, being accretive to our shareholders. Tarik El Mejjad: I mean I don't want to put words in your mouth, but basically, to deliver on the consensus or market numbers means that market has to be much more bullish on the volume growth and lending and probably be less positive on the margin side. But I'm just trying to reconcile a bit what your guidance outlook, which is very helpful versus where market is positioned. Operator: And we'll now take our next question from Delphine Lee of JPMorgan. Delphine Lee: Also I want to take the opportunity to send my best wishes to Nate, thank you for everything. So my 2 questions. First of all, sorry, I just want to follow up on Tarik and other questions around NII. But -- so if we look at your guidance for 2026, which implies about EUR 600 million increases for liability margins. But if you look at the repricing actions that you've done in '25, I mean, the impact on '26 is already EUR 700 million. And then on top of that, you have some small benefits from -- well, your replicating income as well on '26 more, but like still. So I'm just kind of wondering like what is your current assumption and in terms of the deposit cost and deposit pass-through from 42% in Q4? And if you could just sort of elaborate a little bit on what are you seeing on competition on deposits at the moment? What do you expect for '26 and onwards? My second question is on cost. So you've done a good job of trying to kind of contain a little bit of inflation with the savings. I'm just trying -- just trying to understand a little bit if 2%, 3% is really kind of like the run rate that we should expect like even beyond '27. Is that something that you're trying to achieve in the long run? Yes, just trying to understand a little bit the moving parts of that cost number, you've provided this for '26, but even beyond that, like what are the savings? You've mentioned a couple of benefits from FTE reductions, but just kind of trying to quantify a little bit what else can we expect in the long run? Steven van Rijswijk: All right. Thank you very much. I think that on the costs, you see the effects of our digitalization and scalability now really seeing take shape. And we saw that now also in the fourth quarter, but also I'm pointing again at FTE over balances. You also now see that when we look at 2026 about the operational leverage and efficiencies that we have compared to the increase in investments. So the operational efficiencies are higher, and that's where we want to be. We want to make sure that when we make additional investments, we can have operational leverage that is higher than that. So that's maybe a little bit of direction to give you or guidance to give you in terms of where we want to end up. And indeed, therefore, you will see in '26 and '27 improved cost to income to what we have been showing and positive jaws territory that we have now been gotten into and I want to stay in that territory. And at the same time, we continue to want to grow our investments where we can grow our clients for long-term clients and shareholder benefit. But that's a bit of guidance towards the cost. Then Tanate, on the deposit cost of margins? Tanate Phutrakul: I think we gave a bit of detail on Page 20 of our presentation showing the movements in terms of commercial NII. I think the lending NII is driven by basically stable margin and approximately 5% loan growth. And similarly, for liability NII, we also assume 5% liability growth. Of that EUR 600 million we show, part of it is due to volume, about half. The other half is through the improvement in margins. As you say, the replication is getting better, but there's some short-term impact that still need to feed through our numbers and the EUR 700 million is factored into that guidance. Operator: And we'll now take our next question from Namita Samtani of Barclays. Namita Samtani: The first question I have is on German retail. There's quite a lot of cost growth in 2025 there. I think it's around 11% year-on-year, and it's a lot higher than other regions. So I wondered what are you exactly spending on in Germany? And is this defensive spend given the new players entering the market? And then I think about your liability margin, which is, of course, at group level, but are you telling us that we're at peak earnings for Germany in retail given high expense spend and [indiscernible] spend to gather deposits? And my second question, based on your updated '27 targets today, the cost to income implied in '27 is maybe 51%, 52%. It's hardly a standout amongst European banks, even ABN is now going to below 55%. I just wondered, given the digital model ING has or aspires to have and the use of AI, what's holding the group back from delivering a better cost to income target? Steven van Rijswijk: Yes. Thank you very much. On the cost to income side, our main opportunity is to grow our revenues, our revenues over our client balances, our diversification in Wholesale Banking, our revenues over RWA and as a result, but that's then a consequence of it also that will have a positive impact on our cost to income. But what we need to do, that's why our strategy is called Grow the Difference is grow our revenues because that's where we can make the biggest difference in further improving our returns and then indirectly also our cost to income. And so the digital model has brought us a lot in terms of presence in markets, but that's why we're talking about doing new activities in these markets or doing more with customers in these markets because that is the next step in our evolution, what we're currently doing. Tanate? Tanate Phutrakul: Yes. The German cost/income ratio is a robust one despite the increase in investments that we make in Germany. One thing that you have to remember is that the client growth that we have, 1 million customer per year, a very significant portion comes from Germany, which is our main market. So that's why the investments in client acquisition, in creating new products, creating new segments is very strong in Germany. very, very much like the rest of ING seeing a turnaround in terms of the momentum in terms of revenue and cost in Germany. And we do expect that the positive jaw will return to Germany in 2026, while continuing to invest in our franchise, both in terms of the fundamental platforms as well as client acquisition. Operator: And we'll now take our next question from Cyril Toutounji of BNP Paribas. Cyril Toutounji: So I've got 2. One on lending margin. So we had an improvement this quarter, which is welcome and I think pretty good news. And you're saying it's due to mortgages. I'm just curious in which market has happened? And if you can give us more indication whether this can continue maybe a bit? And the second one would be on deposit campaigns. Can you update us on the ongoing campaigns right now? And I don't know if you can give this indication as well, but should we expect more or less campaigns versus the 2025 run rate? Steven van Rijswijk: Yes. Thank you, Cyril. I'll take the question on deposit campaigns and Tanate talks about the lending margin. So yes, about the deposit campaigns, look, we have these campaigns regularly. We had them also in the fourth quarter with Black Friday in some markets or in Germany, as they call it Black Friday. So we will continue these campaigns, and we typically see that there's a good response in getting either new money from existing clients or getting new clients in. And then typically, we see that we get money to stick to around 2/3 of the money that after campaigns will stick with ING and therefore, we can gain new primary customers and increase our deposit levels. So for us, that works well. And what we work on every time is we make them more bespoke to certain customer segments and we make them more data-driven, so we can target them more and more. So we are very happy with the approach we've taken. We are confident about what we are doing, and we will keep on having these campaigns and we make them more bespoke about a year. Tanate, about the margins? Tanate Phutrakul: Yes, So I think we are also pleased to see that we have stabilized our lending margin and that it's improved by 1 basis point. And to your specific questions on mortgage margin, it's been stable or increasing across the board. I think some of the markets where the new production margins are improving is in Belgium, increasing in Germany, increasing in Italy and Spain. So it's quite widespread in terms of margin improvement, but we do see a bit of pressure in terms of new production margin in the Netherlands. Operator: We'll now take our next question from Johan Ekblom of UBS. Johan Ekblom: Thank you for everything, Tanate, and best of luck. Just most questions have been answered. But at the Capital Markets Day, we spoke a lot about the business banking opportunities, and I guess, in particular, in Germany. How should we, from the outside, try and measure your success there? Because it's very difficult to track where you are in terms of the rollout and I guess also when you are expecting to see volumes start to come through in a more meaningful way. So any update on kind of how the business banking rollout in Germany is going would be much appreciated. Steven van Rijswijk: Yes. Thank you very much, Johan. Indeed, business banking is one of the levers that we pull to diversify. To give you a few data points, we -- the third largest growth we had in business banking customers in terms of number of customers this year was Germany. So that already shows you that we're starting to grow quite well in Germany. It starts from a very small base, obviously, because we started from virtually 0. So that's one. Two, we also get very good deposits in from our business banking customers in Germany, so also there. So increasingly, that will become more sizable. But compared to our business banking franchises in the Netherlands and Belgium, for example, of course, it is very minimal because we have EUR 114 billion business banking lending book. And in Germany, we're just starting. So that will take time. But it is almost like you saw with the insurance fees there you see in the fee income line, as an example, it was not even a separate fee line. And there you see step by step by step, it's almost like a snowball. We do more and more and more. And at some point, it will become a sizable business, and that's also what we see happening in business banking in Germany. Operator: And we'll take our next question from Shrey Srivastava of Citi. Shrey Srivastava: Thank you, Tanate, for answering all the questions over the previous quarters. I just want to look more top down because obviously, following on from previous questions, we've talked about the upside on the replicating income versus your guided liability margin still at 100 to 110 basis points. A, is your sort of 5% volume growth guidance predicated on further deposit campaigns to get you within this 100 to 110 basis points? Or is any sort of upside to volume growth from that incremental to the 5%? And secondly, what are sort of the hurdle rates you have in mind when thinking about going forward with a new deposit campaign? Because obviously, as you've heard sort of many of us to get from the assumptions we have when plugging your replicating income into the model to the liability margin of 110 basis points would require some sort of pretty significant deposit campaigns. So what are some of the things you think about when deciding to give up that short-term upside for sort of longer-term growth? Steven van Rijswijk: All right. Tanate, can you give the elements of our replication income or lease liability margin again? Tanate Phutrakul: Yes. I think the 5% deposit growth, I think it's a good base number, right? And I think you look in the context of 2025, where the growth is around 5%. So that trend line, we expect to continue despite competition, despite quantitative tightening. So I think it's a good number to assume 5% growth. Does campaign play a big role in that? It continues to be the case, right, that we have campaigns in many markets we operate in. We continue to use that as a tool, but we also get additional flows coming into the bank all the time. And what I look at really is the growth in our primary customer, the intensity of which we have a relationship with our customer is there. And I think looking at the replication, it's still the 3 moving parts, right? It's really the impact of the short-term replication still having a tail impact is continued accretion of long-term replication coming through and the actions that we would take in terms of rate increases or decreases over time. And I think we like to reiterate that we don't give guidance for '27 in terms of liability margin, but we expect it to operate in '26 at the lower end of the 100 to 110, and we're comfortable that we can achieve our target with that guidance. Operator: And we'll take our next question from [ Seamus Murphy ] of [indiscernible] Seamus Murphy: Sorry, I'm coming back again to a lot of the questions that have been asked in one sense just in terms of the guidance. So I suppose you've guided 16 to -- sorry, EUR 16.3 billion to EUR 16.5 billion for commercial NII in 2026. But in Q4, it was [ EUR 3.928 ] billion. So that suggests an exit rate of just over EUR 4 billion into Q1 2026. That's already in the bag. And if I annualize that, I'm kind of getting EUR 16.2 billion at the start of the year, just before anything else happens and the upper end of your guidance, therefore, only needs 2% growth to achieve the 16.5%. And obviously, we have -- so I suppose question one, is there anything wrong with the math as you start the year that you have kind of EUR 16.2 billion of NII heading into the -- sorry, EUR 16.2 billion into this year at the start? And the second question then is, obviously, we have growth, so there's only limited growth needed. But the second question then is, you mentioned earlier on the call that the long end of the replication portfolio is a positive further into '26 and '27. Two things have happened. Your current account balances have grown EUR 5 billion, I think, to [ EUR 175 billion ] now. And secondly is that, obviously, the curve has deepened. So it would be super useful if you could tell us how much the long end of the replication portfolio will contribute in '26 and '27. And the last question, I asked this also on the Q3 call because it's becoming more and more important for banks, I think, is that do you expect FTEs to fall as we look into '27 and '28 at the group level? Steven van Rijswijk: Thanks, Seamus, for your questions. Well, we do expect FTE over balances to fall. So this is about, of course, a continuous focus on growth and then on a marginal basis, doing that with less marginal cost. And that's why we use the metric FTE over balances, whereby we continuously accept -- sorry, see an improvement or expect an improvement based on our digitalization and AI and GenAI and better process management as we have been doing over the past years. And that trend we see continuing. At the same time, we want to grow because we need to diversify and grow our revenues over our balances and our RWA. But from an FTE over balancing perspective, we should see further improvements. Tanate, how does it work with that? Tanate Phutrakul: Yes, Seamus, we will see each other in London, so we can go into a bit more detail. But I think it's a dangerous game to take Q4 and then extrapolating it. But I think if I look at full year to full year, the impact is over EUR 1 billion, right? That's a 7% growth in net interest income, which I think is a strong number and strong guidance. And I also -- we don't give replicated income in such details of how much the long end would contribute, except that we have disclosed in our presentation that 55% of our replication is long dated. And I also noted the fact that the drive of our primary customer is driving increasing current account and that increasing current account means better margin. So we do recognize that. Operator: [Operator Instructions] And we'll now move on to our next question from Anke Reingen of RBC. Anke Reingen: But firstly, thank you very much, Tanate,and all the best. And then to questions. So firstly, can you just talk a bit about your expectation on lending volume growth in 2026? I guess the 5% applies here as well, but I suppose, Q3, Q4, you've seen very strong growth. So where do you see sort of like the mix falling into 2026? I mean I hear your margin comment, but maybe just more a bit in terms of the mix. And then you commented earlier on about the SRTs of 15 basis points benefit. Can you just clarify, is that per year? Or is that over the 2 years, '26 and '27... Steven van Rijswijk: Thank you very much, Anke, for your questions. If you look at the SRTs, the impact in '25 was 12 basis points and that impact remains there. So once we have taken, let's say, the first loss piece of our balance sheet, it will remain [indiscernible] of our balance sheet. But in '26, we're going to do an additional number of SRTs that should benefit an additional 15 to 20 basis points on our CET1. And we, of course, will then also continue for '27 and thereafter. But on those years, we haven't yet given guidance. When we talk about lending growth, we see good growth across the board, like you've seen in the third and the fourth quarter that both in and mortgages and in Business Banking and Wholesale Banking, we continue to see good growth. The pipelines are good. Clearly, especially with the underlying macro drivers, there is shortage of housing in many of the markets in which we operate, in this case in the Netherlands, that is the case in Belgium, that is in Germany. That is the case in Spain. We are -- we have a total mortgage book of EUR 370 billion. So we are a top 3 mortgage provider in the region in Europe. And in many of the markets in which we are active, we see there are good macroeconomic fundamentals to continue that growth, low unemployment levels, good salary increase over the past couple of years, shortage of housing, lower number of people in individual households, so an increase in the number of households and those fundamentals continue to be there. And that's why that is going to be a significant driver of the loan growth in 2026 and '27. Operator: And we'll now take our next question from Matthew Clark of Mediobanca. Jonathan Matthew Clark: So firstly, coming back to this EUR 25 billion target for 2027 revenues or greater than EUR 25 billion. I mean, are you trying to talk down consensus there, which is EUR 25.8 billion, I think? Or do you think that's still consistent with the greater than component of that target? So I just want to understand your thinking for framing that target that way against the context of a higher consensus? And then secondly, on wholesale lending, why is now the right time for you to be putting your foot down on wholesale lending? What's changed in terms of risk reward, et cetera? And I guess asking that in the context of an uptick in credit losses on wholesale this quarter. Steven van Rijswijk: Yes. Thank you very much. Well, let me put it this way for 2027. So we said that the revenues are larger than EUR 25 billion. So we are confident about our growth, and we're also confident about '27. So don't forget the larger then sign in EUR 25 billion for '27, but yes, that's where we currently are. And we're very comfortable with that level. When you talk about Wholesale Bank lending, well, look, we had slow quarters in the first half of 2025, and then it picked up very well in the second half of the year. In the end, what we want to realize in Wholesale Banking is higher revenues over RWA and a higher return over RWA. And in that regard, we have been investing and we are continuing to invest in Transaction Services and Financial Markets. That will help us to drive the diversification in Wholesale Banking and do more with our customers next to lending, but lending, of course, is also good. And secondly, we're attacking, let's say, our capital there. Our capital was about 50-50 in '24. Now we said for '27, we had a target of 55% in retail and then 45% in Wholesale Banking. It's already at 54% for retail and 46% for Wholesale Banking. So we're on a good path quicker than we initially anticipated. And that's why we continue also to work on the SRTs to make sure that also on the capital side in Wholesale Banking, we can do more with less capital to help with return going up. So it's not a particular focus on lending alone. In the end, we're focused on return. Operator: And we'll now take our next question from Farquhar Murray of Autonomous. Farquhar Murray: Obviously, congratulations, Tanate and best wishes for the future. Coming back to the day job though for now, 2 questions, if I may. Firstly, please, can you reconcile the indication of EUR 0.4 billion of hedging tailwinds into '26 of 4Q with kind of flat replicating income on a year-on-year basis on Slide 29. Is that simply a matter of how things came through in the quarters? And perhaps can you just flesh that out through '25 and into '26? And also, is there a quarterly pattern to that hedging impact and also maybe the short-term effects you mentioned earlier? And then secondly, if we look last year, lending outpaced deposits, if we look at the 8% versus the 5% I know you said the kind of planning assumption as a kind of balanced 5%, but what's your general sense about where customer demand is at present? Steven van Rijswijk: I think that -- so on the customer demand at present, I mean, we -- actually, we do see continued good mortgage growth, again, because we see the macroeconomic elements that we saw in there, we see them continuing. And therefore, if you look at the number of houses being sold last year in a number of our main markets in the Netherlands, Belgium and Germany, they all have increased. And also, we see increases in a number of these housing markets to continue in 2026 and '27. So again, we're very positive towards that end. I think in business banking, we have also been improving our processes, and therefore, we've made it easier for our customers to borrow with us. So I think there, it's also an improvement of capabilities that we have had and by the way, rolling out business banking step by step by step in Germany, Italy and potentially also in other markets that we're looking at. We've spoken about Spain before. And then in Wholesale Banking, it's always more lumpy, funny enough, whereby you do see geopolitical uncertainty on the one hand and the PMI index being relatively low, we've seen sort of a catch-up demand of Wholesale Banking lending in the third and fourth quarter. The pipeline is still good. Yes, probably that Wholesale Banking in that sense is always a bit more choppy in terms of growth than the other elements. But the main consistent element in the lending growth sits in the mortgage side. Then on the hedging tailwinds, there, I want to give the floor to Tanate. Tanate Phutrakul: Thank you very much, Farquhar. I think what we see is that if you look at our quarterly commercial NII, it reached a trough in Q2, improved from EUR 3.7 billion to EUR 3.8 billion and from EUR 3.8 billion to EUR 3.9 billion during the course. So you already see signs of that replication impact. I think what the EUR 400 million refers to is the fact that the short end pressure that we see is decreasing. We see the fact that in Q4, we also have the benefit of the rate cuts already materializing into the numbers and that 55% of the long end is already positive. So it's a combination of all these 3 factors that drives the EUR 400 million tailwind. Operator: And we'll now take our next question from Chris Hallam of Goldman Sachs International. Chris Hallam: I just have one question left. And obviously, good luck, Tanate. I'm sure you're going to miss all these questions on replicating income and liability margins when you're relaxing in Thailand. But just on this question on the corporate side, you talked about increasing levels of working capital lending and lower deposits. Are those 2 points linked, i.e., are corporate customers building up working capital and therefore, draining their cash balances in anticipation of higher activity later in the year? And if so, how long should that working capital cycle last for? And would we notice any impact on NII through this year as and when it reverses, either on the lending margin or on the liability margin? Steven van Rijswijk: Yes. Thanks, Chris. And yes, Tanate will miss those questions. But luckily, we have Ida Lerner, our new CFO, and she already told me yesterday, said she's really looking forward to all these questions. So next quarter, you can expect her to answer these. On the working capital side, yes, I mean, on the wholesale side, you saw that EUR 10.3 billion lending and working capital solutions growth. So part was indeed working capital solutions. That had to do with a couple of large deals, very large companies doing very large deals, and we were leading those deals. So that doesn't necessarily have a link with each other that those are, let's say, seasonal swings that sometimes you have and sometimes you don't have. Clearly, those working capital solutions deals because they are typically short term and self-liquidating or collateralized or they have a borrowing base behind it. They have lower margins. But we have many of these. And so that doesn't have a particular big impact on the lending margin. When we talk about the cash pooling business, that's the pooling both in our payments and cash management and the notional pooling business, typically, clients at the end of the year, they will consolidate their positions and net them off. And because they net them off, they net them off in our accounts, and therefore, you see a lower amount coming in there. So a seasonal pattern. Operator: There are no further questions in queue. I will now hand it back to Steven Van Rijswijk for closing remarks. Steven van Rijswijk: Yes. Thank you very much. I think we can -- we are very proud of our 2025 numbers and also very confident about '26 and '27, hence, the improved and heightened outlook. And I want to thank you for all your questions and observations today, and again, Tanate, for the fantastic collaboration, and you are a great friend and a great colleague. Thanks very much, everybody, and I hope you have a great Thursday. Operator: Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.
Francoise Dixon: And welcome to the Mach7 Q2 FY '26 Results Briefing. My name is Francoise Dixon, and I'm Head of Investor Relations for Mach7. Today, our CEO, Teri Thomas; and our CFO, Daniel Lee, will provide an overview of our Q2 FY '26 results. We will then open it up for questions. If you have a question, please submit it by the Q&A text box at the bottom of the screen. I'll now hand over to Teri. Teri Thomas: Thank you, Francoise. All right. Before I speak about the quarter, I want to briefly ground everyone in who we are and what we do, particularly for those who are newer to Mach7. So we complete the patient's picture with the patient's pictures. We get the right medical images to the right people in the right places at the right time. We do it fast and with diagnostic quality. We operate in a growing and important industry. And in my frequent conversations with our customers, I'm reminded regularly just how mission-critical our work is. While the health care industry has seen pretty solid progress organizing text-based clinical data over the years, imaging data, which goes far beyond x-rays, remains quite fragmented. Many types of images are locked in proprietary systems spread across multiple departments, stored in lots of different formats, and that causes fragmentation. That fragmentation represents opportunity and this opportunity Mach7 is well positioned to address. So our ambition is for Mach7 to become the world's imaging EMR. That ambition, big, it underpins our strategy of moving from archive to architecture, connecting imaging across the enterprise and enabling AI, improving interoperability with EMRs like Epic and Cerner and closing the gaps that still well exist to create comprehensive and unified patient records. Now turning to what you all are looking for the quarter. So today, Mach7 is providing a business update and quarterly cash flow report for the quarter ending 31 December 2025, our 4C. The quarter reflects continued and deliberate execution of the reset we outlined last quarter, sharpening our strategy, strengthening discipline and aligning the organization for sustainable and profitable growth. The quarter marked an inflection point, the strategy that we designed in September and October, and we announced on Halloween is now in motion. This is no longer about planning. It is about execution. The reset has been comprehensive. We've taken a top-to-bottom look at our structure, our processes, our technology, our commercial model, our culture, and we've brought this together into a dynamic operating model that links strategy, execution and accountability. This is hard work. As part of that work, we are taking a disciplined look across our customers, partners and contracts to ensure they support long-term profitability and strategic alignment. That includes being more selective about who we work with and in some cases, stepping back from low revenue relationships that create competitive conflicts or long-term risk to our growth and profitability. The outcome with the VHA, it was disappointing, but it also allows us to focus our resources on opportunities that better align with our core platform, our operating model and path to sustainable profitability. The VHA program required a level of custom development and service intensity that would have continued to weigh on margins over time. Now not all of these changes show up immediately in the numbers, but the foundations are now in place. We are building a performance-driven culture that values top talent, measurable outcomes and disciplined execution while balancing innovation with rigorous cost management and a respect for shareholder capital. So with that context, I'm going to hand it over to Dan, our CFO, to walk you through the financials for the quarter. Dan? Daniel Lee: Thanks, Teri. Looking at our financials for a moment, the second quarter reflects continued execution against the reset strategy that we did outline last quarter with improving discipline and operating performance. Our annual recurring revenue run rate was stable at $23 million on a constant currency basis, reflecting the underlying resiliency of our subscription and maintenance revenues. Our contracted annual recurring revenue or total CARR, closed at $26.1 million, representing a net reduction of $2.9 million over the quarter. This was primarily driven by the removal of the NTP project from our CARR backlog, partially offset by net new CARR sales. Sales orders totaled $6.8 million in the second quarter, including $3.1 million of new sales, reflecting industry confidence in Mach7's value proposition and the effectiveness of our strategy to date. Operating cash flows improved significantly over the prior quarter. Cash receipts from customers were $7.9 million, reflecting a catch-up of the majority of timing-related renewals and invoices that were delayed into Q1 and driving positive operating cash flow for Q2. On the cost side, total payments were $7.9 million, down 9% compared to the same quarter last year and 6% lower than the first quarter, reflecting the benefits of our efficiency and cost reduction initiatives. Advertising and marketing spend was $0.4 million, consistent with the prior year and higher than Q1 due to targeted investment in our primary marketing and lead generation event, RSNA. All other expense categories were on par or lower compared to both the prior quarter and prior year. We ended the quarter with $18.5 million in cash and 0 debt, maintaining a strong balance sheet that positions us well to continue executing on our strategy. Overall, the fundamentals remain very sound, and we continue to operate efficiently as we move into the second half. With that, I will hand it back to you, Teri. Teri Thomas: Thank you very much, Dan. All right. I'll now share a little bit more progress about the progress we're making on executing on our strategy. So first of all, commercial transformation, a big focus for me. It is well underway. During the quarter, we continued simplifying how we operate and lowering our cost base while selectively investing in areas that directly support commercial momentum and customer outcomes. Our primary focus has been strengthening our commercial engine. Today, our sales organization has grown, is more focused and is better supported than when I began 6 months ago with clear ownership across new customer acquisition, expansions, partners and services. We have reenergized the sales and marketing model, and we're strengthening our partner engagement through a more proactive and structured approach, including expanded partnerships with AWS, Dell and Ingram. Our new commercial leadership team is currently with me in California, translating strategy into execution plans across pipeline quality, revenue discipline, partner leverage and demand generation. Now RSNA 2025 was an important commercial activity for us. We showcased our move from archive to architecture with the launch of Flamingo, and we generated some high-quality sales leads through a more customer-grounded marketing approach, and we deepened engagement with more than a dozen partners, an increasingly important growth lever for us. We celebrated a significant product and commercial milestone this quarter with our first Flamingo architecture customer in Q2 fiscal year '26. This was our first contract for the new product and our first brand-new direct customer relationship since July 2023. It is an important signal that our refreshed commercial engine has begun executing. Expanding our commercial opportunities, Flamingo is modular by design, allowing customers to adopt capabilities incrementally, whether for existing Mach7 customers or those entirely new to us. It can be deployed alongside our VNA, our eUnity Viewer with both or independently. And over time, we will continue to expand the capabilities under the Flamingo's wings, strengthening clinical impact, AI integration, EMR connectivity and delivering seamless imaging access to complete the patient's record. While this extends beyond the quarter, January has been busy, and it represents a solid continuation of our execution. We achieved a key regulatory milestone with the eUnity Viewer receiving a new CE certificate under the EU medical device regulations, supporting continued access to European and critical Middle Eastern markets. We initiated platform expansion in Malaysia by hiring a developer, including also an experienced API integration developer, who is now fully onboarded and leading our first development work from that region. Development is underway supporting our global customer base and strengthening Flamingo's integration capabilities. We've established an intern program in both North America and Malaysia for access to fresh graduates with fresh ideas. These new staff are part of a deliberate expansion of our Asia-based team with plans to continue scaling as execution progresses. Operating discipline does remain a core focus. As Dan outlined, the organizational reshaping completed during the quarter delivered cost savings from reductions in IT, operating costs and infrastructure changes, also licensing optimization and contract renegotiations. We're moving and shaking things in a good way. Execution quality with customers also improving. Early gains in eUnity Viewer KLAS scores reflect the initial benefits of our flight crew customer engagement operating model and a renewed focus on accountability, responsiveness and consistency. This remains a top priority area as we continue to refine our model and raise that bar on the customers' experience. As we continue to shift from strategy definition into execution, leadership alignment continues to evolve. We've commenced a search for an experienced Chief Technology Officer following the departure of the Chief Innovation Officer in January. This reflects our focus on strengthening our engineering leadership, delivery of technology, platform scalability and execution excellence. We are also recruiting additional sales staff across Asia and North America to support expected demand from our expanded marketing activity, but we are doing this selectively and in alignment with demand. Looking ahead, Mach7 enters the second half of FY '26 with a clearer strategy, stronger operational foundations and improving commercial momentum. We remain focused on disciplined cost management while selectively investing in growth critical capabilities across sales, product development and platform scalability. As we shift away from the high effort Veterans Health Administration Teleradiology program, we're increasing our emphasis on capital deals in Asia and the Middle East. Over the past 2 weeks, I visited 4 customers across these regions, including one of our largest customers and was encouraged by the innovation we are seeing with Mach7 in production overseas. A parallel focus is continuing to build our transformed commercial engine. Expanded marketing initiatives are in planning and officially launched in February. The industry will see us showing up differently, and we intend to get more visibility with our target customer types. Now I'd like you to know, we are expanding our marketing capability in a disciplined way. Rather than materially increasing spend, we're partnering with an external marketing provider that brings stronger tools, deeper capabilities and greater scale. And this allows us to significantly expand our marketing output as well as our market presence and branding while keeping our investment essentially flat. The same approach applies to how we're expanding our development capability. By hiring developers in Malaysia, we can bring on 3 to 4 engineers for the market cost of 1 in the United States. Paired with our deeply knowledgeable engineering team on the ground in Malaysia, this approach allows us to expand our innovation capacity and accelerate the development of Flamingo as well as other innovations without a matching increase in our development cost base. While our industry sales cycles of 1 to 2 years means it will take time for these initiatives to produce the expected growth in revenue, we are digging in and we are doing the hard work with urgency and with focus, emphasizing not just growth of pipeline, but improved sales conversion rates. We expect Flamingo-related opportunities to begin contributing more meaningful to our ARR in the second half of fiscal year '26 and into fiscal year '27. I will provide further updates at our half year results, including additional insight into execution progress as we continue to build and gather momentum. Before I close, I want to thank our Board for their guidance and support, our employees for embracing change with energy and optimism and our shareholders for your patience and your continued belief in the company. And now time for questions. Francoise Dixon: Thanks, Teri. We have received several questions via the live chat, and I'll commence with the first one from Max. He asks, in dollar terms, what was the contribution to sales orders from renewals and separately, add-on and expansions? Teri Thomas: [indiscernible]. Go Dan. Daniel Lee: I'm happy to take that one. Thanks Teri. Thanks, Max, for that question. Renewals represented around 40% of our sales orders for the quarter. In dollar terms, that was $2.9 million. And add-ons and expansions were just over $0.9 million or 14% of total sales orders. Francoise Dixon: Thanks, Dan. Our next question comes from Andrew Stewart. I noted the comment of improvement in KLAS. Where do we sit at the moment? Teri Thomas: The best-in-KLAS results come out on February 4. And so I cannot tell you it's a few days away what they're going to look like. I do look regularly at KLAS myself as well as several of our other team members, and we put it on our corporate vital signs dashboards. Our eUnity numbers have been improving and looking great. They were tops, they went down. They're coming back up. Our VNA isn't where I wanted to be quite yet. Even this morning, I got a very nice positive comment from one of our VNA customers. So the positive comments are starting to trickle in. However, it's going to take a while before we work through some of the comments that brought our score down over time. So we're targeting the VNA. KLAS is a little challenging because it is a lagging indicator. So I see the VNA not where we want it to be yet, but we're systematically going through our customer base to engage with them in a different way than we've done before. We're executing a systematic engagement and assessment process, which will take several more months for us to complete. With the KLAS reporting lag, we expect it will take up to a year to see the benefits come through fully. So while we've had some fantastic early comments and feedback, including the comments KLAS publishes, but also the direct engagement and feedback from the KLAS staff themselves. And in fact, by the way, I'm going to share one of the most recent comments, they said they are very pleased with the results of our restructure. They love having a cockpit of people, and they're finding those people to be responsive and knowledgeable. The last part of the comment, I feel extremely confident in their ability to fix problems, which I would not have said a year ago. That's the profile I want to see from all of our KLAS comments, but it will take a while for KLAS to get a hold of those people and also for us to orient those customers to the changes underway. Francoise Dixon: Thanks, Teri. We have another question from Max who asks, can you expand on how some of these low revenue relationships were creating competitive conflicts? Teri Thomas: Yes. I'm not sure I'm comfortable sharing the actual names of the companies as that could create some legal risks. Therefore, I'm not going to name any names. However, when we acquired eUnity, some of the eUnity customers had a competing VNA and used our viewer. And that's a delicate situation. Do you want to enable a competitor to better compete with you with your own technology? So we've gone through and prioritized our partnerships, and we've looked at them carefully based on how much revenue they currently bring in, but also how strategically are they aligned with our growth expectations and the quality of the relationships. And there are a small number of those relationships that essentially cost more to maintain than they bring in for revenue and also carry some business probably not best practices. So we are doing a little bit of cleaning up the closets. Francoise Dixon: Thanks, Teri. We have another question from Max. What have you learned from customers around mission criticality? Teri Thomas: Now I've been in health care technology since 1989, and I'm a nurse. And so I understand the pain if a customer goes down or if the system isn't responsive. However, one thing I've learned is that I need the whole team to feel that pain, not just the flight crew, not just the support person. So one of the biggest things I've learned is how incredibly important it is to make sure that our staff really fully understand the impact on patients' lives and clinicians who are just trying to do their best work if our software isn't performing. And in fact, even this morning, I had a call with our team about a customer, and I said, forget the flow charts. If a customer is in trouble, you all get on the phone with them together right away. And if it means a developer is on, a developer is on. So it's creating that strong understanding across all of the roles and living our culture code, which starts with customers drive all of our decisions. So as a leader, I regularly prompt and ask the question, how would this answer feel to the customer? What does this mean to the customer? And what is the impact to the customer and training our company to think about that, not just in the customer-facing part of the business, but also product management, development and even the simple thing that we executed in our strategy, which is having someone answer the phones. Francoise Dixon: Thanks, Teri. Our next question comes from Darren who asked, if you could only focus on one weakness at Mark7 as a business right now, what would it be? And how would Mark7 fix it? Teri Thomas: That's a tough one. I do regularly sit back and think what is the most important thing for us to do. And I actually have a meeting next week to get alignment on big hairy audacious goals for the quarter because I do believe that can be an effective approach to rally our customers or rally our staff around our customers. That's actually the theme of what we're talking about. So I think what -- that last question is actually the answer to this next question. I think somehow Mach7 over time did a good job with taking care of its staff, organizing the business, but stepped away from that deep understanding of the customers' world, and we need to build that back. So in a great intentioned way, let's protect developer time, for example, developers stopped engaging with customers. They started operating on specifications that might have come from a customer to a support person to a product person to a development ops person to a developer. And it's a little bit like the phone game. You actually need to get people on the phone talking directly to be effective and not only do better quality development, but also it teaches people to really care. And it's a different level of caring when you talk to the customer than you're writing to a spec. So if I would say biggest weakness, that's the one we are attacking most heavily that I think will have the most profound impact on the work that we do as a company from top to bottom. Francoise Dixon: Thanks, Teri. Our next question comes from Scott Power who asks, can you expand on your plans to sell Southeast Asia and the Middle East? Teri Thomas: Sure. Yes, I had a whirlwind tour there last week. We have a fantastic team on the ground in Malaysia and Singapore. They're deeply knowledgeable. They actually don't have that Mach7 weakness in that they're really closely connected to the customers there, good understanding of the products. And the customers are really happy. I -- they were proud to show off what they're doing with our software. I visited 3 hospitals in Hong Kong. And I was amazed. They were telling me they were doing things that I heard from the North American team we couldn't do. And I'm like, well, are you doing this with our software? And I validated that, yes, in fact, they are. And so I thought build on where you've got success, and so my first visit there, I was impressed. This last visit there, I was even more impressed. And that's part of why I brought our founder, Ravi, back into the business. He lives in Singapore. He sees Mach7 kind of like a child of his. He wants us to grow up and be all we can be. And so he has this infectious enthusiasm and this energy and this just deep caring about the technology itself that carries a massive amount of credibility in Asia, a high context culture that really values founders. And between the new sales hire that we've got, another person that we're looking to hire, Ravi and that really strong technical team on the ground, we have several prospects in the pipeline that I think we have a great chance of closing as well as some expansion opportunities with our current customers, primarily in Qatar, in Hong Kong, but also even in Malaysia. People like to see their software being used in their country. And so there -- it's not super high profit compared to other areas, but they're right there and it makes a lot of sense. So we haven't done a lot of work on prospecting and trying to build the pipeline deliberately yet, but that will be one of the first things for both the new hire that just began and the open position that we hope to fill soon. So it's a great team. It's happy customers. That's a great recipe for that sales marketing flywheel. So I want to get that thing rolling. Francoise Dixon: Thanks, Teri. Our next question from Max is actually for Dan. Dan, what attracted you to the opportunity? Daniel Lee: Yes. Thanks again, Max. Well, I was drawn to the opportunity because really a combination of the company's reset mission, the stage of growth that the company is currently in and the mission to turn around the culture of the leadership team. The company had a very strong balance sheet. Fundamentals look very sound. And truthfully, it just felt like the kind of environment where I could make the most meaningful contributions and impact as well as continue to grow professionally. Francoise Dixon: We have no further questions on the chat, but I'll just pause a moment in case there are any final questions that crop up. Last chance for people. No, nothing has come through. I'll hand you back to you, Teri, for closing remarks. Teri Thomas: All right. I do believe in setting expectations correctly and then delivering, whether it's with customers, staff or even our investors. So with that in mind, I'm going to close by noting that we are driving a fundamental change in culture, in operating model and in execution, and that kind of change does not happen overnight. While we're pushing hard to accelerate sales cycles, the reality is the full impact on revenue, and as we mentioned, the KLAS scores will likely take 12 to 24 months to be fully visible in the form of our growth of ARR. So progress will be steady, but that kind of transformation and that acceleration of growth and profitability will take time. I'm very proud of the progress we've made, and I'm super excited by the opportunities ahead of us. I'm confident in where we're headed. Our strategy is pretty clear. The market opportunity, very real, and our balance sheet is strong. Delivery is what matters now. So I appreciate your patience as Mach7 evolves. It changes for the better, and we realize our immense potential. And with that, I thank you, and I look forward to sharing more with you soon. Thanks for joining us.
Operator: Good morning, and welcome to Banco del Bajio's Fourth Quarter and Full Year 2025 Results Conference Call. My name is Anna, and I will be your coordinator today. [Operator Instructions]. Before we begin the call today, I would like to remind you that forward-looking statements made during today's conference call do not account for future economic circumstances, industry conditions, company performance and financial results. These statements are subject to a number of risks and uncertainties. Please note that this video conference is being recorded. Joining us today from BanBajío are Mr. Carlos De la Cerda, Executive Vice Chairman of the Board of Directors; Mr. Edgardo del Rincon, Chief Executive Officer; Mr. Joaquin Dominguez, Chief Financial Officer; and Mr. Rodrigo Marimon, Investor Relations Officer. They will be available to answer your questions during the Q&A session. For opening remarks and introductions, I would now like to turn the call over to Mr. Rodrigo Marimon. Mr. Marimon, you may begin. Rodrigo Marimon Bernales: Good morning, everyone. Thank you for joining us to discuss BanBajío's results for the fourth quarter and full fiscal year 2025. Today, we will review our quarterly and annual performance, analyze the key drivers and financial trends and share our strategic outlook for 2026. The industry data cited today throughout the presentation is based on CNBV's information as of November 2025, which is the most recent publicly available data. Without any further ado, let's start with the presentation. Starting on Slide 3 with a look at our key financial highlights for the quarter and full year 2025. It was a year of solid execution despite the challenging operating environment with a stagnant GDP growth and a lower interest rate. Turning to credit performance. The total loan portfolio expanded by 4.6% year-over-year. This was primarily driven by the company loans portfolio, which grew at a rate of 5.2%. On the funding side, total deposits saw a robust increase of 10.5% compared to the previous year. Regarding asset quality, our NPL ratio improved significantly to the end of the year at 1.49%, supported by a strong coverage ratio of 126.5%. This trend also drove an improvement in our risk profile with the cost of risk for the full year at 0.96%, while in the fourth quarter, it decreased further to 0.75%. In terms of profitability, we achieved an efficiency ratio of 39.8% for the full year and 43.5% for the fourth quarter. Our return on average equity stood at 19.4% for the 12-month period and 18.1% for the quarter, while the return on average assets was 2.4% and 2.2%, respectively. Net income for the full year 2025 reached MXN 9.1 billion with the fourth quarter contributing MXN 2.2 billion. Finally, our preliminary capitalization ratio as of December 2025 stands at a solid 15.5%, composed entirely of common equity Tier 1 capital. Moving to Slide 4. We examine our 2025 performance against the guidance provided to the market. We are very proud to report that BanBajío met or outperformed most of the targets established for the year. Starting with our balance sheet, loan growth stood slightly below our range, reflecting disciplined growth in a challenging year. Conversely, deposits outperformed expectations with a 10.5% increase, well above our 6% to 9% target. Our net interest margin landed right on target at 6%, while noninterest income, the combination of fees and trading income grew by 4.4%. Operating expenses grew 8.2%, close to the bottom of the guided range, reflecting our ongoing commitment to cost control. This led to an efficiency ratio of 39.8%, outperforming our 40% to 42% guidance. The significant improvement in our portfolio mentioned earlier resulted in a cost of risk that our target range of 1% to 1.1%. As for our bottom line results, the delivered net income of MXN 9.1 billion significantly exceeded the high end of our guided range. This drove a strong return on average equity, which reached the upper bound of our target. Finally, regarding our asset quality and solvency, we exceeded our guidance for the NPLs, coverage and capitalization ratios. Moving to our loan portfolio growth details on Slide 5. The total loan portfolio reached MXN 278 billion at the end of the fourth quarter, leading to the mentioned year-over-year expansion of 4.6%. This growth was primarily driven by our core business, company loans, which include both corporate and SME segments, increasing by 5.2% and now representing 86% of our total loan book. Consumer loans continued with a double-digit growth trend reported in the past quarters, growing 11.4% year-over-year. The 12.1% expansion in the government portfolio was driven by a specific exposure originated in December with good levels of interest margins, an opportunity aligned with our focus on profitable growth. This trend, coupled with a 11.4% contraction in financial institutions, underscores our strategic reallocation of capital towards our higher-margin business line. On Slide 6, I want to highlight the strategic evolution of our sales force as we move into 2026. This initiative is an enhancement of our existing business model and our competitive edges, designed to further accelerate loan growth by deepening our segment specialization and sharpening our operational agility. We are reinforcing this through 3 strategic pillars. First, we are optimizing our credit process to ensure we improve our speed and responsiveness. Second, we are increasing our regional presence in major cities with an important growth in our sales force and executive bankers. This allow our bankers to focus exclusively on the specific needs of their respective segments, ensuring a higher level of expertise and tailored service. Third, we are scaling our successful SME centers. We recently opened a new hub in Mexico City, and we have 3 more scheduled for the next quarters in Querétaro, Guadalajara and a third location in Mexico City. We expect to conclude 2026 with 11 specialized centers, keeping us on our path to 20 centers by 2030. Turning now to Slide 7. Let's examine our asset quality and risk profile. Notably, our NPL ratio improved significantly to 1.49%. This performance significantly widened the gap with the system average of 2.25% Similarly, our adjusted NPL ratio stood at 2.84% compared to the system's 4.45%. This marked improvement in portfolio health allowed us to optimize the cost of risk to 0.75% for the fourth quarter. Regarding coverage, we maintain a prudent ratio of 126.5%. And as of December 2025, we continue to hold MXN 330 million in additional reserves, which we plan to absorb over the next 6 months. These improvements allow us to enter 2026 with a healthier loan portfolio, ensuring BanBajío's position to support a more active lending environment in the upcoming year. Turning to the funding side on Slide 8. Total deposits reached MXN 273 billion in the fourth quarter, representing a robust 10.5% year-over-year increase. This performance was underpinned by an 11.6% rise in demand deposits and a 9.4% increase in time deposits. Over the last 4 years, we have maintained a resilient 10% compound annual growth rate in total deposits, a track record that remarks the strength of our franchise and the deepening of our core customer relationships. On Slide 9, our current funding breakdown shows that demand deposits remain the core of our strategy, representing 40% of our total funding mix. Notably, zero-cost deposits saw a significant increase during the period, now accounting for 19% of the total breakdown. This robust growth in noninterest-bearing funding was the primary driver behind the market decrease in our overall cost of funds in the quarter. This highlights the reversal of the upward trend observed in third quarter 2025 and the widening of the gap with the reference rate. Our cost of funds for the fourth quarter reached 4.94%, a 169 basis point decrease compared to the same period last year and 50 basis points below the previous quarter. Likewise, our cost of funds as a percentage of TIIE dropped to 64.7% in the quarter, a positive divergence from the system average that saw funding costs climbing closer to the reference rate. Moving to Slide 10. The net interest margin for the fourth quarter was 5.77%. This represents 100 basis points contraction year-over-year, primarily driven by the lower interest rate environment, which contributed 68 basis points to the decline and changes in the portfolio mix, which accounted for the remaining 32 basis points. Through active balance sheet management, we maintained rate sensitivity at around 20 basis points throughout 2025, effectively cushioning the impact of the accelerated rate cycle on our margin. While our expansion into zero-cost deposits drove a temporary uptick in sensitivity during the final quarter, we have already seen a normalization in early 2026, and we expect this stability to prevail throughout the year. You will see the overall stable performance of BanBajío's revenues on Slide 11. Total revenues for 2025 stood at MXN 25 billion, a minor 2.6% decrease despite the significant pressure on margins. This stability was underpinned by the successful execution of our diversification strategy as normalized noninterest income grew a robust 26.2% for the full year. Net fees and commissions increased 16.3% year-over-year, driven by a 39.8% surge in cash management fees and a 38.4% increase in revenues from our digital platform, Bajionet. Additionally, normalized trading income rose 18.2% during the same period. These results validate our intentions to grow recurring fee-based income, limiting the impact of economic and interest rate cycles on our long-run performance. Moving to Slide 12. Our efficiency ratio for the full year 2025 stood at 39.8%, successfully outperforming our guidance range. For the fourth quarter, the ratio was 43.5%. Despite this quarterly uptick, BanBajío continues to be one of the most efficient banks in the industry, maintaining a significant gap against the system's average of 46.3% and demonstrates the operational discipline and strict cost control that we have been anticipating to the market. Turning to profitability on Slide 13. It is important to highlight that despite the quarterly compression seen throughout the year, we successfully exceeded the upper end of our net income 2025 guidance. This performance drove a robust full year return on average equity of 19.4%, effectively reaching the top of our target range, where return on average assets stood at a sound 2.4%. Finally, on Slide 14, we closed 2025 with a preliminary capital adequacy ratio of 15.5%. This level stands significantly above our 14% commitment and well exceeds regulatory requirements. Our robust capital position provides the bank with substantial flexibility to continue with the sound levels of return of value to our shareholders while supporting our growth objectives. Lastly, on Slide 15, we introduced our guidance for the 2026 fiscal year. Beginning with macroeconomic assumptions, we estimate GDP growth at 1.3%, stable inflation at 4% and a 50 basis point decrease in the reference rate from current 7% to 6.5% by the end of 2026. Based on these drivers, we are forecasting loan growth between 8% and 10% and deposit growth from 10% to 11%. We target net interest margin between 5.4% and 5.5%, and we expect fee and trading income to continue to grow at a sound pace of 13% to 15%. Our cost control efforts will prevail. And operating expenses are projected to increase between 7% and 9%, maintaining our efficiency ratio within a 43% to 45% range. We forecast that these factors will lead us to a net income of MXN 8.25 billion to MXN 9 billion and a return on average equity between 16.5% to 18%. This guidance reflects a transition towards a more normalized interest rate environment while maintaining our revenue diversification strategy and top-tier cost efficiency. Regarding our risk profile, we anticipate a cost of risk between 80 and 100 basis points, while keeping our NPL ratio below 1.7% and a coverage ratio above 1.1x. Furthermore, we maintain our commitment to a capitalization ratio above 14%. In summary, our fourth quarter and full year results report BanBajío sound fundamentals and solid balance sheet. We are pleased to have met most of our targets for the past year and remain fully committed to delivering on the guidance provided for 2026. With this, I conclude my presentation, and we can open the call for the Q&A session. Operator: [Operator Instructions] Our first question comes from the line of Ernesto Gabilondo. Ernesto María Gabilondo Márquez: Ernesto Gabilondo from Bank of America. My first question will be on asset quality. You were mentioning that you still have excess provisions of around MXN 400 million and that you expect to consume in the next 6 months. Looking to your guidance, you're expecting cost of risk between 0.8% to 1%. So even that you are consuming the excess provisions, you're expecting that range of cost of risk. So would that be explained because you are going to have a more credit risk appetite this year as you were saying in your now -- your new strategy for the year? And my second question is on your guidance. When looking to your ROE expectations for the year, what is the dividend payout ratio we should be assuming? And when could we have more color of a potential special dividend this year? And lastly, I would like to pick up your brains and to see in which lines of your guidance do you see upside and downside risks? Edgardo del Rincón Gutiérrez: Thank you, Ernesto. Regarding asset quality, NPL, as you saw, at 1.49%, a very similar level that we reported a year ago. So we are very happy with the improvement compared with previous quarters. And also cost of risk, actually, cost of risk was the best cost of risk reported during 2025. So yes, we have not MXN 400 million, Ernesto, we have MXN 333 million of additional reserves. The idea and the commitment with the CNBV is to use them during the following 6 months. So as we mentioned in previous calls, we are going to have a coverage ratio that is equivalent to the regulatory reserves that we need to have. So for this year, we expect more stability. As we mentioned in 2025, we have several isolated cases that we already -- several of them we write off during the fourth quarter because of the low probability of recovery. Of course, we continue with the legal actions regarding those cases. But for this year, we feel comfortable with the level of cost of risk between 0.8% and 1%. We believe we are going to have less important cases transitioning to Stage 3. Actually, the 0.75% that we had during the fourth quarter in part because we didn't have any important case transitioning to Stage 3. Regarding risk appetite, we are not considering increasing our risk appetite. Actually, asset quality remains a cornerstone of the strategy. So we will have additional risk appetite. The name of the game, of course, for us is to bring customers to BanBajio. And that's why we are increasing -- I mean, we are increasing the business units we have in several places, mainly in those cities like Mexico City, Guadalajara, Monterrey in which the financial system is very, very concentrated. So that means additional bankers and additional business units. So that's why we are forecasting to recover growth and to grow the loan portfolio between 8% to 10%. Regarding dividend, Carlos, please? Carlos De la Cerda Serrano: Ernesto and everybody. Yesterday, the Board of Directors approved a proposal to be made in April to the stockholder meeting of a 50% payout dividend on the 2025 net profits to be paid half of it in May and the other half in September. Later on, depending on how the year is developing, the growth in the loan portfolio and so forth, we will consider an additional dividend, but that will be probably considered during the third Q. Edgardo del Rincón Gutiérrez: Regarding your latest question, Ernesto, about opportunities in the guidance, we are very happy with the expense level that we reported during the year. You remember in the guidance that we provide to the market in January, we were expecting between 10% to 12%. So reaching 8%, it was very good. So we feel comfortable with the expense level of 7% to 9%. The plan, let's say, is based in the middle of that range with 8%, but we could have some opportunity there. But this expense level includes also new branches and all the new positions because of the new business units we are implementing. And of course, all this additional expense will be through mainly the first semester because in getting that talent in place is not something that you do immediately. It's going to take a few months. I could say also we are very happy with the results in fees and trading income. Last year, we didn't have the volatility in FX, so we can have more volumes and better margins. we expect this to have a recovery during 2025. And I could say also that the mix of the portfolio that we are expecting in terms of growth is related to having the corporate portfolio growing between 8% to 10%, SMEs that have a better margin around 15% and the consumer portfolio between 15% to 20%. So this could provide an additional yield and better margins because of the mix of the assets. So I could say those could be some opportunities in the guidance. Joaquín Domínguez Cuenca: This is Joaquin Dominguez. Another upside risk could be in case of the sale of some disclosure assets and the recovery of some loans that we had in past due loans during the last few years. Ernesto María Gabilondo Márquez: Super helpful. Just a last question. We continue to see a super peso and a weak dollar. So what would that imply for your loan portfolio that is denominated in dollars and to your loan portfolio related to exporters. I just wanted like to understand if this could have an impact on NIM or in asset quality, for example, we have the peso at 16.5% if reaching a USMCA agreement. Edgardo del Rincón Gutiérrez: Yes. Actually, we had an impact in the loan size because of the exchange rate. The impact was a little bit more than MXN 4 billion, representing 1.6% of the loan book. So this means that instead of having a growth of 4.6% with the stability in the exchange rate, it would be 6.2%. So that impact is already in place. And we don't see additional impact in 2026. Actually, that could be an opportunity. Regarding exporters, those customers represent about 10% of the loan book, the loan portfolio. Until today, what we are seeing in the financial statements, of course, is bringing challenges, but we don't see past due loans because of that. Of course, they need to strategy looking for better expenses and better efficiency. But until today, those customers are reporting good numbers. Operator: Our next question comes from the line of Danele Miranda. Danele Miranda de Abiega: Just a very quick one from my side on loan growth guidance. I was wondering if this 8% to 10% is assuming all positive scenarios already. I mean is this your base case with potential upside? I don't know with USMCA private investment reactivating? Or is this already your positive scenario? And also, is this guidance seasonal? I mean, can we expect acceleration in the second half of the year? Or will it remain in this 8% to 10% level all year? Edgardo del Rincón Gutiérrez: Thank you, Danele. What we are seeing is, I mean, we made several changes in the organization to provide more focus. And as I said, to have additional business units. We are talking about 4 new regional corporate banking offices, one in Guadalajara. I mean, 2 in Guadalajara, 1 in Mexico City that is going to be the tier regional director and additional one in Monterrey. Of course, all of them with additional bankers. And in terms of the SME centers, we currently have 8 SME centers. Those units are to attend companies with loan sizes between MXN 30 million to MXN 100 million. We have 8 because we opened an additional one, the second one in Mexico City last December. And we are planning to open Guadalajara, Querétaro and in the second semester, an additional one in the satellite area in Mexico City to end that year with 11 SME centers. All of this will provide support to attract more new customers to BanBajío. We are talking about between 50 to 70 additional bankers for those 2 important segments that is the core business of BanBajío. So we feel confident with the pipeline that we are seeing today that we can reach the guidance between 8% to 10%. Maybe it's too soon to say if we have an upside risk, an upside opportunity in loan growth. Operator: Our next question comes from the line of Yuri Fernandes. Yuri Fernandes: Yuri Fernandes here from JPMorgan. I have a follow-up regarding margins. And I think the explanation was already a little bit more positive one. But when you think about the implied margin decrease, this year, you mentioned that some 30% of the decrease was mix, right, and 70% was rates. For 2026, for sure, we have like maybe 50, 100 bps lower rates and the average rate in Mexico should be even lower than that. But you mentioned FX volatility maybe should be less and this can help. And then the growth of the loans, they also should help, right? I think you're growing less on the financial sector, SMEs, you mentioned around 15%. Consumer portfolio also growing a little bit less. I know it's small, but it should grow more. So the question is the following. For 2026 for your guidance, how you are viewing the decrease on NIMs? Is this purely rates? Do you have some kind of mix inside that or funding was good this quarter, maybe you are baking in some funding deterioration. Just trying to understand a little bit like the drivers. I know rates is the big part of the answer. But if you can help us build the blocks for the margin decrease, that would be helpful. And then I can ask a second question. Joaquín Domínguez Cuenca: Yuri, thank you for your question. This is Joaquin Dominguez. Well, first of all, our sensitivity remains around 20 basis points for each 100 basis of change of the TIIE rate. For the 2026, maybe the impact of the mix will be more important than last year's in deposit side because as you saw, we grow much more on deposits than in the loan portfolio. That means that we accumulate some investment in the treasury with lower interest rates. If our plans of growing in terms of loan growth, we do deliver as we expected, we will change the mix in assets. We will have more loan portfolio instead of securities in the treasury, and that will provide us an improvement in the total assets. In terms of the loan portfolio, the market we are focused on has a higher interest rate than the average of the total loan portfolio. So if we do well with these SME centers, we will improve the mix of assets, and that will help to improve the NIM. And in the other side, we have been doing well in terms of deposits and increasing and especially at the end of the last year, the demand deposit accounts not bearing interest. So if we maintain that mix of the growth in demand deposits without cost, that will improve the margin, but will increase the sensitivity. And all those factors have a different result in the NIM. But at the end of the day, what we are looking for more than a specific objective in terms of margins is improve all the lines, the mix of total portfolio, the mix of loans and the mix of deposits. And what we did for this guidance is that we maintain the composition of the assets and the deposits as they were at the end of the fourth quarter. So any change of that mix could affect positively or negatively the guidance about the sensitivity and the margins. Yuri Fernandes: No, super clear, Joaquin. So let's do the blocks. Like the average rates in 2025, I think the average Banxico rate was around 8.4% maybe rates go to 6%. I'm not sure what is your estimate there, like 6%, 6.5%, maybe the average rate will decrease some 200 bps with a 20, 23, 24 bps sensitivity. This is like 40, 45. Your guidance is implying a 50 to 60 bps decrease, right, from 6% to 5.4%. So what I'm trying to get here is, is your guidance too conservative? Maybe if the mix plays well, as you mentioned, maybe the margin decrease is higher than -- it's less than the guidance is implying at this point? Joaquín Domínguez Cuenca: I could say that it's not exactly conservative. It's just the result if you make the account considering the balance sheet in the fourth quarter, not the average. I mean, there is something that you should consider that the last reduction in the interest rate was at the end of December of the last year. That impact was not captured in the fourth quarter. It will be reflected in the first quarter of this year. And that effect runs for the rest of the year. So probably that would explain what you're saying. But we are maintaining the NIM sensitivity in our forecast and in our guidance without change. Yuri Fernandes: No, no. Super clear. Just a second one on another topic, asset quality, just going back to Ernesto's questions on this. When we go to your new NPL formation, your new Stage 3 formation putting all together, right, the NPLs and the higher write-offs this quarter, it was a very good formation. It was lower. Just checking, like could we have hopes that maybe there could be a surprise on this because I think Edgardo mentioned before that you had very few cases going to Stage 3 this quarter. So just checking if there was something specific you did something different on renegotiations, reprofile of debt and this explain or sale of portfolio because it was a good number on formation. And when I look to your guidance, the guidance implies 0.8%, 1% cost of risk, slightly higher NPL. So just trying to understand if there was any kind of a one-off in the new NPL, new Stage 3 formation for the fourth quarter. Edgardo del Rincón Gutiérrez: Thank you, Yuri. Actually, no, what we saw in the fourth quarter is a reduction in the balance of Stage 3 loans and the write-off that we did is preparing us to, let's say, to clean up the portfolio. Our criteria is always those loans with low probability of recovery. We'd rather write off them and of course, continue on the recovery actions. But the level that we have at the end of the fourth quarter, let's say, is a more normalized level of NPL. And we expect to be around those levels during that year. As I mentioned before, during 2025, we have several important but isolated cases from different sectors that transition to Stage 3. And during the fourth quarter, we didn't see any important case. Of course, that could happen in '26. We don't have, in our view, any important case at this moment. But we feel well with the 0.8% to 1% that is a more -- also more regular or normal level of cost of risk for the bank. So of course, the -- as we transition and grow more the SME portfolio and the consumer portfolio that normally have higher NPLs, that could change in time. But with the guidance that we are providing, we feel very comfortable. Operator: Our next question comes from the line of Eric Ito. Eric Ito: This is Eric Ito from Bradesco BBI. I have 2 here on my side as well. The first one, I'd like to touch basically on a more strategic point here on your new sales force structure. So you are deploying a lot -- investing a lot. You have this plan of 2030 of 20 branches. So I just want to get a bit sense for, let's say, beyond 2026, 2027, what can we think about efficiency here if that should be one of the points that could continue pressuring OpEx going forward? So this is my first one, and then I can ask my second later. Edgardo del Rincón Gutiérrez: If we want to have a good efficiency ratio and a good ROE, the best strategy that we can follow is to grow the loan portfolio. That's why we decided to increase the business units and sales force of the bank at the end of the fourth quarter. So as I mentioned already, we are adding 4 regional directors for the corporate segment in Mexico, Mexico City, Guadalajara, and Monterrey. And also the SME centers, we are very happy with the results we are having. Each SME center has more than MXN 1 billion in loans. And as I mentioned, is dedicated to a segment, let's say, with loan sizes between MXN 30 million to MXN 100 million. The idea for the following 4, 5 years is to get to 2030 with more than 20 SME centers. We have 8 to date. So we are developing, let's say, a new strategy with new business units to attend that segment that is very, very profitable. But in the corporate area, we have a lot of room to grow. Our market share in commercial loans portfolio is a little bit more than 6%. So we continue with huge opportunity to attract new customers. So that is the idea. Regarding branches, during 2025, we opened 9 branches. And we already have 10 branches that is I'm completely sure we're going to open this year. That number could increase up to 15 if we have the right location, et cetera. So those, let's say, new branches are already approved, but the number of new branches is between 10 to 15 this year. And the idea for the following years is to continue with a similar number of about 10 to 15 branches. So the bank has a lot of opportunity to grow, and we need to grow also our branches and our bankers, et cetera, to capture that opportunity. Joaquín Domínguez Cuenca: Just to complement in the efficiency ratio side, we -- in our projections, we made the exercise considering the maximum number of branches and SME centers to open. So they will not surprise us in terms that we will be expanding more than we budget. So there is no downside risk in terms of not delivering the guidance in terms of expenses. Eric Ito: Okay. Super clear. And then my second one is just maybe a follow-up here, especially on the strategy to grow SMEs, which is a portfolio that you are investing a lot. How can we think about your portfolio mix? Currently, you have 50% of your book in corporate and 29% in SMEs. I don't know if you guys have a target that you could share with us, but I feel like we can continue having this much higher CAGR on SMEs. Edgardo del Rincón Gutiérrez: Yes. With the internal definition of SMEs, we have an SME portfolio or more than MXN 40 billion. That is important because, I mean, we are growing very well. But the margin that we have in that segment is much better than in the corporate segment. It's about 1.5% more margin in the loan book. But more important than that, it is easier to bring the customer and to engage the customer to all the rest of the services regarding cash management, FX, et cetera. So the revenue coming from that portfolio proportionally is very, very important. So that is the, I would say, the main segment for the bank. And I believe with these SME centers, we are putting in place a competitive advantage of BanBajío, we feel that the business model that we are implementing is working very, very well. Then that's why we are accelerating the number of SME centers in the following years. Operator: Our next question comes from the line of Neha Agarwala. Neha Agarwala: This is Neha Agarwala from HSBC. First one on the loan growth, which stands out as a bit on the higher side, especially when compared to some of the peer numbers that we have seen. What is the expectation in terms of USMCA agreement? In your budgeting, when do you expect that to be finalized as that could be a kicker in terms of loan growth? I'll go to my second question after. Edgardo del Rincón Gutiérrez: Thank you, Neha. Of course, loan demand has been affected by the uncertainty coming from the USMCA agreement and the negotiation that will happen during this first semester. In the loan growth, we are forecasting a more conservative growth during the first semester and a better second semester. So that is implied in the business plan that we are guiding. But our scenario is that we reach an agreement with the U.S. We believe that dependency that we have in those 2 markets is very important. And the best scenario for both countries is to reach an agreement. So that is the best scenario. Neha Agarwala: Okay. My second question is on the branch expansion that you've mentioned. With all of this investment to drive up the loan growth, could you compare the NIM profile for the large corporate segment and the SME segment? Because if the mix shifts more towards the SMEs, how in the next 2, 3 years should that impact your NIMs and your cost of risk? And given the expansion plan, it seems like the cost growth will probably be on an elevated level, not just in '26, but in '27, '28 as well, which could pressure the cost-to-income ratio. So how should we think about the evolution of cost-to-income ratio in the next 2, 3 years given the expansion plan? Edgardo del Rincón Gutiérrez: We don't have the NIM by segment at this moment. What I can tell you is the margin in the loan book is better, but also the mix of deposits has a better margin. And also nonfinancial income person at the size of the customer or the loan is more important. So profitability is better. The cross sale ratio in SMEs is more than 5 products and services. And the corporate is a little bit more than 3.2. So as a result, let's say, the SME is much more profitable than the corporate segment. Neha Agarwala: Perfect. And cost to income, if you could give some color on that, the impact on cost to income and how should it trend given the cost growth should be slightly higher? Joaquín Domínguez Cuenca: Neha, well, that cost to income maybe is one of the most important drivers we follow month by month. And what we saw in the last quarter is a quite increase in the cost of risk, but also an improvement in the generation of net interest income. So what we are considering for this year is that the growth on noninterest income that is well supported by a very diversified lines of products that we are offering to our clients will support the increase on expenses, even the reduction of the NIM. So we feel that we can very well supported and control the efficiency ratio due mainly to the growth of the net interest income. Operator: Our next question comes from the line of Brian Flores. Brian Flores: Brian Flores from Citi. I have 2 questions. The first one is on your NIM sensitivity because the cost of funding as a percentage of TIIE has been improving, and you've mentioned the efforts you have made on the asset side. I just wanted to maybe understand how you're positioning yourself, not for 2026 because we understand what is likely to happen. But the sensitivity for further ahead, I mean, when maybe Bajio becomes a bit more stable in the policy rate. Would you be willing by design to reduce the sensitivity for further cycles? I just wanted to understand. And also, I think in the last call -- last 2 calls, maybe you have mentioned a sustainable ROE of high teens. So do you think this guidance actually shows the, let's say, structural level ROE where we should see Bajio going forward? And then if I may, just a second one on GDP growth. In your presentation, I think you have 1.3% as a base case here. One of your peers was a bit more optimistic maybe on tailwinds from the World Cup and internal consumption in Mexico. Do you see if a scenario more similar to them, which is around 1.6% in terms of GDP plays out that there is upside on the loan growth side? Joaquín Domínguez Cuenca: Regarding the NIM sensitivity, what we are seeing is that we do not have a specific target of NIM sensitivity because that by itself do not necessarily reflects an increase in the income or the value of the bank. What it is important for us is to maintain a healthy growth even if the NIM have a reduction, it doesn't matter if the volume of business is higher. So it is quite difficult to say that we have a specific objective of reducing the NIM sensitivity because if we just have the idea to reduce it to 10 basis points, it probably will have high cost to make -- or to create that reduction and would reduce the net income. So it's not directly the relation between lower NIM sensitivity and higher income. So our focus is increased total income and margin income despite what happens with the NIM at itself. So what we are focusing is in improving the mix of assets and deposits, but not having a specific target of NIM sensitivity. Edgardo del Rincón Gutiérrez: Regarding -- thank you, Brian. Regarding ROE, as you saw, we are considering here an additional decrease in rates of 50 basis points to get to 6.50%. And we believe we are getting closer to the floor in rates with all the geopolitical situation and inflation in Mexico, we feel that we are getting close to the floor. And with that, sensitivity will be less important. We are sure that we feel comfortable in providing a sustainable ROE in high teens that is reflected in the guidance. And regarding GDP, we consider the average of the analysts. Actually, that bank that you are mentioning is one of the highest forecast in GDP growth, but the median of the different analysts in that analysis is 1.3%. Of course, if we can have a potential additional growth, more GDP growth that will help a lot in growing the loan portfolio, of course. Brian Flores: And just, I mean, do you have any sensitivity in terms of, let's say, this could add 4 bps to your base case scenario here in terms of loan growth? Edgardo del Rincón Gutiérrez: If you can repeat, it was the transmission connection. You can repeat, Brian, please? Brian Flores: Sure, sure. No problem. No, just wondering if you have a sensitivity measure as to the multiplier. So for example, if we have some upside risks here on GDP, where could we see your loan growth compared to your base case scenario? Edgardo del Rincón Gutiérrez: Actually, the multiple that we are using already in the guidance with a GDP growth of 1.3% is higher than previous years. And what we are planning to do is to gain market share and to bring more customers. So of course, with additional growth in the economy, that will help. But it's maybe difficult to forecast at this moment an upside opportunity regarding that. Operator: Our next question comes from the line of Ricardo Buchpiguel. Ricardo Buchpiguel: This is Ricardo Buchpiguel from BTG Pactual. Just have one question here. How do you see the competitive landscape in the corporate lending environment evolving? We see that BanBajío and other peers have been expanding a lot of their branches network you also have Banamex, is a big bank in Mexico came out of a change in control and eventually could become a bit more aggressive. And at the same time, as we have been discussing in this call, you have a lot of uncertainty mainly in the first half of the year because of this USMCA deal, right? So my question here, with a lot of uncertainty regarding how much the size of the market will grow and a lot of banks including ourselves increasing the number of branches and people, are you concerned in any way for potential pressures in rates? Edgardo del Rincón Gutiérrez: I believe that is a situation that always happen in this market. Competition is important. Of course, we try to compete more with service than with price. Of course, we need to provide a competitive price to the customer. But our business model is more to be really close to the customer, have a very good communication with them, understand very well the opportunity and risk that they are seen and try to help them in all the cycles. So -- but competition is huge. And I believe with the potential IPO of Banamex and they recover, let's say, the strategy that they used to have several years ago, competition will increase. But I mean, that is always happening. Normally in the corporate segment, we are always competing with at least one bank. We have less competition in the SME segment. But I mean, that is part of the regular scenario in this market. And I believe it's good for the market evolution and also for customers. Ricardo Buchpiguel: That's very clear. And just one quick follow-up. If you look at the last few months, not only in Q4, but a little bit in Q1, have you seen any changes in terms of competition, the pressures on rates or is overall stable? Edgardo del Rincón Gutiérrez: It's a huge competition environment. And I believe the fourth quarter was similar with the rest of the previous quarters during 2025. And of course, all the banks are trying to grow and to bring the best customers possible to those banks. So -- but I feel that the environment is stable. It's the same. Operator: Our next question comes from the line of Lindsey Shema. Lindsey Marie Shema: Lindsey Shema here from Goldman Sachs. I just have a quick question following up on the increase in write-offs in the quarter. Given the increase in write-offs this quarter, do you see any impacts from the change in regulation to the ability to be able to deduct write-offs from your taxes, and that's why you moved them ahead? Or is that completely separate? Edgardo del Rincón Gutiérrez: Thank you. We're expecting really the same level. If we consider write-off of 2025 plus the reserves associated with past due loans minus recoveries, we are talking about MXN 2.8 billion during 2025. And actually, that was the same number for '24. For '25 and with this NPL and cost of risk that we are expecting, we could have a small reduction in write-off during 2026. Regarding the new regulation, it will have an impact in the P&L, but will delay the capacity of the bank to deduct those write-offs. It will take at least 2 years starting in the moment that we start the legal action, let's say, to recover that loan. In terms of small loans lower than 30,000 UDIs is going to be 1 year. So it to have the P&L really, but the deduction of those write-offs will take longer. Operator: Our next question comes from the line of Federico Galassi. Federico Galassi: Federico Galassi from The Rohatyn Group. Two questions, if I may. The first one is last year, in the last part of the year was very vocal from the government that could be some caps on fees. I don't know if you have any comment on that. And the second one, maybe you mentioned that, but if you can repeat me what is the Mexican peso that are using in your guidance from the loan growth? Edgardo del Rincón Gutiérrez: Thank you, Federico. The only initiative that is on the table today is regarding interchange fees. There is not a decision yet, but it's an important reduction in interchange fees. Actually, the plan that we are proposing today to the market is not including any impact of this. But the revenues coming from interchange fees represent about 1.8% of total revenues of the bank. And as you saw in the initiative, they are putting a cap in interchange. That means that the discount rate that we are -- that the banks are charging, let's say, to the merchant, that acquiring bank will pay less interchange to the issuer. So on that regard, our acquiring business represent about 3% of total revenue. So that could imply in the short term, a benefit for the bank because of that difference, let's say, in percentage of revenue. Nevertheless, we see this initiative as negative for the market. And let's see what is going to be the final decision regarding that. But with the initiative as it is today, it has a potential positive impact in our numbers. Joaquín Domínguez Cuenca: Federico, this is Joaquin Dominguez. Regarding the second question, we have approximately $1,450 in loan portfolio. And what we are expecting is FX rate pretty close to MXN 80 per dollar at the end of the year. And that would imply a very marginal impact in the valuation of that loan portfolio. MXN 18. Operator: Our next question comes from the line of Andrew Geraghty. Andrew Geraghty: This is Andrew Geraghty from Morgan Stanley. Just a small question to clarify. When you guys said that you plan to open between 10 to 15 branches this year, does that consider the regional corporate banking offices and the SME centers? Or is that separate? Just wanted to clarify. Edgardo del Rincón Gutiérrez: Thank you, Andrew. And it's separate branches, it's that regular branch to make transactions and to sell products and services and the SME centers and the corporate regional offices are business units mainly with bankers to attend those segments. So it's completely different. Operator: Our next question comes from Brian Flores. Brian Flores: Just very quickly here, I was checking here my notes. I think one of the upside risks you mentioned here was probably a recovery of some loans, which I understand. And I think you mentioned sales of assets. Could you just give us examples as to what were you meaning by these sales of assets? Joaquín Domínguez Cuenca: Brian, as we have mentioned in several cases, we used to take warranties in most of our collaterals in more of the loans. So during the years, not specifically last year because it takes many years to recover assets. We have some disclosure assets. We should have a MXN 0 valuation in the balance. And if we sold those assets, we will have immediately an income due to that sales. And also, there are other cases also thanks to the guaranty collaterals that we are negotiation recovering before going the next step in the judicial process. So we have some cases in the pipeline in order to see that we can affirm that we will have some recoveries in this year due to the advanced process we have for those recoveries. Operator: We have not received any further questions at this point. So I would now like to hand the call back over for some closing remarks. Rodrigo Marimon Bernales: Thank you very much, everyone, for joining us today. We remain available to address any follow-up questions via e-mail and any meeting request. We look forward to speaking to you again in April 2026 when we release our first quarter 2026 results. Thank you very much, and have a nice day. Operator: That concludes today's call. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the WM Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Ed Egl, Vice President of Investor Relations. Please go ahead. Edward Egl: Thank you, Olivia. Good morning, everyone, and thank you for joining us for our fourth quarter and full year 2025 earnings conference call. With me this morning are Jim Fish, Chief Executive Officer; John Morris, President and Chief Operating Officer; and David Reed, Executive Vice President and Chief Financial Officer. You'll hear prepared comments from each of them today. Jim will cover high-level financials and provide a strategic update. John will cover our operating overview, and David will cover the details of the financials. Before we get started, please note that we have filed a Form 8-K that includes the earnings press release and is available on our website at www.wm.com. The Form 8-K, the press release and the schedules in the press release include important information. During the call, you will hear forward-looking statements, which are based on current expectations, projections or opinions about future periods. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are discussed in today's press release and in our filings with the SEC, including the most recent Form 10-K and Form 10-Qs. John will discuss our results in the area of volume, which unless stated otherwise, are more specifically references to internal revenue growth or IRG from volume. During the call, Jim, John and David will discuss operating EBITDA, which is income from operations before depreciation, depletion and amortization. References to the Legacy Business are total WM results, excluding the Healthcare Solutions segment. Any comparisons, unless otherwise stated, will be with the prior year period. Net income, EPS, income from operations and margin, operating EBITDA and margin, operating expense and margin and SG&A expense and margin have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations. These adjusted measures, in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release and tables, which can be found on the company's website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures. This call is being recorded and will be available 24 hours a day beginning approximately 1:00 p.m. Eastern Time today. To hear a replay of the call, access the WM website at www.investors.wm.com. Time-sensitive information provided during today's call, which is occurring on January 29, 2026, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of WM is prohibited. Now I'll turn the call over to WM's CEO, Jim Fish. James Fish: Okay. Thanks, Ed, and thank you all for joining us. We're pleased to report another year of outstanding results in 2025, including a record performance in operating expenses as a percent of revenue. This performance, combined with our disciplined approach to pricing, drove full year operating EBITDA margin 150 basis points higher in the Legacy Business. Strong operational performance translated to double-digit growth in cash flow from operations and nearly 27% growth in free cash flow. Our results highlight the strength and momentum we built in our business model through operational excellence, scaling sustainability businesses and integration of Healthcare Solutions. You've heard me talk about the strength of our collection and disposal business with our differentiated assets and the best people in the industry. All of these were on display in 2025 as we drove our best ever operating leverage in our collection and disposal business, reflecting the intentional investments we've made in our people, technology and fleet. Better frontline retention and a decreased average age of our trucks delivered improvements in labor and maintenance costs. Meanwhile, we continue to drive organic revenue growth from both price and volume. By using data and analytics, we're offering pricing that reflects the premium value of our service, our leading commitment to environmental sustainability and the strength of our asset network. It's our unmatched network, particularly our transfer and disposal assets that drove volume growth in 2025, more than offsetting the residential volume declines as we shed some low-margin business. In our Healthcare Solutions business, 2025 was a year of teamwork, focus and execution to build momentum to our integration. Our service delivery metrics and customer service scores have improved to levels above our Legacy Business. Customer call volume has been trending down, and the standardization and enhancement of customer-facing processes and invoices are all leading to rising customer satisfaction. Just last week, we received an acknowledgment from one of our largest Healthcare Solutions customers for the improvements we've made on invoicing, which is a great indicator of the significant progress we've made in the last year in our systems and back-office processes. At the same time, we continue to significantly reduce SG&A and operating costs, streamline our operations and greatly improve asset efficiencies. While there's still work to do, the progress we've made to date puts us in a good position to grow the earnings and cash flow from this business with a lean and efficient cost structure, a healthy pricing environment and new opportunities for volume growth through both cross-selling and market share expansion. On the sustainability front, we drove notable strategic expansion in our sustainability businesses. We commissioned 7 new renewable natural gas facilities, expanding our renewable energy network and further positioning WM as a leader in environmental sustainability. We completed automation upgrades at 5 recycling facilities and added facilities in 4 new markets, which are enhancing the performance of our recycling network and creating new opportunities with customers. The value of our recycling investments is clear, particularly when you consider our recycling segment delivered over 22% operating EBITDA growth despite nearly 20% lower commodity prices in 2025. This combination of operational excellence and strategic investment across our business has produced record margin performance and accelerated cash generation. As we enter 2026, we're well positioned to convert more of our earnings into long-term shareholder value. Turning to our outlook. We expect continued strong growth in the year ahead. Our guidance is for operating EBITDA growth of 6.2% at the midpoint or 7.4% when you normalize for wildfire cleanup volumes in 2025. Free cash flow is expected to grow nearly 30% at the midpoint, reflecting structural earnings strength and the benefit of our investments. As announced in December, our Board approved a 14.5% increase in the planned quarterly dividend rate in 2026, our 23rd consecutive year of dividend growth. We also authorized a new $3 billion share repurchase program. We plan to return about $3.5 billion to shareholders through dividends and share repurchases in 2026, representing more than 90% of free cash flow we expect to generate. We will continue to balance these returns with disciplined reinvestment, tuck-in M&A and a solid investment-grade credit profile. Looking ahead, our priorities are clear: first, growing the core business by leveraging our focus on customer lifetime value, operational excellence and network advantages; second, capturing and maximizing returns from our investments in our recycling and renewable energy businesses; and third, driving accretive growth in Healthcare Solutions as we take the business from integration to scalable growth. Finally, executing our disciplined capital allocation plan to deliver compelling long-term shareholder value. Our results reflect the hard work of our entire team who serve our customers with pride every day. Their commitment fuels our performance and sets the foundation for the opportunities ahead. In 2026, we will build this momentum strengthening the core, scaling our growth platforms and creating meaningful value for all our stakeholders. I'm incredibly proud of what we've accomplished and excited for what's ahead. And with that, I'll turn the call over to John to provide more detail on our operational performance. John Morris: Thanks, Jim, and good morning. WM delivered another fantastic quarter to close 2025, driven by disciplined pricing and continued cost efficiencies across the business. In the fourth quarter, operating EBITDA in our collection and disposal business grew more than 8% and operating EBITDA margin expanded by 160 basis points, supported by strong execution and the ongoing benefits of automation and technology across our operations. The strength in Q4 was driven by operating expenses as a percentage of revenue improving 180 basis points to 58.5%, marking our third consecutive quarter below 60%. And for the full year, our cost management is just as impressive. We finished 2025 at 59.5%, which is the first time in company history that operating expenses have come in below 60% for a year with each quarter of 2025 improving sequentially. As I said on Investor Day, we are fundamentally changing our cost structure through the investments we're making in our people, technology and processes. 2025 was a year we proved the change is real and durable, and we're well positioned to continue capturing these benefits for years to come. The improvement in operating cost was led by substantial improvement in repair and maintenance costs on both a dollar basis and as a percentage of revenue, driven by operational and fleet strategies that are yielding tangible benefits. Accelerated investments in new trucks over the last 3 years has improved our average fleet age, significantly reducing unplanned repairs and the need for third-party maintenance support. And at the same time, our disciplined focus on fleet optimization and a more streamlined maintenance model increased technician productivity and reduced reliance on rental units and external services. These structural improvements were complemented by enhanced route automation and resource planning tools that lessen wear on the fleet and improve overall asset utilization. Taken together, these initiatives reflect our strategic commitment to operational excellence and are driving sustained cost efficiencies that strengthen our performance. Our repair and maintenance costs were not the only cost category reflecting the strength of our operating model as we saw a similar story in labor. In Q4, labor costs improved as we continue to see benefits from our people-first culture across our frontline teams. Driver turnover reached its lowest level of the year at 15.7%, demonstrating our ability to sustain our meaningful improvements in frontline retention. We've implemented a people-centric approach to onboarding, training and accountability, which is improving retention, safety and operating efficiency while also reducing overtime hours and training needs. We also benefited from our connected truck platform, which gives leaders real-time visibility into sequencing, downtime and efficiency to help reduce labor dependency while improving service reliability. And it's also worth noting that our connected truck benefits are not limited to cost advantages as the technology enables rightsizing service levels and other revenue opportunities. These people, process and technology-driven improvements extend beyond our Legacy Business. And now that we've successfully integrated the Healthcare Solutions business into our existing field operations management structure, we expect to extend these improvements we've already seen in on-time service delivery, driver turnover, asset rationalization and network optimization. In both the Legacy Business and the Healthcare Solutions business, we are structurally lowering our labor cost base, strengthening day-to-day execution, enhancing service reliability and delivering continued opportunities for long-term operating improvements. Turning to the top line. We delivered another quarter of strong balanced growth. Pricing continues to be a strength for us with core price of 6.2% in the fourth quarter, not just because of disciplined execution, but because of our strong customer focus and the consistent value we provide to our customers. Our asset positioning at scale, service reliability and the investments we've made in technology and automation differentiate our service offering, which all support our pricing. And on the volume front, we've seen notable growth in 2025 in special waste, renewable energy and recycling. In residential collection, intentional shedding moderated in the fourth quarter, and we continue to drive operating EBITDA and margin growth. We anticipate steady residential volume improvement as we move through 2026. In closing, I'll close by thanking the entire WM team for their commitment and execution throughout 2025. We're entering 2026 with strong momentum, an optimized operating model and clear opportunities to continue delivering value to our customers and shareholders. And now I'll turn the call over to David to discuss our 2025 financial results and 2026 financial outlook in further detail. David Reed: Thanks, John, and good morning. Our 2025 performance demonstrates the meaningful progress we're making toward our long-term strategic goals. Operating EBITDA margin expanded 40 basis points to 30.1% for the full year, which is a result that overcame a 140 basis point margin headwind from the combined impact of the acquisition of the Healthcare Solutions business and the expiration of alternative fuel tax credits. This result significantly exceeded the margin outlook we provided at the beginning of 2025 as we outperformed our own high expectations for cost optimization in our Legacy Business and synergy capture in the Healthcare Solutions business during each quarter of the year. Normalized for these known headwinds I just mentioned, our Legacy Business delivered 180 basis points of margin expansion for the year. This was driven by 120 basis points of growth in the collection and disposal business from the benefits of price, cost optimization and improved business mix, particularly growth in landfill volumes and the shedding of low-margin residential business. Margin growth was also bolstered by a combined 60 basis points from lower commodity pricing in the recycling brokerage business, recycling automation benefits, the growth of our high-margin renewable natural gas business and the lower risk management cost. Cost optimization remained a central theme in 2025. SG&A expense for the Legacy Business was 9.2% of revenue for the full year, a 10 basis point improvement compared to 2024 as we continue to rationalize discretionary spending. Within Healthcare Solutions, we are making consistent progress in reducing SG&A expenses as we integrate and optimize the business. Fourth quarter 2025 Healthcare Solutions SG&A of 20.8% of revenue is a notable improvement of 350 basis points from the prior year period and a significant step toward our long-term ambition to get the SG&A of this business in line with the rest of the company. At 10.4% for the full year, it is clear that we are on track to get total company SG&A as a percentage of revenue below 10% in short order. Our strong execution translated into robust cash flow generation in 2025. Cash flow from operations grew more than 12% to $6.04 billion, and free cash flow reached $2.94 billion, an increase of nearly 27%. These results showcase our success in driving margin expansion and disciplined approach to capital investment. For the year, we spent just under $2.6 billion on capital to support the business and $633 million on sustainability growth investments. In 2025, we allocated $1.3 billion to dividends and paid down $1 billion in debt, reaching a leverage ratio of 3.1x. We expect to reach a leverage ratio within our targeted range of between 2.5 and 3x during 2026. We also invested more than $400 million in tuck-in acquisitions to expand our traditional solid waste and recycling footprint. Moving to the outlook. We expect operating EBITDA to be between $8.15 billion and $8.25 billion in 2026. This projection reflects an update to the classification of accretion expense, a change we are making to enhance the comparability with our industry peers and to better reflect operating performance. As a result, our 2026 operating EBITDA guidance excludes projected accretion expense of approximately $150 million. Our plan calls for a typical quarterly cadence of operating EBITDA contributions across the year. Additionally, we expect an effective tax rate of approximately 24% and a share count at the end of the year of about 402 million shares. We anticipate capital expenditures for 2026 to be between $2.65 billion and $2.75 billion, which is inclusive of about $200 million directed towards high-return sustainability projects. Sustainability growth capital includes spending of about $85 million on 2 recently approved renewable natural gas facilities and 1 new recycling growth project, each expected to be completed and to begin contributing operating EBITDA by 2028. These projects are attractive opportunities to extend our network while bolstering WM's industry-leading return on invested capital. In 2026, we expect free cash flow growth of nearly 30% to $3.8 billion at the midpoint of the outlook, which drives our projected operating EBITDA to free cash flow conversion above 46%. Our guidance includes an anticipated benefit from investment tax credits of about $110 million, which is about a $75 million headwind from the prior year. In closing, 2025 underscored the strength of our business model, the resilience of our operations and the discipline with which our teams execute every day. We are proud of our progress toward our long-term strategic goals, driving margin expansion, strong cash flow generation and continued optimization across the enterprise. I want to thank our dedicated team members whose commitment makes these results possible. As we look ahead to 2026, we are confident in our ability to sustain this momentum to continue delivering operational excellence and to generate long-term value for our shareholders. With that, Olivia, let's open up the lines for questions. Operator: [Operator Instructions] Our first question coming from the line of Sabahat Khan with RBC Capital Markets. Sabahat Khan: Just maybe starting with sort of the top line guidance. Can you maybe give us some perspective on the industrial activity has been weak for some time. There's some views just broadly out there that the economy picks up this year. Maybe just what you've embedded in terms of the macro backdrop. Obviously, we see the sort of the directional volume and pricing commentary. But if you can just delve into what you're seeing in some of your local markets? And is the industrial C&D type market picking up at all? James Fish: Yes. Regarding kind of the macro economy, I would say that we've said for the last few quarters that we're cautiously optimistic, and I think that we stay with that. I might even remove the word cautiously. I think we're optimistic about the macro economy. When we look at our own internal figures, and you mentioned the industrial line of business, that's a line of business that has been pretty soft over the last couple of years. I think we've been down 3% or 4% in volume each of the last probably 7 or 8 quarters. And that business actually has bounced back to almost flat. So that's an encouraging sign for us. I think similarly, as John mentioned in his remarks about the residential line of business, that's been negative for some time. That's been much more by design. But he also mentioned that, that is starting to come back to more of a normalized number. And we think by the time we get to kind of the back half, I think, John, of 2026, we should see that down maybe half. John Morris: Yes, half [indiscernible]. Yes. James Fish: So all of those are encouraging signs. If you look at the landfill line of business, that's been a source of strength for us for a number of reasons, special waste, as John mentioned in his remarks as well, has been good. So all of that would tell me that the economy is on pretty firm footing. Sabahat Khan: Great. And then just a follow-up on the health care side a little bit. Can you talk about -- it sounds like the integration is largely there, but can you just talk about for '26, what you're sort of thinking on the pricing front, maybe some of the larger initiatives on the cost refinement, getting that percentage more to where you want it to be on the SG&A side. So maybe you can delve into some of the commentary shared earlier on the initiatives for this year on the health care side? And what could those margins look like sort of over the next 12, 24 months? James Fish: Yes. So a lot with Healthcare Solutions. We've made a ton of progress just in the last quarter. There's a lot going on between Q3 and Q4, even if you look at Q3 to Q4, there was -- we talked about some lost accounts last quarter that would carry forward into this quarter and carry forward into 2026. And so that did, in fact, happen. But as I said in my remarks, we've made a ton of progress on our customer service -- the customer service side of our business. In fact, the metrics that you use to measure those have actually jumped above our Legacy Business, which is very, very encouraging. Similarly, from Q3 to Q4, we saw credit memos, we think they peaked in Q4. And so as you know, those credit memos have been used to, in part, take care of some of these past due accounts that we've had. I think what I would say is we've really kind of built a wall now between all that is continuing to go on, on the back office side of that business and the customer themselves. And that's a real positive. And the result of that, as we think about 2026 is going to be, I think, better price realization. We've been getting price all along, but we just haven't realized as much of it. And a lot of that has been these credit memos that we've been giving that has offset some of that price. I think when you get into 2026, we're expecting 4.2% price in 2026. Top line is going to be 3%, and that is a reflection of those lost accounts that will anniversary for the most part in the back half of '26. So that's the reason why it looks like all of our growth is coming from price. It is, in fact, coming from price, and it's due to those lost accounts. And then when you think about the expense side of the business, John mentioned that we've rolled that in. And I think Rafa last quarter talked about how we've rolled that business into our areas. And so we're seeing the real benefits of that. We're seeing that what we've honed on the Legacy Business over the last probably 10 years, some of it through technology, some of it through process, all of that gets brought to this routing and logistics business, which is WM Healthcare Solutions. So we're really encouraged about what we're seeing as we roll the business into the areas. I guess the last thing I'll mention here is that cross-selling, which we put $50 million of cross-selling in the EBITDA synergy number back in June of last year. And I would tell you that if I were a betting man that I would take the over on that because in talking to our area leaders last week, almost to a person, they were very encouraged by what they're seeing from their sales folks. In terms of cross-selling, I think it's important to keep in mind that some of that cross-selling benefit though, does show up in the collection and disposal line of business. Not all of it shows up necessarily in the Healthcare Solutions business. Operator: Our next question coming from the line of Bryan Burgmeier with Citi. Bryan Burgmeier: I appreciate all the detail in the press release. It was really helpful. I thought that Footnote h seemed to say that maybe discussion on the 2027 financial targets would be put on hold for a little while. I'm not sure if I'm sort of interpreting that correctly. And if I am, maybe from a high level, can you help us understand sort of what went into that decision? I guess there have been sort of some accounting changes. It's a pretty dynamic macro environment, but just kind of hearing in your own words would be really helpful. James Fish: We did debate, [ Tony ], whether we would get a question on Footnote h. So Heather is the winner on this one. But here's what I would say about the 2027 number. On Investor Day, we gave some high-level estimates. I would -- what I would say about those is that they weren't detailed guidance as we're giving today for 2026. And we will give detailed guidance on 2027 a year from now. So I would tell you that those were estimates. They're kind of the best estimates we can make at the time. I mean our business typically about as far out as we can look is 12 months. It's hard to look at things like commodity prices 18 to 24 months out. So those estimates, I wouldn't rely on those as guidance. I would rely on them as what they were intended, which is estimates. But I will tell you this about '27 that we don't see anything on the horizon that's concerning for us. And I would also say that if there's one thing you know about us over the last number of years, the consistency of our performance has been one of our strong suits, and I think that continues going forward. Bryan Burgmeier: Got it. Got it. It's really helpful. And then maybe just digging into the guidance for '26 a little bit more. Maybe, John, can you give us an idea of maybe the level of margin expansion that you're looking for in collection and disposal this year on sort of an apples-to-apples basis? I guess it's kind of noisy with the landfill accretion and the wildfire comps, but John, your thoughts on net price and maybe some key cost buckets could be quite helpful. John Morris: Yes, Bryan, you saw the guidance we gave in terms of yield and core price. And what we've really been focused on and was really shown up well in Q4 and this year, as I mentioned in my prepared remarks, is sort of the -- is the spread between price and cost, and we're continuing to expand margins. So we're really pleased. Directly to your question, there is a little bit of noise in there. We talked about the wildfires being one of those things that really showed up in Q2, but 50 basis points on a same-store sales basis is kind of what we're targeting from a margin improvement standpoint across the portfolio. James Fish: Don't grade me down by calling the wrong name. I think I called you Tony. Operator: Our next question coming from the line of Trevor Romeo with William Blair. Trevor Romeo: First one I had was maybe on the 2026 outlook for Healthcare Solutions, particularly on EBITDA because I know you did give kind of a revenue outlook. You talked about kind of continuing to optimize the business. I was hoping maybe you could level set how much cost synergy capture you realized in 2025 and then how much is baked in for incremental in 2026? And then along with that, how much sort of underlying growth and margin expansion you expect from the business ex synergies? James Fish: Yes. There's probably a couple of us could take this one, but I'll start and then maybe David or John can jump in. But first of all, as far as '25 goes, we did say, at least on the SG&A synergies, we gave a range initially of $80 million to $100 million, and we finished above the top end of that. So we're encouraged by that, and that ends up being a benefit -- a carryover benefit for us. Some of it is -- well, it all carries over, but some of it's happened ratably throughout 2025. So that ends up being a carryover benefit for us as we come into 2026. We -- the original synergy goal of $300 million, and that, of course, mentioned the $50 million that's included in that for cross-selling, we feel very comfortable with that. I think there's a little bit of a scrambled egg happening here with these businesses because some of this, and I mentioned in cross-selling, some of that ends up showing up in collection and disposal. The same thing happens on the cost side, particularly operating cost, but also SG&A. I will say this about SG&A, which is kind of the long pole in the tent here that David mentioned it in his remarks. But as you look at SG&A pre-acquisition, and that's been something that Devina and I spent a ton of time -- all of us, but Devina and I, in particular, were very focused on getting SG&A down. And that number pre-acquisition had gotten down to, I think, the third quarter of last year was -- or of 2024 was 8.9%. And as for a year, I believe 2024 was 9.4%. And then that jumped up after the acquisition to a high of 11% in Q1 of last year, 2025. We have, through the synergy capture, have really kind of chopped away at that. It ended the year at, I believe, 10.3%. But as David said, there's a near-term pathway to getting that -- continuing to get that thing down as a corporation, that includes Healthcare Solutions down to below 10%. And as we've said many times, that business was running at a much higher SG&A. I think it was as high as 25% when we bought it. It has come down to 20%. I think the number that was in our synergy capture was 17%. And then Devina said a number of times, look, we think that there's no reason we couldn't expect that number to be down close to our own number, which is kind of 9%. And as it gets down there, you could expect to see that SG&A number continue to come down. And then maybe, John, on the operating side? John Morris: Yes, I would say from a synergy perspective, cross-selling and internalization, those avenues are going very well. And as Jim mentioned, Trevor, we're seeing a good bit of the benefit right now showing up sort of in the core solid waste business. I commented on our roll-off volume last quarter being a portion of it, about 60 basis points being driven by simply taking that work and putting on WM trucks. That's not something that's going to show per se in the Healthcare segment. And like I said, in terms of internalization and other synergies we're getting out of the business, that's all going extremely well. Trevor Romeo: Yes. Makes sense. Okay. And then I did want to follow up on the RNG business. I don't know if maybe Tara is on the call, but I appreciate the, I guess, the 60% of volumes contracted for 2026. That's encouraging. For the 40% of the uncontracted volumes, I think the comment in the press release was an expectation for $24.50 per MMBtu on the pricing side. I think if you use today's spot prices, that would imply something -- a decent amount higher than that, let's say. So maybe you could just talk about that a bit. Is that kind of where you see the voluntary market right now? Or is there some conservatism built in there? Or just thoughts on pricing? Tara Hemmer: Yes. So I'm here, and we're really pleased with the progress that we've made on selling a portion of our volume, a pretty significant portion, and it's a testament to how we've been managing the risk that's in this business. On the 40% that remains unsold, this is going to be the first year. If you look at it, our volume is doubling year-over-year from about [ 40 million ] MMBtus to now 21 to 22 plus. So we're going to have a portion that is not allocated to our fleet that will be sold in the voluntary market, and that's what you're seeing in there. From a RIN pricing perspective, we're anticipating RIN pricing to hold steady in that [ $2.30 to $2.40 ] range. So that's what it's all based on. Operator: Our next question coming from the line of Tyler Brown with Raymond James. Patrick Brown: I'll reiterate lots of good detail was in the release. But David or Tara, I just wanted to unpack the comments about the approaching $1 billion in sustainability EBITDA by '27. So I think in the release, you provided a baseline now. So I think that baseline is $300 million. And I just want to make sure that I have it right. But are you basically expecting the investments to yield, call it, slightly less than $700 million of incremental EBITDA over the time frame? And can we comp that to the $760 million to $800 million that you laid out at the Analyst Day? And if so, can we just talk about what's driving that delta? Tara Hemmer: So you absolutely have the parts right. And let me just take a step back on 2 key points. First, we're incredibly pleased with the progress on the recycling and the renewable energy investments. It bears repeating what was in Jim's script with 18% lower commodity prices and delivering 22% higher EBITDA on the recycling business. That's a testament to what we're delivering in labor savings, in premium savings, and we've had strong volume growth, which has a halo effect with our customers. And then likewise, really having a lot of momentum on the RNG business. I mentioned before that we're going to be doubling our output. What you can bridge from the $700 million to the $760 million is really just in 2 buckets. The first is a difference in recycled commodity prices. What was in our Investor Day materials was $125 a ton and now what is in the number is $70, which we do view as a low point. So you can consider that there could be some upside if and when commodity prices come back. And that's over half of it. The other piece is, if you go back to 2023, when we had come out with this broader platform, we've learned a lot. And one of the things that we've learned is that there have been some differences in operating costs, primarily related to electricity costs, which is a bit of a headwind, but also in the medium and long term, a potential tailwind for us because we do have a robust landfill gas-to-electricity platform, and that is something that we can lean into as we look at whether or not we expand those types of facilities on our landfill. James Fish: Tyler, this is kind of case in point to my earlier comment about trying to predict things in our business way out. And that Investor Day was the 2025 Investor Day, and you can go all the way back to the 2023 Investor Day about sustainability, just really difficult. So we're kind of dealing with what we have at the time. And so yes, commodity prices have dipped and hence, the $700 million. But I think it kind of makes the point for us that, a, as Tara said, I mean, these businesses are incredibly good investments and the paybacks on them, particularly the renewable natural gas plants. Well, I think we originally said they were [ 2.5 to 3 ], now they may be [ 3 to 4 ], but still incredibly good paybacks. But this -- if anything that's commodity related, as you can imagine, it's just really hard to predict that far out. Patrick Brown: Yes. No. I just was trying to get the delta. That was extremely, extremely helpful. John Morris, a question for you. So if I look at the normal course CapEx, it looks like that CapEx number is running at less than 9.5% of sales. It just feels maybe a bit light. I realize that Stericycle is less capital intensive, so that's part of it. But is this kind of a good, call it, forward capital plan? Is there something unique in '26 that keeps the budget down? I think you and Jim mentioned the lower fleet age, but I just want to just try to level set on where that CapEx will run longer term. John Morris: I think probably a little higher than that, Tyler, probably the 10-ish percent off the cuff. There's a few things to mention. One, 1,500 trucks is what we said is probably normal run rate for the traditional solid waste business. And as Jim mentioned, we've been obviously catching up and advancing some of those investments, which, by the way, are clearly paying off. As I mentioned in my prepared remarks, we got -- we do have some work to do on the fleet with the health care -- on the health care side is because they leased virtually every one of their vehicles. So we are systematically unwinding that where it makes sense and when it makes sense, right? So there's a timing aspect to when we peel back some of those leases. And then lastly, obviously, the sustainability investments, as you saw in the release and the remarks here is coming down by roughly $400 million to $200 million. So there's some puts and takes. But back to where we started, I think that 10-ish percent range is probably a good mile marker in terms of go-forward capital. Operator: Our next question coming from the line of Toni Kaplan with Morgan Stanley. Toni Kaplan: I also wanted to ask about the Healthcare business. You talked about the 3% growth next year, the 4.2% pricing. It sounds like you're still having some of the issues with the Stericycle customers. You mentioned the credit memos. Do you expect all this to be resolved this year? And how are you thinking about growth in this segment for future years? And just maybe if you could talk about market conditions within the medical waste space and if that's proceeding how you sort of saw when the deal was launched or when you announced the transaction where you were talking about sort of a higher market growth for the health space? James Fish: Yes. So fair question here. And one thing I would maybe correct you a little bit is the customer -- that's why I wanted to make sure I mentioned that we're getting to, and I would argue we're there where the customer is getting a good invoice, they're getting a payable invoice. There's a lot going on behind the scenes for that, especially for the larger customers. By the way, there is a lot going on behind the scenes for our larger customers in the Legacy Business, too, and our national accounts. There's a lot of manual effort that is ongoing there. But our intention was to really kind of build a wall between the back office work that is ongoing and will be ongoing through '26 and what the customer sees. And that's why in my remarks, I talked about the improvement in our customer service stats to levels above our Legacy Business. That is all super encouraging and tells us -- and I think I mentioned that one of our customers recognized us for really improving our invoicing. That was a big customer. I didn't name the customer, but a big customer. So all of that tells me that we've done an effective job of putting that kind of wall in place. So the customers, they really don't care what goes on in the background as long as they're getting good service and good invoice. And then we will take care of the system issues, we'll take care of the process issues, all of that. And that is all -- we're making big progress on that. It's all ongoing. So all that's part of the ERP that we've talked about many times. It also gives us the ability to, as I mentioned, and you asked about kind of the growth of this business. Look, I would tell you this, I think we said 5% to 6%. And really, as you think about what we gave for 2026, 4.2% price, but only 3% top line. And that negative volume piece, as I mentioned, is largely related to these accounts that we've lost. And we knew we had lost them, and we knew that it was going to have an impact on Q4, and we know it's going to have an impact on the first half of 2026. As we get to the back half of 2026, that actually turns into potentially a tailwind for us on a year-over-year basis. And then the last thing I'll mention about this -- so I guess to finish that point, we do feel very good about the strategic business case for this. I know there's been some skepticism out there about, well, is this business not going to grow at the 5% to 6%. You take out those lost accounts and you're almost there right now. So when we get to the back half of next year and into 2027, when you look at that -- the pricing power that we have across the entire organization and when you look at the fact that this business demographically, I mean, if I were to ask you what business should you be in over the next 20 years, I would think that health care is one of those with this aging population in the U.S. and in Canada and the U.K. So that has to be a beneficiary of it. So I think my long answer is, yes, we're very confident in the growth trajectory for the business. And we're also very pleased with the progress we've made, not done yet, but we've built this wall, and the customer is now seeing a good invoice and a good service level. Toni Kaplan: Great. And just moving to -- you mentioned some technology and automation improvements that you've made. When you think about 2026, which areas are you most focused on for efficiency or technology? Just anything that to highlight with level of automation that you're able to continue to do and which areas have the most runway for that? John Morris: Maybe I'll start with, and Tara can chime in. On the recycling side, I think you've seen the benefits. Tara commented in some of her answers about the progress we've made from the investments we've made in recycling. A lot of that has driven sort of the middle of the P&L. And that's where technology enablement and AI are paying off already, and we've made a lot of progress there. When you think about the 15,000 refuse vehicles we run and now another -- call it, another 4,500 on the health care side, building out technology enablement as a logistics service is where you -- I think that's paying off too. When you look at the margins and the OpEx in particular and the momentum that we've built in '24 into '25 and into Q4, I think you're going to see that continue to carry forward into 2026. And then lastly, on the post-collection side, we've talked a lot about the value of our network and having strategically placed assets in the post-collection side, whether it's transfer facilities, recycling facilities, landfill facilities. We're taking kind of an IoT approach at our landfills, too, by embedding technology in those facilities that's going to give us visibility to the operation in a much more efficient manner than we traditionally have done. And those are complex operations, as you know. So we still see a lot of opportunity on the post-collection side, particularly landfills to embed technology to really drive down operating costs there as well. Operator: Our next question coming from the line of Faiza Alwy with Deutsche Bank. Faiza Alwy: I wanted to ask about just volumes in the collection and disposal business in the fourth quarter. I thought they came in a little bit light relative to what we've seen. And I know we've had some -- obviously, special waste volumes. And I know earlier in the call, you talked about sort of the industrial business and the macro environment there and that you're optimistic. So I'm just curious, is there anything more to consider as it relates to collection and disposal volumes in the quarter relative to trend other than just special waste? James Fish: Yes. Look, we don't talk much about weather just because we choose to make it up. I would tell you that weather impacted us in December and likely is going to impact us this week when we get to first quarter results. But we make that up. I mean we don't let our area folks say, well, weather impacts me, therefore, I'm going to be coming in under my budget. But it did impact volume a bit. As you see with the numbers, it didn't impact the overall numbers. So we made it up on the EBITDA line. But when you think about volume, it did have a bit of an impact on volume. MSW was a bit soft and much of that was a result of -- the 2 lines of business that are most impacted negatively by weather are MSW and the industrial line of business. And -- so those were clearly impacted by the weather in early December. I suspect that they'll be impacted this week, too. So that would be my answer that may have caused a little bit of softness there, but it doesn't impact the EBITDA line. John Morris: The only thing I'd add on there, Jim, is residential is the one that sticks out. It's been negative for a number of quarters. And I would tell you, while we see that starting to turn into more of a growth engine in 2026, when you look at 2025, we finished the year at high teens on the EBITDA margin side and over 20% for the quarter on residential, which has always been a high watermark for us. So I kind of look at the volume attrition there a little bit different than I would the other pieces of volume. But again, I think it's important we see that -- we see the teams pivoting from using that as shrinking the greatness to now growing to even better margins as we go forward in that particular line of business. James Fish: Well, I think it's been mentioned today, Faiza, but also if it hasn't, we should reiterate the fact that on the volume line, when you look at 2026, we have 50 basis points headwind on volume from that fire volume that we got last year on the West Coast. The tough part about that is that we don't -- look, unfortunately, natural disasters seem to be happening fairly regularly, but we don't forecast them for obvious reasons. So right now, we don't have anything built in. We have asked our field operations to figure out how to make up that. That's a tough makeup because it was a pretty big headwind on volume, also a big headwind on EBITDA, $82 million was the number from last year on the EBITDA line. So when you look at -- whether you look at volume, whether you look at EBITDA, you may say, well, gosh, a lot of the reports were saying a bit soft on guidance. Keep in mind that, that's why I pointed out that 7.4% EBITDA growth, if you take out that onetime impact from the fires. Unfortunately, these things do happen. So something else may happen. It may not be as big. Hopefully, it's not. Hopefully, we don't have anything this year. But if we do, we have the assets, the geographic coverage, the people, we have all of that to take care of our customers. Faiza Alwy: Yes. Understood. Makes sense. And then I was going to ask about just the margin guide for next year. And I was hoping there are a few moving pieces, in particular, with the wildfires and also, I guess, the roll-in of the sustainability projects. So maybe you can help us a little bit around the quarterly cadence of margins at a high level and how to think about that. David Reed: Sure. I'll give you some of the components. This is David. I'd be remiss if I didn't talk just about the records that was mentioned previously, both in the quarter of 31.3% and for the full year of 30.1%, which I do think is a testament to how our team members focus and dedicate on this throughout the year. But as we look to 2026, we're calling for our fourth consecutive year of EBITDA margin expansion of 30 basis points at the midpoint. But as Jim just alluded to, 50 basis points on an adjusted basis. The biggest contributor to that is going to be from our collection and disposal business. So as we execute our pricing programs, while continuing our strategies around operational excellence and leveraging our network, that's a big piece. We also have some business mix, as we've alluded to, continued shedding of some lower-margin residential business relative to our volume growth in the landfill line of business. And then on sustainability, there's about 30 basis points collectively of benefit in '26 in terms of the bridge as we bring new plants online. We've got 4 recycling facilities and 6 RNG facilities coming online in 2026. There is a modest decline in recycling commodity prices year-over-year that will have a minimal impact on margin. And then Healthcare Solutions, as we've been discussing, will contribute to margin expansion overall for the year as we capitalize on our value capture opportunities, execute our pricing plan, continue our cross-sell efforts, even though that will show up most likely in the C&D business and then continue our progress on lowering our cost structure. And then in terms of cadence throughout the year, it's, call it, 47% in the first half, 53% on the back half in terms of mix, but that's in line with our historical averages. Operator: Our next question coming from the line of Adam Bubes with Goldman Sachs. Adam Bubes: Just had one more follow-up on margins, really impressive in the quarter. And I think if you just compare your 4Q margin prior exit rates to where you typically ended the next year, it would sort of imply that this 4Q exit rate points to potential for better than 30 basis points of margin expansion in 2026. So just wondering out of the 230 basis points of margin expansion in this fourth quarter, how much of that expansion was maybe more one-off? I know you called out the outsized RIN sales that were going to happen this quarter. David Reed: I think for the most part, these are sustained initiatives that we've been executing on, and it just highlights our focus on disciplined cost management. And so we're just seeing it come to fruition. I think as Jim alluded to, with the volume, some of it which we can't control, like just the ability of the business to flex accordingly in the environment that we're operating in, it allows us to maintain and sustain that margin going forward. So for most of it, I think we can carry that forward versus a number of one-offs that was idiosyncratic to the quarter. James Fish: So I'm probably going to make his point for him here, but one thing we haven't really talked too much about is the fact that if you look at our core price for next year, 5.6%, it's a 250 basis point delta, and we typically have gotten this question, so we haven't gotten yet today, but a 250 basis point delta to our forecasted cost inflation. I don't know how that measures up historically, but it's got to be one of the bigger ones for us. So I'm kind of making your point for you. But still, we do think that 30 basis points is reasonable considering the 20 basis points of headwind from the fire volumes. So that's where we came out. Adam Bubes: Terrific. And then on the landfill gas side, can you just update us on voluntary offtake discussions? I think eventually 50% of your production will go into voluntary markets. So what's your confidence level that, that 50% will be absorbed by those markets? And how are those discussions going? Tara Hemmer: We're confident that we'll be able to absorb that in the voluntary market. While the U.S. market right now is a bit softer than it had been, there are other markets that are strong. If you look at Canada, the U.K. and some other international markets, we're able to tap into those as well. And then still in dialogue with some larger utility companies across the U.S. as their public utility commissions pass their rule-making that, that should free up more of the voluntary market in the future. Operator: Our next question coming from the line of Noah Kaye with Oppenheimer. Noah Kaye: I'm sorry to beat the margin math, hopefully not to death here, but just I'm a little confused. So the walk here is 50 bps on an adjusted basis ex wildfires. But I think you said that sustainability was maybe 30 bps benefit in the bridge. And then I think just with the synergies capture on health care and the pricing, there has to be another 10, 20 bps or so, at least. So what am I missing here? Because it seems like collection and disposal is going to be positive based off of what Jim and Dave just said. Just trying to understand what moving pieces there are that we're not accounting for. David Reed: Yes. There's some normalization of certain expenses in corporate and other that we've baked into the guide. Those may or may not materialize, but just we felt prudent just based on how we finished the year to adjust for that. There's also some technology costs that show up in there that are for the benefit of other parts of the organization. And so that's offsetting some of the points that you're highlighting. Noah Kaye: Okay. That's helpful. And then just a quick one on the recycling outlook. The basket was $62 a ton in 4Q, and I think we're kind of maybe at or slightly below that. Maybe you can update us. But just the thought around the $70 per ton outlook for '26, can you help us understand that? Tara Hemmer: So 2026, the way to look at it is the first half, second half story. And so exiting 2025 at $62 a ton, what we're anticipating for the first half is in that $60 to $65 range and then ramping in the back half of the year. Why is that? Well, what we're starting to see is a little bit of green shoots on the fiber side. The headlines previously were that a lot of capacity had been taken out of the U.S. market, which is true. That was more inefficient mill capacity. But the larger mills that remain are going to be looking for material, some of the cloud around tariffs has been lifted. So we're anticipating that OCC prices should bounce back a bit in the back half of the year. We're not expecting any material movement on plastic pricing moving forward. Operator: Our next question coming from the line of James Schumm with TD Cowen. James Schumm: For WM Healthcare, can you give us the revenue split between document destruction and medical waste? And then maybe give some color on document destruction profitability and whether you see this as a core business for you going forward? John Morris: So James, I think the answer to your question is about 2/3, 1/3 between health care and the document destruction business. And then sorry, could you repeat the second part of the question? James Schumm: Yes, sure. Just in terms of like the profitability in document destruction, any color there? I think you talked about in the past that maybe you had an advantage here with your recycling business, maybe you got better paper pricing. But do you see this as a core business going forward? John Morris: Yes. I mean, first, to start on the recycling side. I mean, it's interesting. Both of those businesses are collection, disposal and/or processing businesses, right? And I think you heard some of that commentary from us earlier. So from that perspective, it lays nicely over whether it's on the [ SID side ] or on the health care side to what we see as some of our core competencies. The commodity side of it, I mean, Tara spoke to what we're going to see from a commodity side and probably some more green shoots on the fiber side into '26, which certainly benefit that business. And then when you look at the health care side, it is a collection and disposal and processing business. And Jim gave a good bit of commentary on where we're at. I would tell you that the integration into the areas, which has just occurred over the last, call it, 120 days, I think it's going to be a great platform for us to continue to drive some real expansion in margins now that our field leadership teams have sort of a full purview of the business at the local level, which not dissimilar to the WM core business, there's a lot of elements of this from an operating perspective that are local. So we're excited about what we're hearing from the teams. And Jim mentioned, we just had our quarterly business reviews last week and got a lot of good commentary and a lot of positive commentary on where that business is going. James Schumm: Okay. Great. And then Jim kind of touched on this, but collection and disposal core price in 2026 is expected to be like 5.6% at the midpoint, which seems very conservative off of 2025 6.3% level. So just curious like what was the customer churn number in Q4? And what do you see is the right number for churn? What do you [indiscernible]. John Morris: Yes, we see that obviously bounce around a little bit quarter-to-quarter for a litany of different reasons, but we've talked about churn being in and around that 10% range, and we're still bouncing around in that range, although it varies from quarter-to-quarter. And you've heard us comment at times, it's been as low as 8% and change. It's been a little bit as high as 11%. But when you stretch the tape out, that 10-ish percent churn number is kind of what we anchor on. In terms of the price side, when we think about core price and yield and the conversion, obviously, that number has bounced around. It's been the high 50s to high 60s. But I think what I would point to is when we break it down by line of business and the margin profile of those businesses, what you're seeing is our operating expense under 59% in Q4, under 60% for the full year. So that's showing that we're making progress on the middle of the P&L. And then we look at that relative to customer lifetime value and what's the long-term perspective on pricing that we should take with each of those individual customer segments. And I think you're seeing it translate to all-time high margins. I mean the collection and disposal business was 39%, which I think that's an all-time high as well. James Fish: Maybe one last point here on pricing, James. As you mentioned that you thought maybe 5%, 6% kind of conservative. Keep in mind that as CPI or some of these indexes come down, we've talked about this many times, but there is a lag in those index-based price increases that we can take largely on the resi side of the business, but sometimes on other lines of business as well. And so that lag can be up to 6 months. And so we do expect that as CPI has come down throughout 2025 that we will see a bit of a lag there that will negatively impact 2026 pricing. So hence, the 5.6% as opposed to something in the 6s for 2025. But as John just said, look, we're certainly making up for that on the margin line. Operator: Our next question coming from the line of Jerry Revich with Wells Fargo Securities. Jerry Revich: John, I'm wondering if we could just go back to your prepared remarks. You mentioned some benefits from connected trucks and other tech. Can you just give us an update? Are you folks seeing an acceleration in terms of the savings that you're seeing from logistics management? And obviously, you had the session with Caterpillar at the Consumer Electronics Show. Is -- are the returns from your tech investments accelerating as we head into this year? John Morris: Yes. I think, Jerry, starting with connected truck, we've had that technology on all our commercial fleet for some time now. We've actually expanded that to the automated components of our residential business. So we still see that there's runway there. So we'll continue to build on that. And I think to your point about the -- I mentioned connected landfill and in particular, the heavy equipment side, we see plenty of opportunity that we're starting to unpack with this connected landfill. There was a good bit of detail laid out at Investor Day about what that pathway looked like going forward. So if you think sort of late middle innings on some of the connected truck elements that you mentioned, I'd say we're in the early innings on the post-collection side and see a lot of opportunity to drive cost out of that part of the business as well. Jerry Revich: Okay. Super. And then from a margin standpoint, just really impressive performance over the course of '25 even as recycling commodity prices got worse over the course of the year. David, I just want to make sure I'm not missing anything heading into the first quarter because normal seasonality and the accounting change implies that you're going to be at roughly, I don't know, 30.5% margins in the first quarter, which is typically your seasonally weakest margin quarter. So I just want to make sure there are no moving pieces off of the really strong run rate that you folks have achieved as the year unfolded last year. John Morris: Yes. I'm kind of thinking accretion aside, Jerry, to keep this kind of same-store sales. But you're right, Q1 is usually one of our softer quarters. And I don't know off the top of my head whether that's the right number or not. It feels a little bit high to me. I think it's a little lower than that, but we could circle back with you to confirm. Jerry Revich: Well, nice performance with the margin revisions consistently in '25. Operator: Our next question coming from the line of Konark Gupta with Scotiabank. Konark Gupta: Just maybe one question on the top line. For the full year, I guess, you guys are expecting about 5% at the midpoint. Just looking at the puts and takes on the quarterly side, you have probably Stericycle is more like a second half story, Jim, I think you said. And then second quarter, you're expecting or seeing maybe tough comps from the wildfire last year. How should we think about the growth cadence for the year by quarter? I mean, especially in terms of how the volumes kind of shake out on the C&D side. David Reed: Yes. I mean it's pretty balanced over the year, but you do see more of a pickup in the second half of the year. So call it, kind of below -- 5% or below in the first half and then above that in the second half in terms of the revenue bridge across the year. And the Q2, to your point, is the toughest comp with the wildfire volumes. Konark Gupta: And then volumes, do you expect that to be more evenly spread out throughout the year? Or it's going to be more skewed to the second half too? John Morris: I think the one area that will stick out as we mentioned, our residential volume has been negative 4-plus percent [ print ], and we see that ratably declining. And by the end of the year, we should be right around 2%, maybe a little bit south of that in Q4. So that will be a clear tailwind to volume in the second half of the year. Operator: Our next question coming from the line of Seth Weber with BNP Paribas. Seth Weber: Just wanted to go back to the health care cross-selling opportunity. I think on the third quarter call, you guys mentioned that it's largely been focused on small and medium-sized customers. I wanted to see if that's still the case or if you're getting any better traction with the large hospital networks at this point. James Fish: I think this ultimately is going to end up being more of a large customer opportunity for us. We -- what we've heard from our folks on the sales side is when they're going out and talking to the decision-makers at these customers, typically these large customers, it ends up being the same decision-maker on solid waste as it is on health care waste. So that's a positive for us. And the fact that we feel very good about the services that we have now on both sides, that ends up being good for us. I do think it's going to be more of our -- we've stratified our customers, the As through Fs by size. And so you can imagine the As, Bs and Cs are the bigger ones. I think this is going to be more of an A,B,C thing than it is a D,E,F thing. Seth Weber: Got it. Okay. And then kind of related question, just can you update us on your national accounts business just across the whole company? It's been sort of low double-digit CAGR for the last few years. Is that still kind of running at that -- improving at that same level in 2025? James Fish: I mean, look, I would tell you, national accounts has been one of our real success stories. And both on the volume side, but also on the price side. I think we've done well with getting price increases based on really differentiated service and differentiated data and analytics that we provide our customers. So we're really pleased with the results of national accounts. I mean, gosh, I would tell you a decade ago, national accounts was kind of a mess for us. And today, it is one of our success stories. Operator: Our next question coming from the line of Shlomo Rosenbaum with Stifel. Shlomo Rosenbaum: I want to jump back to what you started kind of the questionings with -- on the call just in terms of the healthy economy, and you said that it's -- things are looking, you say, not cautiously optimistic, just optimistic. Can you give us -- just delve in a little bit more into some of the -- like the metrics on that, the service interval trends, what are you seeing on scale report on some of the mature routes? And then on residential also, scale reports on the trucks that are coming through, how is the temp roll-off activity doing and prices and pulls? If you can just go through some of that, then I have one follow-up. James Fish: Yes. So as we look at what might be considered leading indicators because we are kind of at the back end of the cycle, so -- of the business cycle. But we do have some business that tends to be leading indicators. I would argue that the special waste stream is kind of a leading indicator for us because while those jobs have to be done, companies have some discretion as to when they have to be done. And the pipeline, as we talk to our sales team, is good on the special waste stream. So that's a bit of a leading indicator for us that -- and what we're hearing from them is that those jobs, and we heard it from our area folks last week that those jobs are starting to manifest themselves. So that is one of the indicators that we do look at. The roll-off line of business as well, although a portion of roll-off, the permanent roll-off is kind of more analogous to our commercial business. So I'm not sure that's so much a leading as a lagging indicator. But you mentioned temp roll-off and temp roll-off has been pretty good for us. The C&D business, if I look at C&D, and that's been one that has been -- has really bounced around over the years. And C&D for the year was -- what's that, 3.4%. And if I looked at last year, for the year last year, it was a negative number last year. It was bounced around in '23 and '22 as well for some reasons related to the pandemic. But I think C&D is somewhat of a leading indicator as well if you think about the -- about homebuilding. So it's a tough one because I'm trying to read some of the tea leaves that are kind of macro. And as I look at GDP, it looks like it could be strengthening. I don't know. I guess what I would tell you is the business performs well, whether in good times or in bad. And I'm feeling, I guess, a bit more optimistic than maybe I have in the past. Shlomo Rosenbaum: Okay. Great. And then just I wanted to follow up a little bit more just on a question that was -- excuse me, the comment that was made last quarter in terms of suspending kind of the pricing initiatives in the Healthcare Solutions area that would be expected to be done by the end of the first quarter of this year. Are you still on track for that? I mean, obviously, from your commentary, it looks like pricing is going to pick up this year based on your discussion of 4.2%. But is it a matter of like really hitting that end of the first quarter, we're done with those issues that we're having that was preventing the pricing? Or is that going to extend a little bit further? Or have you already started it? James Fish: Yes. So here's what I would say about last quarter's comment. I mean that was not a universal comment. I mean, some customers, yes, we had -- some customers we had suspended price increases. But the large majority of our customers are getting price increases. But as I said earlier, it was really being diluted by these credit memos. And so we believe that those credit memos, which are really just a tool to try and clean up some of these past due receivables, those credit memos, we believe, peaked this quarter or last quarter, I should say, Q4. And those start on a nice downward trend, which ends up being a tailwind for us as we think about the whole year of 2026 versus 2025. So pricing, look, we have, I think, a fantastic price team, and they are definitely looking at the opportunities that are in front of us. But a lot of those opportunities are not so much a price execution as it is just less dilution to the overall gross number. Operator: Our next question comes from the line of Tobey Sommer with Truist. Tobey Sommer: From a capital deployment perspective, are you shifting broadly to share repurchase? Or as you look into '27, '28 sort of a longer period of time, you're supposed to take in about -- produce about $12 billion in free cash over that 3-year period. How do you see it shaking out between acquisitions in the core, acquisitions and investments outside the core and repurchase? David Reed: Sure, sure. Yes. I mean as we alluded to in the last quarter and also with our December announcement on some of our shareholder returns, we do view 2026 as a year of harvest and a balanced capital allocation program. But to your point, the beauty of our business is that it does generate a lot of excess cash flow. And you can expect a pretty balanced approach going forward. We do want to continue to return capital to shareholders. So you should expect that our share repurchase program is not a onetime event in 2026. We'll continue it going forward, but it's going to be governed by kind of what opportunities we have in terms of investment opportunities, both organically and also inorganically. But the key word here, I think, is balanced from a shareholder perspective, and that's what you should expect. Tobey Sommer: And then I'm curious what you're hearing from health care customers about their sort of tolerance for price increase, particularly this year given various declines in federal funding ranging from the exchange subsidies to Medicaid cuts that may come in a year that could pressure hospital margins? James Fish: I guess I would just say I haven't heard anybody say there's an intolerance for price increases. So if that's a good sign, then -- that's what I've heard. John Morris: I think with the handful of customers I've visited with, I would tell you that I think what's encouraging is the fact that when you combine what were WM kind of core services with the ability to integrate those with the additional health care services, I think the value proposition is something that's really resonating with the customers, especially the ones that Jim was referring to earlier. These big hospital networks, we sit here in Houston, obviously, one of the centers of the universe, if you will, on that front. And when you walk in the door with a comprehensive set of capabilities that these combined organizations have now, I think there's a value proposition that is not going to be matched out there. James Fish: Yes. I think these As and Bs that we've talked about As and even Cs, this is going to end up looking like they're similar in so many respects to our big national accounts on the legacy side. So it's going to be -- it's a negotiation that they have a contract. It's going to be a negotiation on price, what's the price increase going to be. And a lot of that ends up on how much they appreciate the differentiated service offering. So I think that's -- going forward, I don't think it will look much different than what we see with other big national accounts. Tobey Sommer: Appreciate that. What are you seeing in the hazardous waste business? Is that industrial optimism that you kind of mentioned already comparable? John Morris: I think probably our special waste line that we've all commented on is probably a good spot to look. And we've said our pipeline is strong. Our results would demonstrate that through 2025. And I think going into 2026, we haven't seen any indications that that's going to solve. And that's probably the one barometer that I would point to that's probably most closely aligned with your question. Operator: Our next question coming from the line of William Grippin with Barclays. William Grippin: I just wanted to come back to some of the incremental disclosure you gave on the sustainability business. So you gave us the parts to kind of get to sort of your $700 million implied sustainability growth EBITDA in '27. Obviously, a little below the target you gave at prior Analyst Days. But if I adjust for this sort of lower recycled commodity price environment based on your sensitivity, it implies that was maybe $150 million EBITDA headwind. And so sort of ex out the commodity headwind, it feels like maybe this business is actually performing well ahead of your initial expectations. Is that a fair characterization? Tara Hemmer: We're really pleased with how the recycling business is performing, absolutely. I think the number that you rattled off was really more for the aggregate of our recycling business versus the $700 million number relates to the growth projects of recycling and renewable energy. But the comment still stands. We've been very pleased with the investments that we've made in automation and everything that we expected and then some is being delivered coming out of those automation investments, whether it's higher throughput at those facilities, whether it's higher price points on the commodities that we sell, whether it's labor, which was huge for us and has been over a 30% improvement. So really pleased with those investments. William Grippin: Appreciate that. And just the follow-up here. You gave the sustainability growth EBITDA breakout or contribution for the 2026 guide, I think, $235 million to $255 million. Have you broken that out between recycling and RNG? Tara Hemmer: We have not. But the way to think about it, including the royalty, it's about 60% renewable energy, 40% recycling. Operator: Our next question will come from the line of Tami Zakaria with JPMorgan. Tami Zakaria: So the sustainability EBITDA growth of $235 million to $255 million, can you help us with the cadence of this as we think about 1Q versus the rest of the year? Tara Hemmer: You're going to -- a similar story, the way to think about it first half, second half. So you're going to have more of a ramp in the second half than the first half when you have the carryover effect of what we brought online in the back half of 2025, and then we're bringing new projects online 3 in the first half of 2026. So you'll see a bigger impact in the second half than the first half. Tami Zakaria: So for modeling purposes, is 40-60 first half versus back half is a good proxy? Tara Hemmer: I think Ed can get back to you on that -- on some of the modeling questions. Operator: Our next question will come from the line of Kevin Chiang with CIBC. Alexander Augimeri: It's Alexander on for Kevin here. So I believe the EPA is set to finalize the renewal fuel blending rules in Q1. I was wondering if you could share any thoughts or insights into potential changes they could make to the volume obligations from their original proposal. Tara Hemmer: Sure. Yes. We had -- we're hoping that they issue it in Q1. We were hoping it would come out in late Q4, but the government shutdown delayed that a bit. What we've seen is pretty much the market has priced in the current RVO. And if anything, we're cautiously optimistic, maybe there might be some changes around the edges that could be constructive for pricing. But we're not anticipating anything dramatic coming out of the RVO. I think that's the most important point. And we've really seen stability in RIN pricing, which is the most important thing for our business, and our team has done a great job in navigating selling our RINs ratably over time. Operator: Our last question in queue coming from the line of Stephanie Moore with Jefferies. Stephanie Benjamin Moore: I wanted to follow up on a prior question that was just asked on capital allocation priorities. I mean I appreciate the commentary regarding keeping a balanced approach. But I also think as we think about 2027 and 2028, just the shared cash flow that's going to be kind of spun off from this business, especially with the RNG investments coming through, you should be back to your targeted leverage this year. So as you think about that balance and maybe looking specifically at the M&A component, you're going to have, again, a lot of optionality. So as you think about that optionality, any areas that are particularly interesting as you think about the next couple of years? James Fish: I mean I think as far as M&A goes, and then David can comment more on the capital allocation piece or the share repurchase and dividend, but those are kind of dividends kind of set. But M&A, look, I guess what I would say, and John can reiterate here, there's still plenty of good strategic acquisition opportunities out there. I wouldn't expect to see us kind of stray outside of that. We have used typically $100 million to $200 million as our estimate for acquisitions throughout the year, and that's the number we have baked in for this year, that range. So it could be at the high end of that range. But I think for the next few years, that's the number I would -- if I were modeling, that's the number I would use is kind of $100 million to $200 million in acquisitions. And then, David, dividend, hard to say what the increase is going to be, but dividends and capital allocation are going to make up the rest because really, the balance sheet, I think, you would say is in good shape. David Reed: Yes. The balance sheet is in great shape. I think the one thing just to your point about now that we have the share repurchase program is going to start back up this quarter. Obviously, we look at acquiring our own shares versus if we're looking at larger opportunities, we have a very biased view on kind of what the value of our company is. And so that's -- I think you're going to see us to continue our share repurchase program just from that point alone. But we're very disciplined in terms of our pricing approach to acquisitions. Operator: And I'm showing no further questions in the queue. I will now turn the call back over to Mr. Jim Fish, WM CEO, for any closing remarks. James Fish: All right. We had a 15-minute closing remark plan. But in light of time, I'll just say thank you all for your great questions today, and we will talk to you next quarter. Operator: This concludes today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Good morning, and welcome to the Origin Bancorp, Inc. Fourth Quarter 2025 Earnings Call. My name is David, and I'll be your Evercall coordinator. The format of the call includes prepared remarks from the company followed by a question and answer session. [Operator Instructions]. I would now like to turn the conference call over to Chris Reigelman, Director of Investor Relations. Please go ahead. Chris Reigelman: Good morning, and thank you for joining us today. We issued our earnings press release yesterday afternoon, a copy of which is available on our website, along with the slide presentation that we will refer to during this call. Please refer to Page 2 of our slide presentation, which includes our safe harbor statements regarding forward-looking statements and use of non-GAAP financial measures. For those of you joining by the phone, please note the slide presentation is available on our website at ir.origin.bank. Please also note that our safe harbor statements are available on Page 7 of our earnings release filed with the SEC yesterday. All comments made during today's call are subject to the safe harbor statements in our slide presentation and earnings release. I'm joined this morning by Origin Bancorp's Chairman, President and CEO, Drake Mills; President and CEO of Origin Bank, Lance Hall; our Chief Financial Officer, Wally Wallace; Chief Risk Officer, Jim Crotwell; Chief Accounting Officer, Steve Brolly; and our Chief Credit and Banking Officer, Preston Moore. After the presentation, we'll be happy to address any questions you may have. Drake, the call is yours. Drake Mills: Thanks, Chris, and thanks for being with us this morning. This time last year on our call, we introduced Optimize Origin. As we outlined, Optimize Origin was more than a project, it was more than a point in time. It represented an evolution for our company and how we connect our award-winning culture with our drive for elite financial performance. Our short-term goal was for a 1% or greater ROA run rate by the fourth quarter of 2025. We accomplished this goal. While I am pleased with our results, I'm not surprised how our team delivered. We remain laser-focused on our ultimate goal of delivering a top quartile ROA. Origin has a tremendous amount of momentum as we enter this new year. I'm proud of the progress that we've made and extremely optimistic about our future. My optimism is based on 3 primary themes. First, our team continues to execute on Optimize Origin. Second, we continue to capitalize on the disruption in our markets created by recent M&A activity. And third, we have no barrier to growth as we have properly prepared to pass $10 billion in assets. Our teams and our markets are ready. Now I'll turn it over to Lance and the team. Martin Hall: Thanks, Drake, and good morning. As Drake mentioned, we have a deep sense of optimism for Origin as we enter 2026, and that is felt throughout our entire company. I'm proud of the passion and discipline our team showed in 2025 and the aspirational belief we share together in what we can be as a company. My confidence in what we accomplished is based on our team's unrelenting focus and execution surrounding Optimize. This past year, we achieved 20% ownership of Argent Financial, consolidated banking centers, restructured the way we deliver mortgages to the market and reduced FTEs by nearly 7%. NII was up 10.2%. Total revenue, excluding notable items, was up 8.8% and noninterest expense, excluding notables, was down 0.7%. I've said before on our previous calls that I felt our production has been masked by planned reductions due to our client selection process and by payoff and paydown pressures. Even with these dynamics and a data-driven strategic reduction in our production team, loan originations increased approximately $500 million or 37% year-over-year and loan and swap fees increased 57% over the same period. Our continued execution of Optimize Origin is critical to our success. At its core, Optimize is about simplifying how we work, sharpening execution, eliminating friction and freeing up our teams to spend more time creating value for our clients. Optimize will continue to guide how we improve performance, strengthen accountability and invest intentionally for the future. In late 2024 and 2025, our efforts were primarily focused on balance sheet management and expense reduction. In 2026, we are intensifying our focus on the client delivery model and opportunities for additional revenue growth. As Drake mentioned, the disruption in our markets is a tremendous opportunity for us. Just over the past few months, we've added more than 10 production bankers in Houston and Dallas-Fort Worth and see additional opportunities ahead. This investment and disruption is a major strategic focus for us in 2026. Our guidance assumes we will invest roughly $10 million in new bankers and banking teams throughout our markets this year. These investments are on top of continued investments we're making across the organization that should drive continued efficiencies and growth as we strive for our ultimate top quartile ROA target. We feel strongly that the current environment presents unprecedented opportunity for Origin. We are poised to take advantage of it. Now I'll turn it over to Jim. Jim Crotwell: Thanks, Lance. I am pleased to report sound credit metrics for the quarter. Total past dues at year-end came in at 0.96% of total loans, reflecting no change from the prior quarter. Past dues 30 to 89 days came in at 0.19%, a moderate increase from 0.1% as of 9/30 and compares favorably to a level of 0.24% reported as of the prior year-end. Net charge-offs for the quarter were $3.2 million, which were in line with expectations and represent a 0.17% annualized charge-off rate for the quarter. During the quarter, nonperforming assets declined from 1.18% to 1.07% at year-end, an approximately $7 million reduction. We did experience a slight increase in total classifieds, increasing from 1.84% of total loans to 1.92%, an increase of $9.3 million, driven primarily by the downgrade of 4 relationships, partially offset by a reduction in 5 relationships. For the quarter, our allowance for credit losses increased $523,000 to $96.8 million. On a percentage basis, our allowance remained stable at 1.34% of total loans net of mortgage warehouse compared to 1.35% for the prior quarter. As in recent quarters, we did not experience any significant changes in our CECL model assumptions with the actual increase this quarter primarily driven by loan growth. Lastly, as to total ADC and CRE, we continue to have ample capacity to meet the needs of our clients and grow this segment of our portfolio, reflecting funding to total risk-based capital of 47% for ADC and 236% for CRE. We continue to be pleased with the sound credit performance of our portfolio. I'll now turn it over to Wally. William Wallace: Thanks, Jim, and good morning, everyone. Turning to the financial highlights. In Q4, we reported diluted earnings per share of $0.95. We also reported net income of $29.5 million, which drives a run rate return on average assets of 1.19%, well above the targeted 1% plus run rate that we outlined as our near-term target last January. As you can see on Slide 25, the combined financial impact of notable items during the quarter equated to net expense of $1.7 million, equivalent to $0.04 in EPS pressure. On a pretax pre-provision basis, we reported $40.6 million in Q4. Excluding $1.6 million in net expense from notable items in Q4 and $7.9 million of net revenue in Q3, pretax pre-provision earnings increased to $42.2 million from $39.9 million and annualized pretax pre-provision ROA increased to 1.7% from 1.63%. On the balance sheet side, loans grew 1.8% sequentially and 1.1% when excluding mortgage warehouse. Total deposits declined 0.3% during the quarter. However, on the last day of the year, we sold $215 million in interest-bearing deposits. These deposits were repurchased 2 days later. Excluding the sale, deposits would have increased 2.3% during the quarter. Also, while noninterest-bearing deposits declined 1.0% sequentially, they increased 5.3% on an average basis and ended the quarter at 23% of total deposits after adjusting to include the $215 million in deposits sold and then repurchased. Moving forward, we're currently targeting loan and deposit growth in the mid- to high single digits for the year. We remain optimistic that momentum will continue to build, especially as we capitalize on M&A-driven disruption in our markets. And our expectation is for loan growth to be more weighted to the second half of the year. Turning to the income statement. Net interest margin expanded 8 basis points during the quarter to 3.73%, ahead of our expectations. Moving forward, we expect slight margin compression in Q1 due to timing differences in loan versus deposit repricing following the recent Fed rate cuts. By Q4, we currently anticipate NIM in the 3.70% to 3.80% range with current bias to the higher end. Our outlook includes 25 basis point Fed rate cuts in March and June. Combined with our balance sheet growth expectations, this results in expected net interest income growth in the mid- to high single digits for both the full year and Q4 over Q4. Shifting to noninterest income. We reported $16.7 million in Q4. Excluding $483,000 in net benefits from notable items in Q4 and $9 million in net benefits in Q3, noninterest income declined to $16.3 million from $17.1 million due largely to a reduction in swap fee income and normal seasonality in our insurance segment. Moving forward, we anticipate full year noninterest income growth in the mid- to high single digits with Q4 over Q4 growth in the low to mid-single digits when excluding notable items. We reported noninterest expense of $62.8 million in Q4. Excluding $1.3 million in expense from notable items in Q4 and $1 million in Q3, noninterest expense increased to $61.5 million from $61.1 million. Moving forward, as both Drake and Lance mentioned, we believe there is a significant opportunity facing Origin as a result of M&A-driven disruption across our footprint. Given the magnitude of this potential opportunity, we felt the best strategic decision we could make for the long-term benefit of our shareholders is to invest in the production side of our business. As a result, our expense outlook is for mid-single-digit growth, both for the full year and on a Q4-over-Q4 basis after excluding notable items. Combined with our revenue growth outlook, the end result is the expectation that we will achieve a run rate ROA of at least 1.15% in Q4 and a pretax pre-provision run rate ROA in excess of 1.72%. Lastly, turning to capital. We note that Q4 tangible book value grew sequentially to $35.04, the 13th consecutive quarter of growth. And the TCE ratio ended the quarter at 11.3%, up from 10.9% in Q3. During 2025, we redeemed roughly $145 million in sub debt and repurchased roughly $16 million worth of our common stock, all while maintaining regulatory capital ratios above levels considered well capitalized, as shown on Slide 24 of our investor presentation. As such, we continue to have capital flexibility. With that, I will now turn it back to Drake. Drake Mills: Thanks, Wally. As we close out 2025, I want to reiterate how proud I am of our team and the results we delivered throughout the year. The initial steps we have taken with optimize Origin have made us a stronger, more resilient and more efficient company. We are entering 2026 with significant momentum, a stronger earnings profile and a sharper focus on our employees, customers, communities and shareholders. I believe there is more opportunity before us than at any other time in my career. Origin is officially on the offensive. Thank you for being on the call. We'll open it up for questions. Operator: [Operator Instructions]. Our first question comes from Matt from Stephens. Matt Olney: I guess I think it was Lance's comments that the bank has already taken advantage of some market disruption with some recent new hires. I think Lance said it was about 10 producers in the footprint. It's great to hear. As far as the expense guidance that you provided, any more color about how many producers this implies that you're targeting for the year? Is it those 10? Or do you expect additional hires? I'm just trying to appreciate any volatility we could see in the expense line item from new producer hires or other items in the expense base? Martin Hall: Yes. Matt, thanks for the question. I'll take part of this and maybe Wally want to jump in on part of this. No, we have a lot of dry powder in that $10 million to be able to hire on top of that $10 million plus. Those are some that we've done in the last couple of months, some here in the recently kind of in the last 30 days. But I can tell you, it's a fun time for us right now. We're having very strategic conversations in every one of our markets with bankers and banking teams. This is the opportunity for us to really leverage our award-winning culture and our geographic model and kind of build from an organic perspective. So that $10 million that we're talking about, I couldn't tell you if that's another 15 or 20 bankers or what it's going to be specifically, but it's kind of a little bit of a war chest to allow us to accomplish both things we want to accomplish, which is have a nice steady ROA build and at the same time, to invest in future revenue by taking advantage of this disruption. So it's a great spot for us to be in. William Wallace: Yes. And Matt, maybe I'll just provide a little bit more color specifically on sort of the expense load and how we're thinking about it to help you all out. So look, we have the 10 hires that started late in the fourth quarter or even some were starting early this quarter, January 1 of this year. We also will have our merit increases and cost of living adjustments that kick in, in the first quarter. And then we also have the full impact of payroll taxes that come back in, in the first quarter. On top of that, if you noticed in the press release when we discussed our fourth quarter noninterest expense, we talked about some increase driven by technology contract renegotiation expense. From time to time, we partner with another party or third parties that will help us renegotiate some of our larger technology contracts. And as part of Optimize, we turned over every stone and took a look at all of our contracts, and we partnered with the firm to help us with some of our larger ones. We completed one of those during the fourth quarter, and we anticipate seeing the benefits of that negotiation beginning to impact the expense run rate this year. However, we are also in the process of renegotiating an even larger one that we are in the late stages of, and we're anticipating that we will finish that negotiation during the first quarter. When we finish one of these negotiations, there is a sizable upfront expense that gets booked and then you get to see the run rate benefit after that. So to kind of put that all into numbers, I would say maybe we think about a $64 million expense run rate, plus or minus $1 million the first quarter with the -- assuming we close this negotiation in the first quarter and book that fee, it would be on the higher end of that range. And then you'd see the benefits in the second, third and fourth quarter bringing us down at the low end of the range. And then as we layer on hires, we'll build that expense back up. So think about $64 million and then you all can try to guess as good as we can as to when we'll hire, but we're actively in discussions, and we anticipate that we will continue to be looking for new people to have discussions with as the year progresses, just given this disruption. So that was a lot of words, but hopefully, that helps you all just kind of think about the expenses in your models. Matt Olney: Yes, Wally, that was perfect. Very helpful. Thanks for kind of going through all that stuff. Makes sense. And maybe just one point of clarification for Lance. As far as the new hires as it relates to the loan growth guidance this year, any of those new hires you expect to impact the loan growth guidance in '26? Or is that more of a 2027 impact? Martin Hall: Yes. And Wally you may want to correct me. I think the vast majority of what we put into budget was at the back half or Q4. I mean, as we make these hires, they have nonsolicitation, noncompete language. There's timing around that. So anything that got put in for this year was very much in the back half. William Wallace: Yes. I would just add, Matt, that the equation for us is how do we balance our desire to improve our profitability run rate while also taking advantage of what looks to be almost a generational opportunity from potential disruption. So known hires, people that we have hired and have started, we budgeted, like Lance said, that there would be impact really, really back-end loaded given the time it takes to get on board and then to start communicating with customers and building new relationships and impacting our balance sheet. And then unknown hires, it's hard to budget them. So we would anticipate that a lot of the dry powder that Lance referenced would be impacting the 2027 loan growth run rate. So hopefully, we can continue to see our loan growth accelerate in the coming 1, 2 to even 3 years depending on how long we can capitalize on this disruption. Matt Olney: Okay. And then I guess switching gears on the net interest margin, Wally, it sounds like the margin, I don't know, may got of itself in the fourth quarter. It sounds like the loan beta could catch up in the first quarter. Just any more clarification on the margin and what we saw in the fourth quarter and kind of more about what you mentioned in the prepared remarks about the first quarter. William Wallace: Yes. So thanks, Matt. We do get some timing differential. Our bankers have been very disciplined, and we are anticipating how we're going to move deposit costs before Fed moves. And the cuts that we got in the fourth quarter, we moved deposits on day 1. For the floating rate loans, those loans don't reprice until their next billing cycle. So if somebody got their bill right before the Fed cuts and then they cut, it would be 30 days before we see the impact of that on the loan pricing. So we've already got the benefit of the deposit reset starting to flow through the numbers, but the loan pricing will come down on a slight lag. So that results in a little bit of pressure in the first quarter. But we still have the tailwinds from assets repricing. In 2026, we've got about $150 million or so of securities that will roll off and that we will replace. We're picking up right now about 50 to 75 basis points on spread on those. And then we've got $350 million to $400 million of loans maturing in 2026. The average yield on those is about 4.8%. And right now, new yields are in the kind of low to mid-6s. So we're picking up some decent spread on those as well. So net-net, we do anticipate after the first quarter that you'd see margin expand back up to what we provided on the outlook slide, that 3.75 range, plus or minus 5 basis points. Operator: Our next question comes from Michael from Raymond James Financial. Michael Rose: Maybe just following up on Matt's question just around the incremental hires this year. Yes, I think we would agree that there's a lot of potential opportunity here, another deal announced yesterday. What types of lenders -- I assume most of these are lenders are you trying to hire? Any change? And I assume most of them maybe would be targeted in Texas, but there's clearly been some disruption in other areas of your footprint. Maybe if you can just give us some details on kind of what you're looking for? And would you expect that pace of hiring to kind of persist through the year with the potential for more in 2027? Or is this -- and I'm trying to get to the point of like does the expense growth potentially slow as we move into 2027 as you get more positive operating leverage from the plans for this year? Martin Hall: Yes, this is Lance. Yes, very much so. So the strategic identification of kind of bankers that are going to be really effective in our model really are C&I focused with also kind of a focus on deposits and treasury. So of the 11-ish that we've hired so far, it's been, I'm going to say, 2 private bankers, 3 treasury management officers and the rest are C&I lenders. And I think that will be kind of the mix as we continue to grow as we're balancing really strong core deposit growth along with this loan opportunity. Yes, at the volume of the conversations we're having, I think this is going to be a consistent opportunity for the foreseeable future. I do think operating leverage will continue to enhance for us through this because it's a unique combination right now of our organic pipeline just from the business that we have is really strong and growing. One of the things we talked about in the last couple of quarters was I really felt like I was seeing really strong originations that was getting masked by some of the credits that we were pushing out as well as sort of unusual payoffs and paydowns. It was interesting to watch this quarter kind of get back to normal. We saw the highest origination level that we've seen in over 2 years as well as the paydowns and payoffs drop to the lowest level in 2 years. And then looking at what our pipeline is for the next 30 days, like there's a real ramp-up of demand and loan opportunity at what I think are the really disciplined pricing levels. And so I'm very optimistic without the hires of our ability to get that upper single-digit growth, mid- to high single-digit growth and then just sort of gets the accelerator with these new hires that we have targeted. So really, really optimistic around that. Drake Mills: Michael, this is Drake. I also want to -- as you ask about '27 and trying to understand about positive operating leverage, I've been extremely proud of Lance and this bank team because as we bring these hires on, especially as we focus on our ROA hurdles, they are doing an excellent job of continuing to cut out expense out of the organization to cover up some of the costs that we have of bringing these new people in. So it's just not -- we're not sitting here resting our laurels as far as expense management. We're reducing those expenses as we bring these people on. So it somewhat neutralizes that in '27. Martin Hall: Yes. Maybe a data point or 2, Drake, that's a good point. Kind of going back to the beginning of Optimize, we've now reduced our commercial banking team by almost 25%, and that was pushing out portfolios that we just didn't think were going to be the right mix for us or the ability to kind of grow ROA at the level that we needed it done. And it wasn't necessarily to cut expense. It was really to reinvest into better producers, better revenue streams. We're seeing that. Just last year, the average ROA of our bankers' portfolios increased by 26 bps. And so the work around ROA and the data that Wally and his team are doing is really paying dividends for helping us make better decisions on future revenue growth. Michael Rose: Very helpful color. And maybe just the follow-up here would be -- when I look at current consensus, I'm not saying it's right, but it does show that ROA kind of stagnates in '27. But I think what I'm hearing today is you guys are going to continue to invest, reap those benefits, maybe some of the technology costs come off here, sustainably higher loan growth. I know the peer hurdle has moved to get into that top quartile as well. So it seems like to kind of get there, you're going to have to do more in '27. Is that the way that we should all kind of conceptually think about it? And then I guess the last piece of that, sorry for so many questions would be the capital build here is fairly meaningful. Why not lean into the buyback a little bit more as well? Drake Mills: Well, first off, as we look into '27, we are going to stay focused on where that peer ROA is and what it takes to get in the upper quartile. And to do that, Optimize Origin, as I said in my opening comments, isn't a project. This is a continuance of how we focus on the profitability and the overall culture of this company. So we will continue to look at fine-tuning. We haven't talked at all about third-party management on some of these expenses and projects that we have that are still in the pipeline that I think are going to create significant revenue opportunities, but also to enhance as we continue to model things that work and don't work and reduce the expenses on those things that are not. So I'm pretty -- I've got a bullish outlook on '27 is continuing to ramp up ROA and not stagnate. So through that, when you start talking about capital deployment, we do see a significant opportunity with this dislocation in these markets. And we think that growth is going to come at a faster pace than what we are planning at this point just because of the upset in the markets. And what happened yesterday is going to continue to help us in Texas, but it's across our footprint. I've been very pleased with what's going on in Louisiana. So first off, our organic growth story and strategy is in play, and we think it's really going to accelerate. I love capital, but the reality of it is, I think buybacks are a part of our life today. It makes sense for us. It creates strong shareholder value. But we'll also be looking at dividends, and I think you'll see some opportunities there for us to deploy some capital as we go forward. So we're going to stay focused on 20% of our earnings through going out in dividends. And I think buybacks are here for a while. Operator: Our next question comes from Woody from KBW. Wood Lay: I wanted to just follow up on the disruption. And obviously, it should be a boon for the hiring front. But do you feel the impact of that on the loan competition side? Or is competition as intense as ever? Martin Hall: Yes. Woody, this is Lance. Good question. We were actually talking about that this morning. I would say it is highly competitive, but not irrational is the way I would say it. I think the competitors have been good. I mean, we're starting to see some tighter margins around SOFR quotes, primarily in the urban markets. On the opposite side, the main competition on the deposit side, some of the smaller community banks. But I don't feel that it's irrational at this point. And I feel like there's still discipline and there's still opportunity to kind of keep growing margin and ROA. Drake Mills: And I love what Lance said because internally, this is about profitable growth. We are looking at total relationships and the market opportunities we have give us the opportunity to be extremely disciplined through this process. So it's not about total growth. I think we can sit here and grow 15%, 20%. But when we look at our ROA hurdles and what it takes to make a relationship profitable to the point that it accelerates that, that's where our focus is. And I'm really pleased that we have these opportunities and can stay disciplined. Wood Lay: Got it. And then on the deposit side, I mean, you all have been very successful in lowering deposit costs during this current easing cycle. Are we at the point yet where incremental cuts, it gets a little more difficult to lower deposit rates? Or do you think that you can continue these deposit betas? Martin Hall: Yes, I'll let Wally speak to the betas, but I'll just tell you, anecdotally, I feel like we still have opportunity. I think the back half of last year, I think we saw some of the benefit and the power of the rural deposit base we have in North Louisiana. We spend a lot of time talking about Texas as our sort of driving force and rightfully so. I mean, we grew like loan originations 36% year-over-year and 75% of that was in Texas. But if you step back, we actually grew deposits 14% in Louisiana at our lowest deposit price point across our footprint. So Louisiana continues to pay huge dividends, and that's a big piece of getting our total deposit cost down. So I think there's still opportunity for us to push on that. William Wallace: Yes. Woody, I would just add, when you think about our deposit betas, we -- in our outlook and internally, when we think about how to model net interest margin or net interest income, we're still using our historical beta assumptions in the model, though we have been beating that so far. It does just -- it does feel like at some point, it's going to get harder to beat that beta. But it is an area of focus for us. We think it's an area of opportunity for us. So hopefully, we can continue to exceed our own expectations on the deposit beta side of the equation. Wood Lay: That's helpful color. And then just last for me. As I think about like the top end of the range for the net interest margin versus the bottom end, does it really come down to loan growth where if growth is stronger, you all might be on the lower end of that range. And if it's lighter, you all might be at the top. Is that the right way to think about it? William Wallace: I think that's a fair way to word it, Woody. We don't know how promotional acquiring banks are going to be, and that could put pressure to loan spreads. We are putting some of that in our modeling. But if those pressures increase, then yes, that could put us towards the lower end. And that equation is also true on the deposit side of the equation. So we're just trying to -- it's a wide range and we get it, but we're just trying to solve for the fact that we just don't know how banks are going to act until we see it. So we'll continue to update you from quarter-to-quarter. But right now, even with some pressures on spreads on both sides of the equation, our bias is towards the higher end of that range, but that could come down if the pressure intensifies. Operator: Our next question comes from Stephen from Piper Sandler. Stephen Scouten: Not to beat a dead horse on the new hire conversation, but you talked about it being a generational opportunity. So I think it's worth continuing. Can you talk about maybe how you think about the earn-back period or like a breakeven period on these new hires, just how long it takes them once they get past these noncompetes and what have you? And then just how you compete for these folks? Because obviously, everyone -- every bank we talk to is talking about this generational opportunity and the industry is in a great spot, right? Everybody seems to have capital and want to grow. So how do you become the bank that these people want to come to? Drake Mills: Well, first off, I think we're so focused on C&I, owner-occupied CRE and those lenders, they want to be in a shop that does C&I good and it supports the markets. Also, I think we have very good representation in all of our markets. I think about Nate in the Southeast and that has deep relationships with these teams that have worked with them at some point in time. They have respect for our presidents in our markets. And I think the relationship, the culture, the C&I drive and how we manage our teams is certainly gives us somewhat of a competitive advantage. Through this, we have been pretty focused on 12- to 15-month earnback or profitability levels timing, I should say, on these teams. And where Nate and his team in the Southeast took 18 months, they are now profitable. That was in an environment with higher interest rates and tough to move some credits until maturity. So we're in a different environment. We like the environment we're in, and we think that we can pick and choose the right people that fit our culture, that fit our philosophies when it comes to lending and are in the markets and the industries that we want to lend into. So I think overall, that gives us a very strong competitive advantage to be successful. Martin Hall: Yes. I might would add just -- I love this opportunity more than I like M&A just because we can really use data to really drive and what type of clients do we want inside of our portfolio, and you can do that kind of from a low-risk environment and identifying and targeting teams. This is where our culture shines. I mean when you're named one of the best banks in America to work for repeatedly and then you combine that with our geographic model, which C&I bankers really like to be a part of that you have an entrepreneurial attitude, not in a siloed line of business, you get to bank your clients. And so if we can offer a good model, an entrepreneurial organization, somebody that allows them to bank the clients they want to bank from a C&I perspective, really good treasury management tools that allow them to kind of go up market, I think it creates a competitive advantage for Origin. Stephen Scouten: Yes, that's really good. And Lance, you touched on something that I wanted to hit, and it's like is the use of data. And it seems like a lot of the progress has been aided by really intentional and sophisticated use of data. I'm curious how that has helped shape the composition of your loan growth and kind of what you're focused on and maybe how that shifted from a couple of years ago, whether it's risk-adjusted returns, loan sizes, loan type and just kind of how this Optimized Origin process has changed the focus of the bank as you move forward and how you lend. Martin Hall: Yes. I'm so glad you asked that question. I mean that has kind of become the driving force of what we do. And I give Wally and his team all the credit. I mean, we're -- honestly, we're just a different company than we were 2.5 years ago because of our access to meaningful and actionable data, spend tremendous amount of time digging into portfolio data, banker profitability, client profitability, product profitability. You've seen what we've done with branches. It's just kind of obsessing now over finding ROA enhancement opportunities through the use of data. Our ability now to kind of design like what a top performer banker looks like for us inside of our model using data. And then the flip side is kind of what the bottom performing bankers look like and then how do you coach from that from a data perspective? Or how do you know it's time to kind of push out and reinvest. So I actually kind of can't give Wally them enough credit for what they've done for us. It helps drive type of deposit clients we want, our investments in treasury, the loan mix. I mean there's just so much there that is -- we're making decisions in a different way than we have kind of over my history here because of what's at our fingertips. Stephen Scouten: Yes, that's fantastic. And then I guess last for me. Obviously, net charge-offs came back to like a more normalized level here this quarter. I'm sure NPLs are still a bit more elevated than you guys would like. With everything going on, all the positives, is there anything that can be done there to migrate some of the credit -- the lingering credit issues maybe down a bit quicker? Or how do you think about the path for nonperformers from here? Jim Crotwell: This is Jim. Yes, when Lance spoke to client selection move out, it's really shifting more toward those loans that are criticized in this quarter, the $45 million, 75% of that was in the criticized area. And so that really is our focus. So I'm very pleased with the progress we made on nonperforming for the quarter, and we see some reduction there. We've always had some good news early on this quarter. And that is really our focus to really drive those metrics down, particularly as it relates to nonperforming. So I feel good where we are in the direction of what I'm seeing that we can accomplish in '26. Operator: Our next caller is Gary from D.A. Davidson. Gary Tenner: I had a couple of questions. One, just moving over to the fee side for a minute. Just curious about the swap activity in the quarter, obviously down quite a bit. And I think you had kind of flagged that it would be down, but pretty minimal in the quarter. So just wondering if there was anything unusual behind that. I would have thought with the expected and actual rate cuts that it would have been a little more active. Unknown Executive: Yes. No, I actually just think it was extraordinary in the third quarter, to be honest with you. I think it kind of came back and normalized a little bit. A little hard to budget for the -- I mean we actually had -- I think our swap and loan fees were up 59% kind of year-over-year. We had a great -- we expect really good volumes around that this year, but maybe not quite to the same level we had last year. So I think it was more about the third quarter being really high. Gary Tenner: Okay. And then you had noted securities cash flow is about $150 million. If loan growth comes in a bit stronger, is there room to work the securities portfolio down a bit more and use some of those cash flows to fund loan growth? Or is the base case assumption that it's fully reinvested in the securities portfolio? William Wallace: Yes. Gary, we have worked very hard over the past 2 to 3 years to work the securities portfolio down to a reasonable portion of the balance sheet. And we define that as kind of the 11% to 12% range, which is where it's at right now. So we anticipate that we will keep the securities portfolio where it is relative to assets. So if loan growth accelerates, then you'd actually see the securities portfolio build accordingly. So no, there's not -- we don't anticipate that there's any room for a shift out of securities into loans. Now I would note, though, that we do have a lot of liquidity right now. Some of that is seasonal due to public funds seasonality and tax season, et cetera. So there could be some opportunity as we deploy liquidity into the loan portfolio that's not currently in the securities portfolio for some benefit there. Martin Hall: Yes. And then maybe also, we did a really good job of growing core deposits last year, which allowed us the luxury of replacing all of our broker deposits. I think at this point, correct, Wally, we have no broker deposits. William Wallace: Correct. That's exactly right. We're in a good shape from a liquidity perspective, Drake. Operator: This concludes the Q&A. Handing back to Drake Mills for any final remarks. Drake Mills: Thank you. As we look forward to 2026, we are blessed with many positives. Margin expansion, treasury management revenue growth, fee revenue growth, expense management, pipeline growth, strong loan growth outlook, deposit noninterest-bearing growth. Partners in Argent, 20% has been a big hit for us. Southeast market hit profitability in Q3, which is a big move for us. Our mortgage group has a positive contribution now. We have strong teams and strong dislocation in our markets. So due to Optimize our geographic footprint, we feel we're positioned to be balanced and disciplined. I think that is critical as we move forward to consistently build ROA while also investing in our long-term growth and shareholder value. We are so focused on how do we manage and create greater shareholder value. It's taking commitment and focus to put Origin in a position of offense. I look forward to a very rewarding 2026. Thank you for being on the call, and thank you for your support. Operator: This concludes today's call. Thank you, and have a great day.
Operator: Ladies and gentlemen, welcome, and thank you for joining Eurofins 2025 Full Year Results. Please note that this call is being recorded and will be -- will later be available for replay on the Eurofins Investor Relations website. [Operator Instructions] During this call, Eurofins management may make forward-looking statements, including, but not limited to, statements with respect to outlook and the related assumptions. Management will also discuss alternative performance measures such as organic growth and EBITDA, which are defined in the footnotes of our press releases. Actual results may differ materially from objectives discussed. Risks and uncertainties that may affect Eurofins' future results include, but are not limited to, those described in the Risk Factors section of the most recent Eurofins' annual and half year reports. Please also read the disclaimer on Page 2 of this presentation, subject to which this call and Q&A session are made. I would now like to turn the conference over to Dr. Gilles Martin, Eurofins' CEO. Please go ahead. Gilles Martin: Thank you, Andrew, and hello, everybody, and thank you for joining our full year 2025 results call. I will keep -- we have a long slide show, but I will not go through every slide. I have to give apologies for Laurent Lebras, our CFO, who is not well today. So I will not go in great detail through the financial slide and leave time for questions. If I start on Page 5, or the Slide 2. I'm happy to report on a strong year 2025, where we achieved all our objectives or exceeded [Technical Difficulty] Eurofins, as you know, is every 5 years defining a plan for the next 5 years and sharing with investors what we are trying to do, what we will do in the next 5 years. We just completed year 3 of that 5-year plan, where we are building a truly global network, fully digital network of laboratories organized in a hub-and-spoke structure. So we get the benefits of scale in our large hub laboratories. And we have a network of local laboratories to collect samples close to our clients, serve our clients in their country, their language and yet be able in the large laboratories to implement automation, artificial intelligence and all the things that make our services much more unique and faster and more reliable than what others do and we do. So this is continuing to proceed at pace. I'm happy to report that I can confirm we should be done by 2027. There's been massive investments. And we start to see some of the benefits of that in our operating leverage, which has continued to improve every year. It improved well in 2025. Overall, our margins -- reported margins and our adjusted margins continue to improve year-on-year. Our EPS has shown a remarkable growth, 24%. And I think it's just the beginning because we still have heavy investment, heavy OpEx investment, especially in our deployment of digital solutions, development of digital solutions, which should give us significant [Technical Difficulty] and the cost of which will go down. We have generated before those investments to buy our sites because we prefer to own our sites. This is linked to the long-term view that we have. We think over the long term, although they provide a lower immediate return on capital deployed over the long term, we're going to use them forever. It's a great benefit to have them because we can expand on those sites. But before those investments, we have generated more than EUR 1 billion of free cash flow to the firm. So our group is starting to generate serious cash and it's just the beginning of that. And if I move to Page 6, the nice thing is that is accelerating in the second half. Organic growth is still not where it will be, we think, when -- and we'll talk about that later, but it's still accelerating quarter-on-quarter and half year-on-half year. Our EPS growth in the second half even reached 30%, which is quite remarkable. And our free cash flow has grown also much faster in the second half than in the first half. On our investment program on Page 7, you see that we are starting to be done. We still have massive IT investments that post 2027 should be less. And more importantly, we should get the benefit of that. We're still adding some start-ups, but you see the investment has started. We've done the peak of it, so it's starting to be less. So all of that is running according to plan. We still will add a few large and very efficient sites to our network over the next 2 years. They are being constructed right now, and we think the delivery will take place over the next 24 months, more or less for in our current perimeter that should take what we need in our program. On Page 8, we provide a bridge on the evolution of margin. And you can see we've had a nice underlying operating leverage. As we had flagged, we have some dilution from the acquisition for a very low amount as compared to the profits we think we can generate in 2 or 3 years of the network of clinical laboratories of Synlab in Spain. We are merging it with our network, and we're taking a lot of cost out. We've had a lot of exceptional costs for that. And that should -- the first phase should be completed by the middle of next year. We think we will create significant value from this combination. But nonetheless, short term, it has been dilutive, especially in the second half. First half, we only had 3 months. Second half, we had 6 months. We have a bit of an impact from the FX because we make more profits in North America, although we want to improve profits in Europe as we finalize this IT program and site consolidation. So a good improvement of margin, good drop-through on Page 9. If you see the trend, well, the COVID peak is well behind us, but we are catching up. Our revenues now are over the peak revenues from COVID. Our margin is catching up. It's -- and I think we are very confident in exceeding 24% margin in EBITDA -- adjusted EBITDA in 2027. And considering the benefit of that beyond 2027, I think there is some room to, at some point, maybe achieve or get close to the margins we had during COVID. So that's also encouraging. On the -- if you see -- if we look at the CAGR, we've had since 2019, 8% revenues CAGR, 35% CAGR of free cash flow to shareholders. So -- and that's ultimately the most important thing, while we still carry huge amounts of investments. And I think those investments, once we have built our network of labs, we have them for the next 20 or 30 years. So the growth of the EPS and the cash flow per share should be for quite some time over proportional to our total revenue growth. On the financial numbers on Page 11, you have a breakdown. I think I will go back to that as part of the question and answers. Main point is our profits are going in the right direction, are growing, growing faster than revenues and the EPS is growing also faster than revenues. We took the opportunities for us, the fact that our share price is massively undervalued is actually an opportunity, and we took advantage of that opportunity to acquire a lot of shares last year, which is even further boosting our EPS. And the impact of that, once we hit in 2027, our target -- margin targets and cash flow targets will be compounded. On Page 12, you have a bridge of our revenue evolution. We generated EUR 250 million of organic growth. Of course, it has been a bit diluted by the FX impact. And we have a sequential increase quarter-on-quarter of growth. And I think that will continue because now the comps that were strong in some areas, I can talk about it a bit later, will not be there next year as we enter -- or this year as we start 2026. On the Page 13, we give a bit more breakdown by area. I think all our areas are doing well. Life areas are doing well. Food & Feed and Environment are growing both in Europe, North America and Asia. BioPharma, and I'll come to that on the next slide, is starting to recover. It is still being soft, it is still being far from what we think we can achieve long term. Diagnostics could do a little bit better, but it's starting to show in many areas, some recovery. Q4, of course, didn't get the negative base effect of tariff reductions in France. Consumer. Consumer has been hit because consumer and technology includes some material science testing, microscopy, et cetera. This had a big boost in 2024 from the -- a lot of tools companies were looking at potential stricter export restrictions, both from Europe and North America to China. And there was a lot of anticipated buying of tools from our clients in 2024 that gave us a bit of boost on that in 2024, which is not -- has not recurred in 2025, but now we think '25 has hit a plateau and we should grow from there. But that explains the only 2.3% growth in Consumer & Technology. Consumer was better than that. On BioPharma. And here, we have, I think, the last year was a mixed picture. The bulk of it is our BioPharma product testing, where Eurofins is a global leader, and that has continued to do well, mid-single digits. We have done at times better, close to double digit or double digit on that. There is some potential upwards. And we have a good outlook for next year. We are adding a lot of capacity where we will be adding -- expanding our big site in Lancaster, expanding our site in the Netherlands. So we'll have more capacity coming online in the next couple of years. So there is some upside potential on BioPharma product testing, but the growth has stayed solid -- quite solid during the time where BioPharma is reevaluating its pipelines, hasn't been affected like Discovery. In Discovery, this is, we think, plateauing now. It's still a little bit down in the second half of the year. Genomics is still hurting from cuts in research fundings. But again, we think we're hitting now a plateau and we can grow from there. Agroscience is part of the ancillary activities, and that is still down significantly. So we have made significant efforts to cut our footprint. There has been massive restructuring for the size of that business, significant restructuring. That's also part of our SDI. We've closed a number of field stations to basically fit our capacity to the demand. There could be at some point upside when the agrochemical companies, Agroscience companies and the seed company have more visibility on regulations to get their products approved, especially in Europe. So we keep that activity where we are a global leader, but that has suffered. And between Genomics and Agroscience that explains a large part of the overall softness of BioPharma. Otherwise, BioPharma will be at the same level of growth as our Life activity -- area of activity. So our CDMO did well in the first half of the year in the U.S. because we -- or in Canada because we filled a tranche that got completed at the end of the year before. It's a bit less in the last quarter because now it's full, and we're going to have a next tranche coming up online in the next, I think, 24 months. CDMO was a bit softer in Europe. It was a bit more on smaller biologics clients, but we think this will pick up in the next few quarters, too. So that's for the ancillary activities for BioPharma. We have, of course, in BioPharma, some clinical works, large contracts and our clients are positive. on the start of those programs. And of course, that would switch completely the growth of the ancillary activities. If we look at the -- especially Central Laboratory, Bioanalysis, we do think that some point in '27, we will have -- we should have a significant boost from those activities. That's also hurting our profits because we keep capacity that is in excess of what we have as volume right now because studies should start relatively soon. We have significant demand from clients. So we're optimistic on that. And in any case, the -- we're now at a baseline where we don't think that would go down anymore and affect our BioPharma growth anymore in 2026. On Page 15, you've got a split of the margins. So the margins are growing everywhere, especially in the rest of the world. The rest of the world is catching up with U.S. margin. Europe has not been improving as much as we wanted. We've had an impact, of course, in Europe of the reimbursement cuts in clinical diagnostic in France that occurred in 2024 that affected the comparable with 2025. We've got the dilution from Synlab. We've got a number of other things. We think we have a big upside in Europe to increase the margins and make them move much closer to U.S. margins, which will also reduce the FX impact on the translational results and margin. So we're optimistic over the next 2 years to significantly increase the margins in Europe. Another thing that we do is described on Page 16. So we have labs that are well integrated, where we have deployed our IT solutions, where we -- that have been in the group for a long time. And then we have a number of start-ups that we launched over the next few -- the last few years. The peak start-up investment is behind us and the start-ups of the peak start-up years are starting to be profitable. As I mentioned earlier, we are opening fewer start-ups now. They have a smaller impact on our results. So that's part of our nonmature scope. On that scope, we also have companies like Synlab that we just bought and we are restructuring. And what is interesting to see is the impact of that nonmature scope on our overall results is starting to be less and less -- it's -- we have a target that SDI at EBITDA level will be less than 0.5% of our revenues, and we think we will achieve that by 2027 as planned. Anyway, even in 2025, the impact on the group EBITDA is starting to be negligible at 2.7%. But we will continue to show it separately and our reported results and the mature scope result will converge. It's nice to note that our mature scope is already achieving the 24% margin we are targeting for 2027. So overall, very encouraging results. On Page 17, you see that we are self-financing all our investments, including our M&A in -- with EUR 150 million left after that. And we've had, of course, in 2015, the purchase of our -- of the related party buildings. I'll come to that in a minute. But -- and that was an exceptional one-off investment. We spent EUR 540 million to buy back our own shares. And from next year, our cash flow should be such that we will have a lot of headroom for our cash flow to finance further share repurchase, for example, building repurchase is done. We won't have to spend money on that. So we can have a very compounding -- very well compounding model where with our cash flow, we can continue to do M&A, finance not only our CapEx, but our CapEx will be less. So we'll have more room for M&A financing and even more room for returning to shareholders and preferably through share buybacks as long as our share price remains so seriously undervalued in our opinion. On Page 18, you see that our teams are starting to do a better job in managing net working capital. We've got a good result this year in managing net working capital. And there is still potential of improving things further. We're not -- certainly not best-in-class there, but we're making progress, and we think we can do more. On funding on Page 19, we've continued our prudent financing management. We are well funded for the next few years. Our leverage is very reasonable considering our cash flow. Also, our EBITDA will increase over the next 2 years, we believe. So that will naturally bring the leverage down. We will generate some cash. So we're confident on maintaining our leverage between the 1.5 to 2.5 multiple range that we have set for ourselves as an objective. On Page 21, I illustrate some of the new sites that came online. We can talk about that. On Page 22, we can have a summary of our footprint. We have a quite large lab footprint. We are very far along in building our -- and completing our hub-and-spoke laboratory network in Europe and North America, especially. We still will have opportunities in Southeast Asia and Asia generally for the next 10 years or 20 years, also a little bit in Latin America. We can still add a few locations in North America. We're not -- we don't have 100% coverage yet, but the impact of what we need compared to what we have is -- will be very modest past 2027. And now we own most of our big sites. And what is planned for the next couple of years will mean that by 2027, we will own our big sites, and we usually have land next to that existing building so that if the demand increases for those hubs, we don't have to move. We don't have to lose all the investments we did in those buildings, which was our life for the last 10 years as we had to consolidate a lot of acquisitions that were not -- where we found them, they were not necessarily where they should be, and they didn't necessarily have the focus that we wanted or that was optimal for best efficiency. Now we have that footprint, and that will stay, and we can just incrementally add capacity on the same site as we need. So we're quite pleased about the progress. That was a 10 years program. Now we own what we need to own. On Page 23, some discussions on return on capital employed. I think that would be more for one-on-one meetings for those of you who are interested. But obviously, we have a mix of assets on our balance sheet. We have the labs that have grown organically and that have a very high return on capital employed. We have the lab that we acquired. And until 2018, we built Eurofins through a lot of acquisitions. So we incurred goodwill. And of course, that provides lower return on capital. We have a substantial amount of our capital on our balance sheet, which is those buildings that we own that have a book value of EUR 1.3 billion. Probably if we were to do a sale and leaseback, it would be more like EUR 2 billion or more. And that has, of course, a lower return. So we give on Page 23, an analysis of the returns of our business as we can see it. But it confirms that the business we run has a very high return on capital employed. And if we deploy additional capital, especially if we deploy it organically, we're looking at very significant returns. On Page 24, it covers the start-ups that we've made over the last few years and peak start-ups of '22, '23 as a whole are starting to be profitable. So we have -- and that can only amplify going forward. So we are very satisfied with what we have built and the impact it should have on our performance, our service to clients and financial results over the next 2 years and later. On Page 25, we give a list of some of the acquisitions we did. So we continue to be active. We think we also should add about EUR 250 million of revenues next year from acquisitions at reasonable multiple. That means a lot of small bolt-on acquisitions, maybe not the bigger ones that would be sold at a much higher multiple. But the world is big enough, and we have enough opportunities. We continue to be innovative. Our labs invent a lot of new tests and new capabilities. That's on Page 26, and I will not go through all of them. You probably have heard of the baby food -- latest baby food contamination with cereulide, which could be caused by Bacillus toxin. This is not a test that people were doing routinely most of the time. It normally doesn't happen. So -- but when the crisis started, we developed the test very quickly. We developed a test that's actually more sensitive than what was available before in the market because most of those things come from encapsulated in this specific contamination, it comes from oil that is added to vitamins or that is added in the form of oil encapsulated. And measuring it, you have to break the encapsulation to get to the full amount and the true amount. So we make a nice breakthrough here in developing within a very short time when the crisis started, the right test and the most sensitive test in the market, we believe. But we can go deeper on that if some of you are interested in Q&A. Page 28. We basically, we can only confirm that our objectives for 2027 are realistic. We think we will exceed them. The plans for CapEx are unchanged. And BioPharma will pick up in the next few quarters, we believe. So we're still confident that we can revert to the typical organic growth we've had for decades of 6.5%, just to give a number, but higher mid-single digits, mid- to high single digits. And we are building the network for that. And also the efficiencies and quality of service we are building should enable us to grow significantly faster than our competitors and than the market. On Page 29, we give some ideas about the returns that we are generating. So we were -- we are pleased to have returned EUR 1.5 billion to shareholders since 2021. So not only are we quite profitable, but we returned a lot of cash to our shareholders already, although we are still building the house, we return a lot. And we built Eurofins for a lot of acquisition until 2018, which caused us to incur a lot of goodwill on our balance sheet. But since then, we bought some companies, but much less. And if you look at the return on capital -- on the incremental capital we've added since then, after this big M&A phase, and you see that even including the goodwill, we already have 23% return on the incremental capital, which shows that we are reasonable in what we pay for acquisitions. We create value from our acquisition and our stock of businesses continue to improve. So we're very satisfied about the performance of 2025. We're very optimistic about what we think we will generate over the next 2 years and especially beyond. In fact, I think we are building something that's going to be quite extraordinary in our markets, more and more focused. We've been also reviewing our portfolio, shedding a few small things. So over the next 2 years, we'll continue to do that to be a true leader in our industry, to the most innovative in our industry. I don't have time to talk about it now because it's a result presentation, but we're investing a lot in new technologies, in AI, in automation to create real competitive advantage, a real differentiation in the speed and quality of our service, which should make us really the partner of choice of all the multinationals around the world in the industries we are serving. And I don't think anybody else is doing the type of investments we're doing. So I'm very positive and optimistic as to our performance post 2027 when we are done building that. When we are building that, this causes a lot of disruption to service when you deploy new IT solutions the last 2 years where we started deploying heavily new IT solutions. We've had a lot of disruption to service to clients. This is not the best when you change the digital tools in the company to show the best performance to clients. But this is now more and more working, and we see -- we're going to see the back end of that. And then we see the opposite, much better performance, faster performance, and that should help us also in growth and gaining market share post 2027 and where we have in the countries where we are done already, already in '26 and '27. So that's my introduction for today. And sorry for the very quick speed of my speech and presentation. Now I'm happy to answer questions, and [ Busi ] is here too, if we have some financial questions that I don't know the answer of. Operator: [Operator Instructions] Our first question is coming from Tom Burlton with BNP Paribas. Thomas Burlton: I've got a couple just on BioPharma to kick off and then one on capital allocation. So on BioPharma, specifically within ancillary activities and the Central Lab, Bioanalysis business, you referenced these awards. Is there anything you're able to give us in terms of additional details on sort of how big, anything slightly more granular about phasing and so forth? Because I was originally expecting some of these to start coming through in sort of mid-2025, and it feels like they got pushed to the right, I guess, because of client decisioning and things like that. And in your opening remarks, you talked about anticipating potentially a significant sort of boost in demand. But you said by 2027, and then you went on to say that some of those could ramp up quite soon. So I'm just trying to understand the timing there and what's going on? Because it feels like that when it does come through, it could be quite a big driver to Biopharma and then to group organic growth. The second one, still within BioPharma, just on the discovery part of the business. It looked like through the back end of last year, we've seen a bit of a pickup in terms of the biotech funding. And I think that only really accelerated to kind of through Q4. We don't have the kind of longer run, I guess, data on your discovery business by quarter. How would you think about the sort of normal lead lag time as to when that should flow through to your business, your network and we really start sort of seeing it in numbers? Just still trying to gauge the sort of, I guess, the cadence of BioPharma growth as we go through 2026. And then just on capital allocation, keen to understand kind of how you're thinking about buybacks. So you mentioned towards the end of your remarks, you've been very -- you've been active in buying back shares and returning cash to shareholders and the share price has developed, I guess. You've got fairly fixed targets in terms of your added M&A revenues and your leverage is, I guess, within the target range. Would you expect buybacks to be a kind of ongoing feature, maybe not at the levels they were in 2025, but how should we think about kind of ongoing return of cash and whether you'll be kind of pragmatic or consistent about that? Gilles Martin: Thanks a lot, Tom. On BioPharma, yes, Central Lab and Bioanalysis, we have some fairly large contracts. And our best guess now maybe would be H2 -- that we are talking about would be H2 2026 for start of that. It's always difficult to time. They have to recruit patients, et cetera. So that's our best guess as we can see. What is clear is the comp has eased now. So going forward, we don't expect anywhere those revenues going down. And if you do the math, if you have a negative 20% or negative 30%, even on a small part of the scope, that has a big impact on the average growth of that scope. So that -- we don't think we're going to have any negative, especially not of that magnitude going forward, and that should have an impact on the overall growth of BioPharma this year. And in the second half, hopefully, if we get those programs to kick in, it could become quite substantial. And well, maybe if I said 2027, I think overall, BioPharma, even our core BioPharma product testing could grow more than the mid-single digits where it is now. And that could also increase. When would that be? That's what maybe I said '27. But overall, BioPharma, I don't see why BioPharma as a whole shouldn't grow faster than life. It has been the case for decade. And this -- we've had phases like this again in 2012, where the pharma industry was reevaluating pipelines and so on. The industry was a bit soft for a couple of years, and then we've had a decade of much faster growth. So I think that will return. And why will it return? Because simply, the research is providing so many new products that are so powerful that it's just worth it for the pharma industry to spend money to develop those drugs because they will make a lot of profit with it. Even at lower reimbursement, they will make a lot of profits. Discovery, yes the lag time, that goes from company to company, project to project, but it's not immediate indeed before a project starts. What is it 6 months, 12 months to get things to flow through depending on the project and the products in actual work for even the coding, it takes 2, 3 months to design a study to design a project. It's not something that you buy off a catalog. All those studies for BioPharma, they are bespoke and they take time to define. It's like you build a house, you need to get the plans, get the plans approved before you can start building it. Capital allocation. Well, if you look at -- we're an active buyer in the market, and we also have our own assets that sometimes we get approached by people who would like to buy some of our potentially noncore assets. So we know what those assets are worth. If you look, ALS is trading at 15x EBITDA, UL is trading at 19 or 20x EBITDA. A lot of transactions are in that range between 15 and 20. Even with the recent rerating, our stock is trading at 10x. So obviously, if I have extra capital to deploy, it's a no-brainer to buy back our shares. I know what I buy. I know the potential of the profit increase of what I buy. I don't have to do -- we don't have to do a due diligence on it. We know what we're buying. And so once we've done the M&A, we think it will be accretive, and we think we can get our return over our hurdle rates. And if we have extra possibilities, we are going to continue to do buybacks. And I think we will generate a lot of cash. And actually, we might buy even more this year as we bought last year. Of course, that will depend on how the market view our share and share price, et cetera. But in spite of the recent good run of our shares, on those metrics, if you just look like the multiples of, that people pay for assets in the market, either public assets or private assets, we have -- we're anywhere between 30% and 60%, 70% undervalued. And in the capital allocation policy that our Board follows and we talk about, buying back our shares appears very attractive at the moment. To us, we're insiders. So we -- maybe if you're an outsider, there are other considerations that apply. As an insider, we will continue the buybacks. Operator: Our next question is coming from Suhasini Varanasi with Goldman Sachs. Suhasini Varanasi: A few from me, please. So you mentioned the cereulide testing that you had launched in January. Have you seen increased demand for that testing given the recalls seen in the market? And is it possible to quantify the proportion of benefit to revenues? That's the first one. Second one is on the margins. Your reported EBITDA margins have seen very strong underlying improvement in 2025. Can you perhaps provide some color on the scale of the expansion that you expect in 2026 and maybe the key risks around this. FX, obviously, is a little bit of a risk. We can't quantify that. Synlab, maybe the drag is a little bit less than last year. Or maybe additional M&A? Just some color around that would be helpful. Thank you. And I think in your prepared remarks, you had indicated something around EBITDA margins could potentially return to peak COVID levels beyond '27. Just wanted to understand -- get some clarity on that. And is it the medium-term target potentially beyond '27? Gilles Martin: Yes. cereulide, it is just starting. We don't know how big this crisis will be, how many charges, how many lots were affected. I'm not sure it will become a routine test because that was apparently caused by a contamination from contaminated oil from China. So hopefully, that will stop and be put under control. So we -- and considering the size of Eurofins, for something like that to become material, it would have to be a really massive, massive global recall of all the milk in the market. So we don't expect any impact -- any material impact on our revenues. But still, it's good for our clients to know that when there is something like that, we are there and we have the most sensitive methods, much more sensitive than the ISO method. So if they want to check their supplies, we can do that for them very well. Yes, we've gone on the advice of many of our investors and potentially analysts, we've gone away from giving specific margin targets. And some companies do that. We've done it for 2027, and we stick to that because they were there and we believe in it. And hopefully, we can do better than that. So for this year, what we've said we will improve. And as you say, some of the factors that you mentioned will play a role. FX, we don't exactly know what it will be. M&A, we don't exactly know. We have a number of start-ups. We have to see exactly how fast they ramp, new buildings when they come online, et cetera. So what we can say is we think we will improve. We think we'll achieve or do better than the 24% margin next year in '27. I can't be more specific this year. What is clear is we have massive investment in IT that we hope to largely complete this year. So that should help definitely next year. How fast all those programs get deployed, all those software gets deployed, how fast do they get -- do we start to accrue the benefits of it is also a little bit difficult to plan quarter-by-quarter. And what I said about margin, maybe don't get too excited too quickly. But it has always been the case that our best scopes have -- EBITDA margin in excess of 30%. The whole of Eurofins will never be there, but there's no reason why 24% should be a cap. Of course, we will talk about that once we complete that period. And depending on our perimeters then on potential M&A, we might do then, et cetera, we'll try to set objectives beyond 2027 when we publish 2027 results. But all things being equal, staying in our market, staying in our current perimeter, there's no reason why we shouldn't go beyond that because every year, we're improving. And there's a very long -- if I look at what we plan to achieve this year, there's a very long list of things we are doing that will improve our results substantially. And if on top of that, BioPharma starts to pick up a bit, it could be even more faster and more meaningful. Operator: Our next question is coming from Delphine Le Louet with Bernstein. Delphine Le Louet: A couple of questions on my side and a bit of a clarification regarding the infant baby formula product and how big that is actually today into the food business. And sticking with the food business with a broader vision, where are you taking the most market share? Or where have you been taking the most of the market share over the course of '25 when it comes to segments or region into that field? And second question, dealing with the CapEx envelope for next year and probably the year after in the range of EUR 400 million. I was wondering how much of that is dedicated to the regular, let's say, IT ongoing and to the IT transformation you're coming to a close now. Can you detail that a bit more, please? Gilles Martin: Thank you. It's really hard to say where we gain share or where we don't. I think we gained share, especially in the markets where we are strong in North America. I think we continue to gain share in the many European countries we do too. And this baby formula testing, this test is not something we were doing in the past. By the way, we just developed the test, but it's not going to be a huge market, a huge -- I hope so for the milk industry. Although from time to time, there are issues in the milk industry, and there were issues in North America and a lot of recalls in North America. We helped our clients a lot to go through the shortages to help them mitigate the shortages of the milk powder in North America over the last few years. So this is -- we work -- what we do is essential. People forget it, but there are segments of the population who are very fragile. And when they eat contaminated food, it can be fatal and especially babies. And we also test a lot of supplements, sport supplements. If you put not enough or too much vitamin in certain products, it can be toxic. It's not only the bacteriological contaminants. So this is more like a reminder of you can't stop testing food. If you stop testing food, bad things happen. And actually, it shows maybe nobody could have guessed that, that would happen. But it shows you have to have very broad testing programs because even if a contamination hasn't happened in 5 years, it doesn't mean it won't happen again. And if you have a brand that is valuable, you don't want to be the one whose products are contaminated. I think that's maybe one of the many wake-up calls. It's not because you haven't had a problem with your products in the last 5 years that you won't have one tomorrow. So testing is important. It's like having a fire detector, maybe you haven't had a fire in 20 years, but you best [Technical Difficulty] detector in your house or in your [Technical Difficulty] that can still happen. On the [Technical Difficulty] Operator: Apologies ladies and gentlemen. We have appeared to have lost our speaker line. One moment, please, while we try to get them back. Once again, apologies, ladies and gentlemen, we are trying to get the speaker line back in, one moment, please. Okay. Ladies and gentlemen, we have just heard from the speakers. They are trying to reconnect. So please hold, they would be with us momentarily. Okay. Ladies and gentlemen, I believe they will be with us in one moment. Once again, apologies for the slight delay in getting our speakers reconnected, but they will be with us shortly. Okay. I believe we have our speakers back with us. Gilles Martin: Thank you. Sorry, everybody. I don't know what happened with the telephone line. So I was answering the answer -- the question on IT CapEx and indeed, maybe EUR 50 million of the IT CapEx is linked to this development of new IT solutions for digitalizing our full network of laboratories. I think we can take the next question. Operator: Our next question is coming from Remi Grenu with Morgan Stanley. Remi Grenu: Just one last question remaining on my side. I think there's been press coverage around the potential divestment of part of your consumer and tech product testing business. So can you maybe tell us how you're thinking about that division in the context of the perimeter of the company? And if overall divestments are still very much on the table as you flagged on previous call and how we should think about you going into 2026? Gilles Martin: Thank you. Well, we get a lot of inbound calls. There are things businesses that we look from inside what we like, what we don't like. As I mentioned, there are smaller businesses in Clinical Diagnostics last year that we closed or sold in countries where we had no path to become market leader. We like our consumer product testing. We like our material science testing, although material science was softer in '25, we see a great potential with all the AI chips and the memories now that are in great demand and the needs for tools that's going to pick up. So we like that division. We like consumer products, and we'll never part with certain elements of it. They are very close to the core of our business of medical device and testing for life, et cetera. But we do get inbounds. And then we are -- when our boards get inbound, we have a duty to look at it because, of course, we get very attractive offers sometimes, extremely attractive compared to our current valuation. And so we have to look at it. What comes out of those reviews, we never can know, and we'll look at it. But I'm running a company as a CEO, but also as a member of the Board, I'm a capital allocator, and we have to look where we put our shareholders' capital to work. We have no limitation. We're not limited by the amount of capital we have to invest in our core sector, but maybe there might be at some point, M&A opportunities in our core area of business that are larger that we want to take on. And then maybe it's worth to have an active review of the value of all our assets. That's all I can say about that. Operator: Our next question is coming from Allen Wells with Jefferies. Allen Wells: A couple from me, please. Firstly, just maybe a financial question. I just wanted to understand some of the moving parts on the free cash flow for the business. Obviously, solid reported number, but it does include another working capital inflow in Q4 and obviously, year-on-year reduction in CapEx. I just wondered how you guys are thinking about the sustainability, particularly of those two variables as we move back towards the ambition of a mid-single-digit growth level business. Maybe you can talk a little bit about the drivers of that working capital movement because I think it's the second year in a row you've had an inflow at the full year? And likewise, on the CapEx side, it sounds like you expect similar levels of CapEx in 2026 versus 2025 or maybe even slightly lower. Can that level of CapEx support an acceleration in growth up to the kind of 6.5%? That's my first question. And secondly, just a follow-up question on [Technical Difficulty] net-debt-to-EBITDA towards the upper end of your, I guess, preferred range. You talked about the potential to do more buyback of shares in 2026. But if I assume a similar CapEx and M&A trends, it doesn't look like that will be self-funded at least on my back of the envelope calculation says. So are you happy to run net-debt-to-EBITDA up towards the top or even above the top end of that range? Gilles Martin: Very much. Yes. Well, we did a good job in working capital this year. And of course, that is finite. We're not going to get very big negative net working capital. I think we might still have a little bit of room over the next 2 or 3 years to be better at collection. We're not as good as maybe we should be at collection. And so -- but that's always a fight, of course, with our clients who want to pay later. And we -- but they don't always pay on time like in any business. So I think we can be better at getting our clients to pay on time. And we're kind of kind to many suppliers. So we pay maybe a bit too fast. So I think I couldn't tell how fast net working capital will be improving, and it can maybe 1 year be a bit less good and so on. So that element, I think it was a good year of EUR 40 million or EUR 50 million this year and last year will not be a gain of EUR 50 million every year forever, obviously. I think long term, we can do a little bit better. That's what I can say on the net working capital. On CapEx, I think we have a high CapEx at the moment. Our maintenance CapEx is 2% or 3%. And with that, we can grow mid-single digit. And so with CapEx at EUR 400 million ex investment in own sites, we have headroom. We didn't quite spend the EUR 400 million in the last couple of years in '24 and '25. So we're a little bit below in '24 and '25. But we are confident our EBITDA will increase. If you run the numbers, we don't want to give a number, but if you put 24% of whatever revenues you model based on M&A, et cetera, you're getting close to EUR 2 billion or around EUR 2 billion of EBITDA. And if the free cash flow conversion is over 50% -- significantly over 50%, that's a lot of cash to use for buybacks and M&A. So we have headroom -- and as we talked about assets, when we look at certain assets that could give even more headroom. But we cannot predict the future. A lot of those things look at what we could buy for M&A. I don't know what is going to come our way at a value where we find we can get a good return. That is definitely very hard to plan. And the same thing, are we going to keep all our assets or maybe some marginal ones we will dispose of for very high multiples. We did it already for the -- what is it called our software testing business and media testing business. I think we sold it for 18x EBITDA because we've got a really good offer. This is -- there's a bit of opportunism on that level of capital management depending on our own M&A opportunities and the level of our share price. So net-debt-to-EBITDA, on the other hand, we don't want to exceed the 2.5x. That's clear. And I think overall, if you look at all the cash flow we should be generating this year and next year, unless our share price would be very depressed for that period, we should rather move down than up on the net-debt-to-EBITDA multiple. Allen Wells: Can I ask one kind of additional question? Just looking at the numbers around Europe as well. We know obviously that growth accelerated in Q4 to 5%. That was on a slightly easier comp. It looks like a chunk of that improvement was the diagnostics business, which we know there was a bit of comp effect. Was there any contribution in that Diagnostics business from the organic growth in Synlab or maybe what's the organic contribution from Synlab in there? Because obviously, I know that you account for the organic growth from day 1. Gilles Martin: I think it was 0 in Synlab. It's negative actually because we are shedding some contracts that were loss-making. So... Allen Wells: Just the Diagnostics, the underlying Diagnostics business coming back, nothing from Synlab? Gilles Martin: And I think also Synlab is part of M&A. And so it's -- so no, Synlab is not-- another thing, I think looking at figures after the comma in organic growth per quarter and trying to analyze changes that post-comma changes on organic growth quarter-to-quarter is not really meaningful. It can be one contract, it can be just when something finishes, the contract finishes, doesn't finish. I wouldn't extrapolate too much, especially if you look at it at smaller slices like one activity in one continent. Operator: We will take our final question today from François Digard with Kepler Cheuvreux. François Digard: I will -- maybe just a follow-up on cereulide analysis. Could you share with us how quickly you were able to roll out these tests? You shared already that the commercial implication is limited, but it's interesting to understand how you have processed through that, the first question. The second question is on BIOSECURE Act in the U.S. Do you expect it to be a tailwind for you? Or could your France, European nationality in state prove to be a disadvantage in the U.S.? Gilles Martin: Well, we have several labs around the world doing this test at the moment, and some are still setting it up, and they are cooperating to exchange method because that could be also an issue for clinical diagnostics in human health. I don't know if you heard, but in some countries, even the government labs didn't have a proper test to test the stool of the babies that were affected. So I don't know the exact minute how many of our labs are actually doing it. But when it all started, I think within a week, there was a test running at one of our labs. And maybe we might have had a lab that was already able to do it, but was not performing the test routinely because the demand was not there. And BIOSECURE Act, I don't know that it will have any impact. I mean I'm not sure I've heard from anyone in our company that would have an impact one way or another. No, we do our own testing locally in every country. So we have local companies that do testing in Europe, others do -- are based in China, the local testing in China, local companies in the U.S. doing testing in the U.S. I have to conclude -- sorry operator. Yes, I have to conclude and thank everybody for joining our call. It was a long presentation. I apologize, but I tried to give some color from the management perspective on our numbers. I will be happy to meet some of you in London and for other meetings over the next couple of weeks and later during the year. Thanks a lot for your support, and have a great day. Goodbye. Operator: Thank you, Dr. Martin. Ladies and gentlemen, the floor -- sorry, the call is now concluded, and you may disconnect your lines. And we thank you for joining us, and have a pleasant day.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the Celestica Q4 2025 Financial Results and Conference Call. [Operator Instructions] I will now hand the conference over to Matthew Pallotta, Head of Investor Relations. Please go ahead. Matthew Pallotta: Good morning, and thank you for joining us on Celestica's Q4 2025 Financial Results Conference Call. On the call today, we have Rob Mionis, President and Chief Executive Officer; and Mandeep Chawla, Chief Financial Officer. Please note that during the course of this call, we will make forward-looking statements, including statements relating to the future performance of Celestica, our business outlook, guidance for the first quarter of 2026, our 2026 annual outlook and anticipated trends in our industry and their anticipated impact on our business. These are based on management's current expectations, forecasts and assumptions including that there are no material changes to tariffs or trade restrictions compared to what is in effect as of January 28. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and their potential impact on our results cannot be reliably predicted at this time. For identification and discussion of the material assumptions, risks and uncertainties, please refer to our public filings with the SEC and on SEDAR+ as well as the Investor Relations section on our website. We undertake no obligation to update these forward-looking statements unless expressly required to do so by law. In addition, during this call, we will refer to various non-GAAP financial measures. We have included in our earnings release, found in the Investor Relations section of our website, a discussion of those non-GAAP financial measures and a reconciliation to the most comparable GAAP measures. Unless otherwise specified, all references to dollars on this call are to U.S. dollars. All per share information is based on diluted shares outstanding and all references to comparative figures are a year-over-year comparison. Let me now turn the call over to Rob. Robert Mionis: Thank you, Matt, and good morning, everyone, and thank you for joining us on today's call. We delivered very strong results in the fourth quarter, driven primarily by growth in our CCS segment across both our communications and enterprise end markets. This led to revenue and adjusted EPS both exceeding the high end of our guidance ranges, while adjusted operating margin of 7.7%, once again marked the strongest performance in company history. I'd like to briefly review our performance for this past fiscal year. Overall, 2025 was another exceptional year for the company. For the full year, we achieved revenue of $12.4 billion and adjusted EPS of $6.05 representing growth of 28% and 56% year-over-year, respectively. Our adjusted operating margin of 7.5% marked the second consecutive year of 100 basis points improvement, driven by growth in AI-related demand for data center technologies, strong operational execution and improved operating leverage. We surpassed our annual outlook for each of our key financial metrics, further building on our positive momentum generated over the last several years. Looking back, our financial results reflect a consistent progression marked by a sustained annual improvement across revenue, adjusted operating margin and adjusted EPS. As we look ahead, we anticipate the strong momentum to continue with revenue growth expected to accelerate in 2026. Furthermore, our optimism continues to strengthen regarding the significant pipeline of growth opportunities that lie ahead for our businesses, particularly in our CCS segment, which we believe will sustain this growth trajectory in 2027. Before I provide an update on an annual outlook for each of our businesses, I would like to hand the call over to Mandeep to discuss our financial performance during the quarter and our guidance for the first quarter of 2026. Mandeep, over to you. Mandeep Chawla: Thank you, Rob, and good morning, everyone. In the fourth quarter, revenue of $3.65 billion was up 44% and above the high end of our guidance range, driven by a very strong demand in our CCS segment. Our non-GAAP operating margin was 7.7%, up 90 basis points driven by strong margin improvement in both of our segments. Our adjusted earnings per share was $1.89 in the fourth quarter, exceeding the high end of our guidance range and an increase of $0.78 or 70%. Moving on to some additional metrics. Adjusted gross margin was 11.3%, up 30 basis points, driven by higher volumes and stronger productivity. Our adjusted effective tax rate for the quarter was 19% and lastly, as a result of strong profitability and disciplined working capital management, we achieved adjusted ROIC of 43%, up 14 percentage points versus the prior year. Moving on to our segment performance. Revenue in our ATS segment for the quarter was $795 million, 1% lower and in line with our guidance of a low single-digit percentage decline. The decline in revenue was driven by lower volumes in our Capital Equipment business and previously communicated portfolio reshaping in our A&D business, partly offset by stronger demand in our other end markets. Our ATS segment accounted for 22% of total company revenue in the fourth quarter. Revenue in our CCS segment was $2.86 billion, up 64%, driven by very solid growth in both our communications and enterprise end markets. The CCS segment accounted for 78% of total company revenue in the fourth quarter. Revenue in our communications end market increased by 79%, above our guidance of a high 60s percentage growth, primarily driven by strong demand and ramping programs for 800G networking switches across our largest hyperscaler customers. Our enterprise end market revenue was higher by 33%, which was above our guidance of a low 20s percentage increase driven by the acceleration in the ramping of a next-generation AI/ML compute program with a large hyperscaler customer. Our HPS business generated revenue of $1.4 billion in the fourth quarter, representing growth of 72% and accounted for 38% of total company revenue. The strong growth was driven by ramping volumes in 800G switch programs with multiple hyperscaler customers. Moving on to segment margins. ATS segment margin in the quarter was 5.3%, up 70 basis points, primarily driven by improved profitability in our A&D business. CCS segment margin in the fourth quarter was 8.4%, an improvement of 50 basis points, driven by strong operating leverage. During the fourth quarter, we had 3 customers that each accounted for at least 10% of total revenue, representing 36%, 15% and 12% of revenue, respectively. For the full year 2025, we also had 3 customers that accounted for at least 10% of revenues at 32%, 14% and 12% of revenue, respectively. Moving on to working capital. At the end of the fourth quarter, our inventory balance was $2.19 billion, a sequential increase of $141 million and higher by $427 million compared to the prior year, as we support continuing revenue growth in our CCS segment. Cash cycle days during the fourth quarter were 61, an improvement of 8 days versus the prior year and was 4 days better sequentially. Turning to cash flows. In the fourth quarter, we generated $156 million of free cash flow, resulting in total annual adjusted free cash flow of $458 million in 2025, which was an increase of $152 million compared to the full year in 2024 and above our most recent annual outlook of $425 million. Our capital expenditures for the fourth quarter were $95 million or 2.6% of revenue bringing our total capital expenditures in 2025 to $201 million or 1.6% of revenue. Since we last spoke at our Investor and Analyst Day in October, we have continued our discussions with key customers in our CCS segment in order to align on long-term capacity planning. As a result of these discussions, we are meaningfully increasing the scale and scope of our capital investment plans in 2026 and 2027 in order to build out the revenue-enabling capacity required to support the strengthening demand we see ahead. We now anticipate that our capital expenditures for 2026 will be approximately $1 billion or 6% of our current annual revenue outlook. Importantly, we anticipate to be able to fully support this increase in capital expenditures through operating cash flow. The investments we are making in new capacity, which we expect will come online throughout 2026 and 2027 are a response to record bookings, accelerating growth in the scale of our existing engagements and meaningfully improved long-term demand visibility with our hyperscaler customers. We view our investments in new capacity as highly strategic aligning our global footprint with a multiyear capacity road maps of our key customers in support of their large-scale investments in data center infrastructure and AI capabilities. These investments will include a combination of capacity additions at our larger sites, new customer-driven investments in the United States and upgrades to manufacturing capabilities, including investments in power. We are undertaking significant new investments in Texas in support of growing customer demand for U.S. capabilities in the areas of R&D, manufacturing and advanced assembly. At both our Richardson campus and new site in Fort Worth, we are adding a total of over 700,000 square feet of footprint, with expanded power availability. This incremental capacity is expected to come online in 2027. Also, in order to facilitate greater engagement on R&D and design, we plan to establish a new HPS design center in Austin. Our CapEx plans also include large-scale investments in our manufacturing capacity and capabilities across the rest of our global network. In Thailand, we continue to add new capacity to support very strong demand from multiple customers. We are adding over 1 million square feet in additional footprint with upgrades, including expanded power availability, advanced liquid cooling manufacturing and testing capabilities. We expect this new capacity to come online towards the end of 2026 and into 2027. Elsewhere in our network, we are upgrading and retooling sites to add new manufacturing lines in locations such as Mexico and Japan in support of customer demand for greater geographic diversification. Allowing them the flexibility and optionality to derisk their global supply chains within our network. We are also excited to announce our plans to establish a new HPS design center in Taiwan. Overall, we are very encouraged by the strong alignment and close collaboration on capacity planning we have with our customers, which underpins our confidence in making these investments. Turning to our balance sheet and capital allocation. At the end of the quarter, our cash balance was $596 million. Our gross debt was $724 million resulting in a net debt position of $128 million. We had no draw outstanding on our revolver at the end of the quarter, leaving us with approximately $1.3 billion in available liquidity. Our gross debt to non-GAAP trailing 12-month adjusted EBITDA leverage ratio was 0.7 turns, an improvement of 0.1 turns sequentially and 0.3 turns versus the prior year period. As of December 31, we were in compliance with all financial covenants under our credit agreement. During the fourth quarter, we received regulatory approval to launch our new normal course issuer bid, which permits us to, at our discretion, purchase up to approximately 5% of our public flow until November 2, 2026. We will continue to be opportunistic towards share repurchases as our approach remains unchanged. During the quarter, we repurchased approximately 132,000 shares under our normal course issuer bid for $36 million. For 2025, our repurchases totaled 1.36 million shares at a cost of $151 million or an average cost of approximately $111 per share. Now moving on to our guidance for the first quarter of 2026. First quarter revenue is projected to be between $3.85 billion and $4.15 billion, representing growth of 51% at the midpoint. Adjusted earnings per share are anticipated to be between $1.95 and $2.15 representing an increase of $0.85 at the midpoint or 71% growth compared to the prior year. Assuming the achievement of the midpoint of our revenue and adjusted EPS guidance ranges, our non-GAAP operating margin for the first quarter is expected to be 7.8%, representing an increase of 70 basis points. We expect our adjusted effective tax rate for the first quarter to be approximately 21%. Finally, let's review our revenue outlook for each of our end markets. In our ATS segment, we anticipate revenue to be down in the low single-digit percentage range as growth in our HealthTech and industrial businesses are being offset by market-related softness in our Capital Equipment business and portfolio reshaping in our A&D business. In our CCS segment, we anticipate revenue in our communications end market to grow in the low 60s percentage range, primarily driven by ongoing ramps in multiple 800G programs with our hyperscaler customers. In our enterprise end market, we expect a very strong growth in the 100 high-teens percentage range, supported by the progression of a next-generation AI/ML hyperscaler compute program. With that, I will now turn the call back over to Rob for an update on our 2026 annual financial outlook and to provide additional color on the latest developments in our business. Robert Mionis: Thank you, Mandeep. Given the strengthening demand forecast across our portfolio, we are raising our 2026 annual financial outlook. We are increasing our revenue outlook to $17 billion and raising our adjusted EPS outlook to $8.75, representing year-over-year growth of 37% and 45%, respectively. This represents our high confidence view for 2026, which we will continue to refine and update as the year progresses. We are also maintaining our free cash flow outlook of $500 million. This demonstrates the inherent cash-generating power of our business, allowing us to organically fund a significant increase in capital investments while continuing to generate cash to fund other investment opportunities. Since our Investor and Analyst Day this past October, the velocity and scale of awarded programs and growth opportunities for Celestica continues to expand. As Mandeep discussed, we have responded by significantly increasing our capital investment plans in order to grow our global footprint in alignment with our customers' multiyear requirements. These investments are intended to provide us with the necessary scale to support the accelerated growth we anticipate in 2026 and which we believe will be sustained in 2027. In undertaking these investments, we have closely collaborated on demand planning with our largest customers, which has informed our decisions on the location, capabilities and scale of the new capacity we are developing. These investments are targeted to strategically support our customer base and their program-specific requirements over the long term. On this note, we are proud of our decade-long partnership with Google and are excited to continue supporting the acceleration of leading AI data center architecture. Celestica remains closely aligned with Google on the development of complex data center hardware and systems. As a preferred manufacturing partner for Google's Tensor processing unit, or TPU systems, Celestica is committed to making long-term investments in both capacity and capabilities both in the United States and across our global footprint, which includes our planned investments to expand manufacturing capacity in 2026 and 2027. These investments are designed to support the scaling of production for current and future generations of Google's custom silicon TPU systems as well as leading-edge networking technologies. Based on our latest outlook, we anticipate full year revenue growth of approximately 50% in our CCS segment, supported by strong demand and new program ramps across both end markets. In communications, demand from hyperscalers is driving strong volumes for our 800G programs, while 400G remains highly resilient. We continue to expect mass production for our first 1.6T switching programs to begin ramping in the latter part of the year. Over the past 90 days, we have continued to add to our pipeline of newly won business in networking, adding to an already robust view of demand into 2027. We are pleased to announce that we have secured the design and manufacturing award for the 1.6T networking switch platform with a third hyperscaler customer. This HPS engagement is expected to ramp production beginning in 2027 with design work already underway. This new program award, along with strengthening demand forecast from our largest customers and a significant funnel of opportunities gives us confidence and optimism regarding the growth trajectory of our networking businesses. In our enterprise end market, demand signals remain solid. As anticipated, we saw a meaningful ramp in our next-generation AI/ML compute program with a hyperscaler customer during the fourth quarter, and we continue to expect that volumes will accelerate into 2026. Looking towards 2027, we continue to anticipate strong demand from our hyperscaler and digital native customers, driven by ramps in next-gen AI/ML compute programs. Now moving on to our ATS segment. We are maintaining our outlook for revenues to remain approximately flat to up in the mid-single-digit percentage range for the full year 2026, consistent with the targets we shared at our Investor and Analyst Day in October. We continue to expect growth in our Industrial and HealthTech business, supported primarily by the ramping of new programs. We anticipate this growth will be at least partially moderated by lower volumes in our Capital Equipment business in the near term. As we progress through 2026, we anticipate overall ATS revenues to be higher in the second half of the year, led by a recovery in Capital Equipment volumes as broader market growth tailwinds come into effect. We also expect year-over-year growth to improve as we lap the impact from the strategic portfolio reshaping activities we undertook in A&D during the first half of 2025. Overall, we expect 2026 to be another year of transformational progress in the growth and evolution of our business. We are experiencing an unprecedented level of demand supported by the sustained large-scale multiyear investments from our largest data center customers. We believe our company is uniquely positioned as a critical enabler of the AI/ML revolution, helping to solve the most difficult challenges in the data center from advanced liquid cooling solutions throughout the rack to the transition to next-generation networking platforms. It's our ability to deliver these complex system-level solutions that allows us to win new mandates and solidify our leadership in the technologies of tomorrow. Today, our team is intently focused on our operational execution as we scale our global footprint to meet this growing demand. With that, I will now turn the call back to the operator to begin the Q&A session. Operator: [Operator Instructions] And your first question comes from the line of Ruplu Bhattacharya from Bank of America. Ruplu Bhattacharya: So it looks like you've taken up both the top line and the bottom line guide for fiscal '26. If we take the midpoint of the guidance literally, then there seems to be a slowdown coming in fiscal second half and also some loss of operating leverage. I mean the revenue guidance is 51% year-on-year for fiscal 1Q, but the full year is 37%, so implying some slower growth in the remaining 3 quarters. Likewise, in EPS it's 71% for the first quarter, but full year is 45%. So EPS is definitely growing faster than revenue and there is leverage in the model, but it looks like some operating leverage decline in the remaining 3 quarters. So can you just clarify for us, is there something specific that's causing this slowdown? Or should investors just chalk this up to conservatism in the guide? Mandeep Chawla: First of all, welcome back. We're always very happy to work with you. So thank you for the coverage. Yes, look, we're very confident on our 2026 outlook. And as we said in our commentary and Rob mentioned, it's our high confidence view. Our customer forecasts right now for 2026 are higher than the $17 billion that we are guiding and what's also really nice to see right now is that the demand outlook with our customers is actually extending beyond sometimes our typical fourth quarter outlook. Similar to past outlooks that we've had, Ruplu, we're taking a pretty pragmatic view. Our views on next quarter and the quarter after that are typically going to be very much dialed in and we're going to share with you what that visibility exactly looks like. But when we look beyond the 2 quarters, we're just being pragmatic. We're focusing on securing supply. We have no concerns at this time, but we just want to make sure that the supply base can also ramp as fast as we are ramping, and then we take into account the macro uncertainties, which, as you know, there's a lot of them. But as we go through the year, we are working towards a higher number, and we'll look to be updating the numbers as we go. Ruplu Bhattacharya: Okay. If I can ask a quick follow-up. I want to ask about risk management. So you obviously have a lot of opportunity in both your white box switching business and the custom ASIC server business. One thing you mentioned is you're increasing CapEx to fund the growth. Can I ask if you're concerned about any potential funding for future AI-related projects? And is there any risk to programs materializing? And have you taken that into account? And also, you've kept free cash flow at $500 million. Given that CapEx is going up and you're probably going to need more working capital to support revenue growth, can you just tell us like -- is there a risk to the story here? And what is giving you confidence to maintain the free cash flow guide? And again, congrats on the quarter. Robert Mionis: I'll start off, I'll let Mandeep finish up. With respect to programs materializing, the build-out that we're doing is based on both businesses. We had a record bookings year in 2025 and we're really just building out to support those bookings. So there's very little risk in those programs materializing. They have been in the development cycle right now, and we're doing proof of concepts with respect to validation testing and they're well underway to ramping in 2026. In terms of risks to the entire story, Mandeep talked about it. We view it more as uncontrollable, like geopolitical risks. There's always an opportunity of tightening supply chain. But frankly, our suppliers realize now that we have a lot of leverage these days given our scale. And we're also a design agent, which is giving us some leverage in the supply chain. We also have a lot of opportunities, as Mandeep mentioned. Demand continues to well outstrip our ability to provide it in the very short term. We have very strong demand from networking with respect to 400G, 800G and 1.6T ramps that are happening later on this year. And on top of this, we have some very strong demand for AI/ML compute. And within the enterprise market, we're also seeing signs of very significant growth. So overall, we see more opportunities than risk at this time. Mandeep Chawla: I'll talk about cash generation. And look, we're very comfortable with our ability to invest. And frankly, we're willing to invest even more as we go through the year. That's what's in front of us. We think we'll generate at least $500 million of free cash flow this year. That's after paying for $1 billion of CapEx. I know that those on the call already are aware of this. We generated positive free cash flow every quarter for almost 7 years now. And it's because we are very focused on generating strong positive free cash flow every quarter. And so with the growth plans that we have in front of us, we don't see that being a risk. And this is even going beyond the fact that we have an incredibly healthy balance sheet. And so we think that we can fund these with cash generation and not have to even use the balance sheet. Thanks for your questions. Operator: Your next question comes from the line of Samik Chatterjee with JPMorgan. Samik Chatterjee: Maybe if I can start with the CapEx investment and the ramp here, I know you provided us an update at the Investor Day and you mentioned that activity really ramped with customers again since then and engagement did ramp. I'm trying to think like when you are sort of going ahead and doing this investment, should we think about this as something that drives revenue in 2027 itself? Or are these sort of programs as well as the ramp sort of more to address customer demand in 2028, 2029. Just trying to get a sense of what kind of program visibility customers are giving you already to drive this significant investment from you? Just trying to get a sense of that? And I have a follow-up. Robert Mionis: Samik, yes, the capacity that -- the CapEx that we're investing in now, as I mentioned earlier, is based on booked business. With respect to 2026, we do have the capacity to grow beyond our current high confidence outlook. So the investments we're making are enabling additional capacity for 2027 and 2028 based on booked business. Now as we continue to win in the marketplace, we'll further evaluate our capacity expansion plans, and then there will be an opportunity to expand our revenue outlook for '27 into '28. But right now, the investments we're making in '26, which also will have a follow-on effect into '27 is really just on the backlog of business that we have right now. Samik Chatterjee: Got it. Okay. And then maybe for the follow-up, the outlook that you're sharing for CCS to maintain these sort of strong growth rates into 2027. Just wondering, does that sort of incorporate the digital native customer and the ramp with that customer? -- And any updates in terms of over the last sort of 90 days, anything -- any updates in relation to your timing or sort of how you think about the magnitude of that ramp in 2027? Mandeep Chawla: Yes, Samik. So we are seeing accelerating growth happening within CCS. If you go back to our commentary from 3 months ago versus today, 3 months ago, we were saying that when you break down the numbers that CCS would be growing by about $3.5 billion in '26. And then when we put a 40% growth rate on that, it was implying about a $5 billion of CCS growth in 2027. We're now updating those numbers and going off of a higher base. So now what we're implying is that 2026, CCS will grow probably closer to $4.5 billion, so about $1 billion higher than what we talked about 3 months ago. And because we're saying that we're seeing very strong trajectory continuing, we're now seeing CCS grow close to $7 billion in 2027 and that's off of a higher base. And so the demand outlook is very robust. Your question on the digital native customer, that continues to progress just as we would have expected it to. We still expect it to be a meaningful contribution in 2027. We are actively working on the design aspects of the program. And we do believe that, that program will still ramp into the '27, and that's included in the numbers that we're sharing. Operator: [Operator Instructions] Your next question comes from the line of Thanos Moschopoulos with BMO Capital Markets. Thanos Moschopoulos: Can you speak to how we should think about the margin trajectory? Just given the mix shift dynamic where you've got some enterprise becoming the larger part of CCS mix, would that imply that there might be some compression in CCS margins as the year progresses and into '27? Or are there offsets to that? Mandeep Chawla: Yes, we're seeing tremendous amount of growth happening right now in enterprise. We are really pleased with the trajectory that we are -- that's already underway. You saw that we had a very nice growth number in the fourth quarter, and that's accelerating as we go into Q1. We expect that program to continue to grow all through 2026. And then just as a reminder, we've already won the next generation of that program. And so we would expect those programs to actually ramp into 2027. So our outlook for enterprise continues to be very healthy. We are seeing very strong operating leverage. And so we don't necessarily expect a large mix headwind, if you will, from growing of the enterprise business. We do make more money on networking in general. But with the leverage that we're getting and the very disciplined cost management, we still think that the enterprise business is going to be able to generate very strong profitability. And so for that reason, it's embedded in our numbers. 2026, we're giving an outlook right now where margins expand by 30 basis points. And what I would just say is that that's our -- that's the floor of our expectation. We would be looking to do better than that hopefully. Robert Mionis: I would also add, Thanos, that networking is also very strong in 2026 and going into 2027. In 2026, we see 400G very resilient, the 800G very strong and we see 1.6T ramping in the back half of the year. So we have all 3 major programs running concurrently, which is helping the operating leverage and also helping the mix. Operator: Your next question comes from the line of Michael Ng with Goldman Sachs. Michael Ng: Great. My question is just around the CapEx. Encouraging to hear about all the visibility your partners are giving you. I wanted to ask whether the capital intensity in the business has changed at all? Or does the $1 billion CapEx support 2% to 2.5% revenue over time, kind of implying a path to $40 billion to $50 billion of revenue over time. Is that a fair way to think about it? Or has the capital intensity in the business changed at all? Mandeep Chawla: Michael, I'm not going to help you back into that number, but I completely understand the way that you look at it. What I would say is that we have in the last number of years been investing the majority of our CapEx dollars into growth CapEx. We spent probably $70 million to $80 million on maintenance and that's not going to change very much. And so as a percentage of revenue, we expect that our maintenance CapEx is going to be very predictable and not a huge driver. And so therefore, the delta is really on growth CapEx. To the point that Rob has made, we are making this sizable investment to tie to programs that we've already won that are going to be generating, we believe, material revenue in 2027 and 2028. Should those wins continue, and we would expect that they would, we have no hesitation in increasing our CapEx. But you almost want to think of it almost like at a project level. We are building -- we're making these investments to support specific wins at this time. At a certain point, we would expect the CapEx to moderate because, again, the vast majority of it is growth. And so when we get back to a maintenance level, we would be back to what we would normally expect. Operator: Your next question comes from the line of Karl Ackerman from BNP Paribas. Karl Ackerman: So I know you have deep engagements on the 400-gig and 800-gig switch programs, but could you speak to the opportunity you have to address multi-rack scale-up XPU networks, such as optical circuit switches and co-packaged optics-based switches perhaps in terms of the breadth of customer engagements. Robert Mionis: Yes, sure. So we see increasing activity and increasing R&D expenditures. Some of it's a little premature to talk about now, but to do more AI/ML and networking integrated -- fully integrated systems, both supporting scale-up and scale-out fabrics. Based on a proof point with our digital native and some other early engagements that we have with other providers, we see this as a major growth driver for our business moving forward. As these AI models continue to grow and GPU to GPU interconnects become more and more important, scale-up will be as much as an opportunity as scale-out. So we see this as a major growth opportunity for us. And we're well underway in capturing a lot of that -- those growth opportunities and we hope to have more to share with you in coming months. Mandeep Chawla: Karl, what I would just add to Rob's comment is that when you look at the 1.6T wins that we've already had to date, they are both being used for scale-up and scale-out. And with the funnel of opportunities that we have in front of us that diversification continues, and we would expect that we would continue to grow in that area. In addition, I think to the question that you raised on co-packaged optics, we are starting to see conversations with our customers increase in this area. We still believe that in terms of mass adoption, it's going to be more towards 3.2T, which are programs that we're working on in our R&D group. But we haven't seen customers looking for mass adoption of CPO as of yet. And so that's pretty similar to what we said a few months ago. Operator: Your next question comes from the line of Tim Long with Barclays. Timothy Long: I did want to just talk about a few comments on the call you guys made about new programs and new program wins. Could you talk a little bit about kind of -- you talked about some strong backlog and visibility and wins as well as, obviously, the capacity expansions. You obviously got a lot of large switching and AI/ML and digital native rack wins. Can you talk about the outlook for the next few years. What we should expect to see from newer programs where they could be centered? Would this more be around new switching customers or new applications or use cases from some of the existing customers? Anything you could give us on that would be helpful. Robert Mionis: Yes. The visibility, Tim, that we're seeing with our customers at this stage is unprecedented. We're certainly into '27 and many customers were talking into 2028. Our customers now are viewing us less as a supply chain partner and more as a technology leader. And part of that process is aligning on our technology road maps, which is informing our investment decisions. And these investment decisions are enabling and informing all the future products moving forward. And those products are more in the lines of a fully integrated rack systems supporting in scale-up and scale-out. Also staying on the leading edge of switching 3.2T samples are due in probably towards the end of 2026 and we're already starting to work on that. Mandeep alluded to some of the proof of concepts that we have co-packaged optics. So where it's only going to be ready for when that hits down the 3.2 cycle as well. So broadly speaking, our portfolio is getting broader and deeper with our customers moving forward. Operator: Your next question comes from the line from David Vogt with UBS. David Vogt: So I have a question about sort of the scope of work and the economics of the digital native customer. Can you kind of update us on where we stand in terms of what that relationship looks like as we go into '26 into '27? And then Mandeep, on the CapEx numbers, that $1 billion, can you help us parse through how much of that CapEx is tied to sort of the existing customer base and the expansion of programs and projects with your largest customers versus incremental customers like the [ DNC ] or any other incremental customers that you see in the pipeline for '26, '27? Robert Mionis: Yes, I'll start off. With respect to the digital native customer, we have a very tight engineering-driven relationship with our customer. In 2026. So we're going to be shipping them largely samples and getting ready for the ramp that should be starting in the early parts of 2027. At this stage of the game, the program is on track, and we're just getting ready for the ramp working with them and the silicon provider and all the ecosystem partners, but it's -- the relationships is a solid relationship. Mandeep Chawla: Yes. And just to add on to that in terms of question for CapEx and how it's kind of being allocated. So geographically, now you're aware of how we're allocating it. We're putting in significant investments in areas like Thailand, Richardson, Texas as well as Fort Worth. And it's really to support multiple customers. And so we are largely investing in programs that we've won across the major hyperscalers. Those are very -- we have a high confidence view to work with these customers sometimes for well over a decade. But with our digital native customer, we are willing to make investments as well. And so some of the investment is going towards enabling the ramp in 2027. But I would say the vast majority of the expenditures are tied to programs with our hyperscalers. Operator: Your next question comes from the line of Paul Treiber with RBC Capital Markets. Paul Treiber: Just a question, just in light of the new program win momentum that you're seeing, can you speak to how the returns and expected returns on those programs compare against existing programs? And really, what I'm going to add is also, are you seeing competition changing the returns on new programs versus what you saw in the past? Mandeep Chawla: Yes. Paul, I'll take the first part of the question, and I'll let Rob talk about the competitive intensity that's happening in the marketplace. Look, the approach that we take when we make investments with our customers is really a holistic view. We look at it on a global basis. We want to ensure that we're generating strong profitability. But more importantly, we want to make sure we're supporting our customers in the geographies that they need. And so we will look at investments at the customer level on a global basis. But of course, we want to ensure that specific investments tie out on their own as well. I know you know this, which is we're a very ROIC-driven company. We're focused on strong profitability, but just as much we're focused on a very disciplined level of investment. And so we'll make sure that business cases hold. And so from a returns perspective, what I would just say is that we continue to focus on expanding our ROIC. We continue to focus on expanding our margins while generating very strong top line growth. And so those are always factors whenever we're looking at business cases. Robert Mionis: In terms of competitive intensity, and I would say as time goes on, the programs that we're bidding on and winning are becoming more and more complex. In many cases, some of the business that we decided not to play the pricing game on in 2025 have come back to us in 2026 because others could not execute on it. So when we look at our competitive moat, we have some fantastic engineering to be able to design these complex products. But even more so a very few of our competition can produce these products at scale. And when you combine those 2 together, it's really giving us a lot of tailwinds in '26 and also moving into 2027. That combination is proving to be very powerful for us. Operator: Your next question comes from the line of Ruben Roy with Stifel. Ruben Roy: Rob, maybe you could follow up where you left off there, and I had a question on the 1.6T win, the new win at a new hyperscaler. Are you seeing a shift towards HPS design-led solutions and away from cost plus? You've got the design center that you talked about in Austin. Just wondering if that's something that's happening as you move towards these more complex switching technologies and how you see that playing out from a margin perspective as you think about 2027, '28 time frame? Robert Mionis: Yes. Certainly, thanks for the question. 1.6T and even as we move into 3.2T, the complexity that's required, the engineering complexity that's required on these things is moving more towards HPS engagements. So on the networking side, we see that increasing over time. And the density and the complexity is only going to increase at every node. On the AI/ML compute side, we like to play really on the HPS and JDM design-oriented AI/ML compute. And we also see as that gets more and more sophisticated, more opportunity for us to play in that area, and we have several projects in the pipeline to improve those engagements on the HPS side as well. Operator: Your next question comes from the line of Steven Fox with Fox Advisors. Steven Fox: First of all, congratulations on reaching a point where people are complaining about 37% growth. I thought that was great. In terms of my question, there's been a bunch of confusion around with your largest customer, how the supply chain works on those AI/ML compute programs and where you are sort of positioned versus their other suppliers? Is there any -- can you just sort of clarify how you're playing there? What kind of competition you see? And then it looks like you're also expanding directly to support some more programs on that. So anything on that would be helpful. Robert Mionis: Certainly. I would chalk this up, you can't believe everything you read. What I can emphatically say is that our partnership with Google has never been stronger or more integrated. We have absolutely no indication there are new entrants into that market. As you know, these are very complex products to manufacture, especially at scale. And we have been doing it for a very long time with this family of products. As a preferred partner with Google on these leading edge compute programs. We have a joint commitment to each other moving forward, not just for the current generation, but for future generations of their TPUs. And we've been supporting this technology for generations and we hope to continue to do so going well into the future, which is warranting a portion of the investments moving forward. And I would also add that the capacity expansion that we're making certainly is in support of Google, but it's also in support of growth from other hyperscalers and digital native support. Operator: Your next question comes from the line of John Shao with TD Cowen. John Shao: So within your guidance, how much do you bake in a price increase of key components or materials? At this point, are you still comfortable with the supply chain? Do you think this is going to be any source of potential margin compression given right now, we're getting this inflationary environment in the supply chain? Mandeep Chawla: Yes. So we factored in inflation and pricing into the numbers that we've already shared. Just as a reminder to everyone on the call, when we have networking, we have it on a turnkey basis, which is our typical approach, meaning it includes the silicon, where on the compute side, it typically does not. And so where there is a lot of price inflation, it's happening on the silicon side. So you're not going to necessarily see our growth in our enterprise numbers being driven by that. On the networking side, we're growing in terms of overall volume. But yes, there is inflation happening at the silicon side, which we're able to pass on to our customers. And so are we seeing margin compression? No, not right now. But if silicon becomes a much larger part of the bill of materials, then perhaps it will, but that's not in our line of sight at this time. But there is a little bit of contribution in our revenue growth year-over-year coming from just the fact that ASPs are going up, but the vast majority of the growth is due to units. Operator: Your next question comes from the line of Todd Coupland with CIBC. Thomas Ingham: I wanted to ask about the 1.6 programs in the second half of the year. And at this point, what are the range of outcomes and gating factors for those programs to start to ramp this year? Just talk about that a little bit. Robert Mionis: Yes. We have 10 active 1.6T programs in the pipeline right now. And 5 of them will start ramping in the back half of the year and certainly into 2027. And several -- the balance of them are in the development pipeline and will be ramping later in '27 into '28. The gating factors really is just completing the development cycle as planned and things are on track. Silicon is on track. So I just think it's business as usual in terms of supporting our customers' ramps. Mandeep Chawla: Todd, if I could maybe add to that. When we look at our -- the overall switching demand that's out there right now, what we're really encouraged by is there's been a tremendous amount of growth happening in 800G that happened in 2025, and that's continued in 2026 and 400G continues to hold. So 400G will be a strong contributor in 2026. 800 will continue to grow. And then you got 1.6 coming on as well towards the end of the year. And so the dynamic that's really been playing out in the last couple of years is that the next-generation technology is not necessarily cannibalizing the previous generation. And so this is one of the reasons that we have a lot of optimism on the networking space exiting '26 even and going into '27. Operator: Your next question comes from the line of Atif Malik from Citi. Atif Malik: We got a couple of questions from investors on this yesterday. In your press release, you called out Google TPUs as a preferred manufacturing partner versus sole source. Is that a new disclosure? And then just as a follow-up, if some of your hyperscalers were to adopt more TPUs, do they all go through you guys? Or there are other entities like Broadcom and others that can participate in the TPU rack [ trade ] business? Robert Mionis: On the first one, Atif, no, I don't think it's a new disclosure. We're not sole sourced or single sourced on the TPU programs nor have we -- frankly, nor I think we've ever said that. For [ BCP ] purposes, most, if not all of our hyperscaler customers remain a second source. But we are a primary source for them on TPU programs and continue to do so. With Google and with all of our hyperscalers, share is largely awarded on performance. Our performance has been very strong. And as a result, they make the decisions accordingly. Mandeep Chawla: And then to the question that you were raising about as Google's TPU gets adopted beyond just Google itself, how does that play out. Right now, our view is that those -- that increased level of demand for their types of products will flow through their supply chain. And as their preferred manufacturing partner, we would expect to be able to support them with that. And so right now, it's wonderful to see that their product is being adopted in the marketplace, and we do expect to be able to support them with that growth. Operator: Your final question comes from the line of Robert Young with Canaccord Genuity. Robert Young: On the third hyperscaler, 1.6 win, how was this one? Was it an extension of 800? Was it tied to your Tomahawk ASIC experience. And, like, is it part of a rack integration with another outside vendor? Or is that being done by the hyperscaler? Just some context around that? And then if you could also talk about how you expect operating margins to evolve as you move into 1.6 terabytes programs and how that might differ between -- I think you have 2 full rack and then 2 stand-alone if I understand the large programs. Now how would the margin structure differ and evolve? Robert Mionis: Rob. Yes, on the third 1.6T, so with this hyperscaler, we were predominant share on the 400G. We were predominant share and one on 800G, and this is just an extension of going to the 1.6T. The engagement started with a design win that we're happy with the performance with this switch. It's based on the 400 and 800. And we were awarded the mass production for this switch as well. Mandeep Chawla: Yes. And then in terms of the margins, Rob, what I would just say is that we approach our switching portfolio in a similar way even as we go into the next generation, we typically make more money during the ramping and the development cycle of a program. And then as it gets to mass production, we try to offset that pricing with operating leverage. And so we do expect 1.6 programs to be as profitable as we've seen on some of our past switching programs. One interesting dynamic, though, is that more and more of our switching portfolio should be moving towards HPS. We have some of our switching portfolio today in EMS. And just typically as we embed more of our engineering, that leads to better pricing. And so we are happy with the way that the margin profiles look like for 1.6 products. Robert Young: And is there any context on between the full rack deployment and stand-alone? Mandeep Chawla: Yes, it's integrated. And so we take a look holistically when we are doing this for our customers. As you mentioned, it's integrated. So there's 1.6 switches, but then there's also compute and then there's the integration activities, so we do testing for them. And then at certain points, we may be able to do services as well. If you look at it on a holistic basis, and we ensure that the value that we're bringing on the switching side, which has the most engineering that we have is getting captured in overall price. Operator: There are no further questions at this time. So I will now turn the call back to Rob Mionis, CEO, for closing remarks. Robert Mionis: Thank you. And thank you again for joining us this morning. 2025 was an exceptional year for Celestica, characterized by record financial results. We're excited to build on this momentum in '26 and as we raise our annual revenue outlook to $17 billion. The strategic investments we are making provide us with the capacity to support our customers' multiyear AI road maps and our deep partnership with industry leaders like Google and our expanding global footprint in Texas and Asia reinforces our confidence that our growth trajectory will be sustained into 2027 and beyond. We look forward to updating you on our continued progress next quarter, and thank you again for joining the call. Operator: This concludes today's call. Thank you all for attending. You may now disconnect.
Operator: Ladies and gentlemen, welcome to the STMicroelectronics Full Year 2025 Earnings Release Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Jerome Ramel, EVP, Corporate Development and Integrated External Communications. Please go ahead, sir. Jerome Ramel: Thank you, Maura, and thank you, everyone, for joining our fourth quarter and full year 2025 financial results call. Hosting the call today is Jean-Marc Chery, ST President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, President and CFO; and Marco Cassis, President, Analog, Power and Discrete, MEMS and Sensor Group and Head of ST Microelectronics Strategy, System Research and Application and Innovation Office. This live webcast and presentation materials can be accessed on ST Investor Relations website. A replay will be available shortly after the conclusion of this call. This call will include forward-looking statements that involve risk factors that could cause ST results to differ materially from management's expectations and plans. We encourage you to review the safe harbor statement contained in the press release that was issued with the results this morning and also in ST's most recent regulatory filings for a full description of these risk factors. Also to ensure all participants have an opportunity to ask questions during the Q&A session, please limit yourself to one question and a brief follow-up. Now I'd like to turn the call over to Jean-Marc Chery, ST President and CEO. Jean-Marc Chery: Thank you, Jerome. Good morning, everyone, and thank you for joining ST for our Q4 and full year 2025 earnings conference call. I will start with an overview of the fourth quarter and the full year 2025, including business dynamics, and I will hand over to Lorenzo for the detailed financial overview. I will then comment on the outlook and conclude before answering your questions. So, starting with Q4. We delivered revenues at $3.33 billion, above the midpoint of our business outlook range, driven by higher revenues in Personal Electronics and to a lesser extent in Communication Equipment and Computer Peripheral and Industrial, while Automotive was below expectations. Gross margin of 35.2% was also above the midpoint of our business outlook range, mainly due to better product mix. Excluding impairment, restructuring charges and other related phaseout costs, diluted earnings per share was $0.11, including certain negative one-time tax expenses impact of $0.18 per share. Q4 revenue marked the return to year-over-year growth. During the quarter, we further worked down inventories, both in our balance sheet and in distribution, and we generated a positive $257 million free cash flow. Looking at the full year 2025. Net revenues decreased 11.1% to $11.8 billion, mainly driven by a strong decrease in Automotive and to a lesser extent, in Industrial, while Personal Electronics and Communication Equipment and Computer Peripheral both grew. Gross margin was 33.9%, down from 39.3% in full year 2024. Excluding impairment, restructuring charges and other related phaseout costs, diluted earnings per share was $0.53. We invested $1.79 billion in net CapEx, while generating free cash flow of $265 million. Let's now discuss our business dynamics during Q4. In Automotive, during the quarter, we grew revenues 3% sequentially. Year-over-year revenues declined, but with continued improvement in the trend. Automotive design momentum progressed with design wins across both electric and traditional vehicle domains for applications such as onboard chargers, DC-DC converters, powertrain and vehicle control electronics. These included design wins for power semiconductors, smart power devices, automotive microcontrollers, analog and sensors. These awards supported by engagements with various OEMs and Tier 1 ecosystems, strengthen our position as a key supplier to the automotive industry. Regarding the acquisition of NXP's MEMS sensor business, the transaction we announced in July is still expected to close in H1 2026. In Industrial, revenues were better than expected, showing increases of 5% sequentially and 5% year-over-year. Importantly, inventories in distribution further decreased and are now normalizing. In Industrial, our portfolio of microcontrollers, sensing technologies and analog and power devices is strongly positioned to support industrial transformation trends and the need of physical AI. During the quarter, we saw design wins across industrial automation and robotics, building automation, power systems, health care and home appliances. In November, we held our STM32 Summit where we announced several key innovations, including the first microcontroller built on the 18-nanometer process, a next-generation wireless microcontrollers and an updated suite of edge AI software tools. Personal Electronics, fourth quarter revenues were above our expectations, down 2% sequentially, reflecting the seasonality of our engaged customer programs. During the quarter, we strengthened our position in mobile platform and connected consumer devices, both with our engaged customer programs as well as our open market offering for devices such as our sensors, secure solutions and power management products. Revenues for communication equipment and computer peripherals were up 23% sequentially, better than expected. In AI and data center infrastructure, we continue to reinforce our position supporting the increasing demand for higher power density and energy efficiency. During the quarter, we secured multiple design wins for silicon and silicon carbide-based power solutions, supporting next-generation AI compute architectures. We also continue to work with customers to bring our silicon photonics technology to the market. The strong momentum in optical connectivity technologies for data centers also contributed to a significant rise in demand for our high-performance microcontroller used in pluggable optics. The low-earth orbit satellite business based on our BiCMOS and panel level packaging technologies continued to progress during the quarter with shipments ramping to our second largest customer. Moving to sustainability. We remain on track for our key 2027 commitments. Carbon neutrality in all direct and indirect emissions from Scope 1 and 2 and focusing on product transportation, business travel and employee commuting emissions for Scope 3 and 100% renewable energy sourcing. A major milestone this year was the launch of Singapore's largest industrial district cooling system at our Ang Mo Kio facilities in Q4. We also continue to maintain our strong presence in the major sustainability indices where we were honored to be recognized in the Time world's most sustainable companies list for the second consecutive year. Now over to Lorenzo, who will present our key financial figures. Lorenzo Grandi: Thank you, Jean-Marc, and good morning, everyone. Let's have a detailed review of the fourth quarter. Starting with revenues on a year-over-year basis by reportable segment. Analog products, MEMS and sensor grew 7.5%, mainly due to Imaging. Power and Discrete products decreased by 31.6%. Embedded Processing revenues were up 1% to 2% with higher revenues in general purpose and automotive microcontrollers, offsetting declines in connected security and custom processing products. RF and optical communication grew 22.9%. By end market, communication equipment and computer peripheral and personal electronics both grew by about 17%. Industrial grew by about 5%, while automotive decreased by about 15%. Year-over-year, sales increased 0.6% to OEM and decreased 0.7% to distribution. On a sequential basis, Power and Discrete was the only segment to decrease by 3.9%. All the other segments grew, led by RF and optical communication up 30.5%, while Embedded Processing and Analog products, MEMS and sensor were up, respectively, 3.9% and 1.1%. By end market, sequential growth was led by communication equipment and computer peripherals, up 23%. Industrial was up 5% and automotive was up 3%, while Personal electronics declined 2%. Turning now to profitability. Gross profit in the fourth quarter was $1.17 billion, decreasing 6.5% on a year-over-year basis. Gross margin was 35.2%, decreasing 250 basis points year-over-year, mainly due to lower manufacturing efficiencies and to a lesser extent, negative currency effect and lower level of capacity reservation fees. On a sequential basis, gross margin improved by 200 basis points. Q4 gross margin included about 50 basis points of negative impact resulting from a nonrecurring cost related to our manufacturing reshipping program. In the next few quarters, we expect a similar negative impact on gross margin from the just mentioned nonrecurring costs. Total net operating expenses, excluding restructuring, amounted to $906 million in the fourth quarter, slightly increasing year-over-year due to unfavorable currency effect. They were slightly better than expected, reflecting our continued cost discipline and the initial benefit from our cost savings initiative. For the first quarter 2026, we expect net OpEx to stand at about $860 million, decreasing quarter-on-quarter. As a reminder, these amounts are net of other income and expenses and exclude the restructuring. In the fourth quarter, we reported $125 million operating income, which included $141 million for impairment, restructuring charges and other related phaseout costs. These charges are related to the execution of the previously announced company-wide program to reshape our manufacturing footprint and resize our global cost base. Excluding the nonrecurring items, Q4 non-U.S. GAAP operating margin was 8%, with Analog product MEMS and Sensor at 16.2%, Power and Discrete negative 30.2% Embedded Processing at 19.2% and RF and Optical Communication at 23.4%. Fourth quarter 2025 net loss was $30 million, including certain onetime noncash income tax expenses of $163 million compared to a net income of $341 million in the year ago quarter. Diluted earnings per share was negative $0.03 compared to $0.37 of last year. Excluding the previously mentioned nonrecurring item related to the impairment, restructuring charges and other related phaseout costs, non-U.S. GAAP net income stood at $100 million and non-U.S. GAAP diluted earnings per share stood at $0.11, including certain negative onetime tax expenses impacting of $0.8 per share. Looking now at our full year 2025 financial performance. Net revenue decreased 11.1% to $11.8 billion. In terms of revenue by end market, Automotive represents about 39% of our total 2025 revenues. Personal Electronics about 25%; Industrial, about 21% and Communication and Computer Peripheral about 15%. By customer channel, sales to OEMs and distribution represent 72% and 28%, respectively, of total revenue in 2025. By region of customer region, 43% of our 2025 revenues were from the Americas, 31% from Asia Pacific and 26% from EMEA. Gross margin decreased to 33.9% for 2025 compared to 39.3% for 2024, mainly due to lower manufacturing efficiencies and to a lesser extent, the price and mix, lower level of capacity reservation fees, negative currency effect and higher unused capacity charges. Operating income stood at $175 million compared to $1.68 billion in 2024. Excluding $376 million for impairment, restructuring charges and other related phaseout costs, non-U.S. GAAP operating margin was 4.7%. On a reported basis, net income was $166 million and EPS was $0.18. On a non-U.S. GAAP basis, they stood respectively at $486 million and $0.53. Net cash from operating activities totaled $2.15 billion compared to $2.97 billion in 2024. Net CapEx expenditure was $1.79 billion in 2025, in line with our revised expectation and lower than the $2.5 billion of 2024. Free cash flow was $265 million positive in 2025 compared to the $288 million positive of the previous year. Inventory at the end of the year was $3.14 billion compared to the $3.17 billion at the end of the third quarter and $2.79 billion one year ago. Days sales of inventory at quarter end were 130 days, slightly better than our expectation compared to the 135 days for the previous quarter and 122 days in the year ago quarter. Cash dividends paid to stockholders in 2025 totaled $321 million. In addition, during 2025, ST executed share buybacks totaling $367 million. ST maintained its financial strength with a net financial position that remains solid at $2.79 billion as at end of December 2025, reflecting total liquidity of $4.92 billion and total financial debt of $2.13 billion. Now back to Jean-Marc, who will comment on our outlook. Jean-Marc Chery: Thank you, Lorenzo. Now let's move to our business outlook for Q1 2026. We are expecting Q1 '26 revenues at $3.04 billion, a decrease of 8.7% sequentially, plus or minus 350 basis points. We expect our gross margin to be about 33.7%, plus or minus 200 basis points, including about 220 basis points of unused capacity charges. This business outlook does not include any impact for potential further changes to global tariffs compared to the current situation. In terms of net CapEx for 2026, we plan to invest about $2.2 billion to support capacity addition for selected growth drivers like those for cloud optical interconnect and our manufacturing reshaping plan. To conclude, 2025 turned out to be a challenging year for the end market we serve, characterized by continued inventory correction in automotive and industrial, in particular, the first part of the year. The second half was better with gradual improvement of the revenue trend and a return to a year-on-year growth in the fourth quarter. We are entering '26 with a better visibility than entering '25 with the inventory correction in distribution progressively improving. Beyond the evidence of a cycle recovery, ST will benefit from the following company-specific growth drivers. In automotive, we see solid momentum in our engaged customer programs in ADAS, where we expect to grow this year and in the coming years. In silicon carbide power devices, following a significant contraction in 2025, we anticipate a return to revenue growth in 2026 with revenues projected to recover to 2024 levels by 2027. In sensors, we see strong demand, both in MEMS and imaging sensor and our planned acquisition of NXP MEMS business will strengthen our leading position across the automotive and industrial segment. In industrial, in general purpose MCUs, building on market share gains 2025 and a road map of new product launch for 2026, we are on track to return to our historical market share of about 23% by 2027. In Personal Electronics, where we continue to see strong momentum in our engaged customer programs in sensors and analog, we should keep on benefiting from increased silicon content in 2026 and beyond. In communication equipment, computer peripheral, in data centers, including cloud, optical interconnect and power and analog for AI servers and data centers, with the current market dynamic, we believe we can deliver $1 billion revenue before 2030 with already USD 500 million in 2026. In low-earth orbit satellites, we are expanding our customer base, and we anticipate continued revenue growth as low earth orbit constellation projects expand globally and penetrate new applications such as direct-to-cell constellation. Lastly, ST is uniquely positioned to address human wind robotics through our broad portfolio, spanning MCUs, MEMS, optical sensors, GNSS and power management. We are already generating revenues through engagements with major OEMs, and we estimate our current addressable bill of material at about $600 per system. Thank you, and we are now ready to answer your questions. Operator: [Operator Instructions] Our first question comes from Francois Bouvignies from UBS. Francois-Xavier Bouvignies: My first question maybe for Jean-Marc, I wanted to come back to what you said about the outlook. I mean, if we look at your revenue guidance down 8.7% quarter-on-quarter, this is below seasonal -- better than seasonal, sorry, of minus 11%. And if we take into account less days, it's actually significantly above seasonal. So, I was wondering, I mean, this is looking quite interesting. And if we compare to other peers like TI yesterday or ADI and Microchip, you see a number of your peers talking about above seasonal. I mean what's your view on the trajectory from here? Do you think this above seasonal trend can carry on a little bit? Or we shouldn't get carried away like we did in the last two years where we have many fall starts? Do you see like a very genuine evidence of a cycle recovery from here? Jean-Marc Chery: Well, we will not guide for 2026 today, clearly, but we are confident in our ability to grow organically for next year. But it's clear that we enter in a better and healthier situation compared to '25. If you remember last quarter, okay, I already shared with you that we were seeing a backlog that were reading during the quarter better than the usual seasonality. And today, with the visibility we have on Q2 that generally speaking, okay, is plus, let's say, low mid-single digit, but we absolutely see no reason that we will not be at least capable to deliver it. More important, I think, beyond the cycle is to share with you that we see for the company some specific growth driver. First of all, in automotive, clearly, we will have the sensor. And at a certain moment, when we will complete the acquisition of NXP, of course, it will bring additional revenues. This is obvious. But we see also positive momentum on ADAS ASICs and the silicon carbide after last year that was pretty challenging. Well, in industrial, clearly, the dynamic is really strong, thanks to the inventory correction gone, but more important is our portfolio. So we have done a tremendous effort in introduction of new products in '25 and '26, and this will contribute beyond the cycle. For Personal Electronics, our engaged customer program, you know that we have the visibility, okay? So I confirm to you. So we confirm that it will support us beyond the cycle. And last but not the least, data center. But clearly, in 2026, cloud optical interconnect, so means both photonics ICs and analog mix signal by CMOS ICs plus our high-performance general purpose microcontroller will contribute because you know that the connectivity engine of the server will move to optical one. So this will be certainly an acceleration. And as well, we will start to contribute to the power supply unit and to the server from the green to the processor. Last but not the least, beyond the cycle in '26, we see also low earth orbit satellite communication with our engaged customer program, so with our ASICs really positive. This will be a bit offset by the capacity fee reservation. But all in all, I confirm really our confidence level to grow organically in 2026 and because we have, let's say, significant growth driver beyond the cycle of the market. Francois-Xavier Bouvignies: Very clear. And yes, maybe on the gross margin side, I mean, with it, I mean, obviously, it's a concern for the market. You delivered the guidance is in line on the gross margin, but 33.7%. But when I look at the consensus, it has 35.6% of gross margin for the year. So it would assume a recovery from here. So with the top line that you described nicely, should we see as well an improvement of gross margin from the level in Q1? Lorenzo Grandi: Maybe I take this one, Jean-Marc, about the gross margin. But today, of course, the gross margin will depend on the evolution of the revenue in the course of the year. As explained by Jean-Marc, we expect, let's say, to increase. But the gross margin today that we see in Q1, we believe is clearly the lowest point in the year, this expectation of 33.7%. So we will see some increase. This increase is also driven by the fact that we expect to have constantly reduction in our unloading charges during the year. So we expect some mild increase for the second quarter and then a more significant increase also driven by the seasonality of the revenues in the second half of the year. Yes, at this stage, we can say that the expectation for us is to have increase in our gross margin all over the year. Operator: The next question comes from Andrew Gardiner from Citi. Andrew Gardiner: I was interested, Jean-Marc, in digging a bit deeper into the automotive space. Clearly, your largest end market and the one where we're still seeing the most difficulty in terms of getting through the bottom of this cycle. There's a number of sort of end market data points out there that are, I suppose, still causing investors' questions in terms of the health of the market, tariff threats back and forth admittedly, but also not helping. I'm just wondering how -- can you give us a bit more detail in terms of how you're seeing your customers behave? Do you think inventory is absolutely at a bottom in terms of the automotive channel and at the OEMs and the Tier 1s. What kind of confidence do you have as we look into the future quarters that we can return to stronger demand trends? Jean-Marc Chery: Well, first of all, clearly, when we see our Q4 revenue in automotive, it was slightly below our expectation and mainly, in fact, driven by the pulling from inventory a little bit lower than expected from some Tier 1 means that the automotive market for, let's say, legacy application, clearly is pretty soft. Inventory correction is certainly gone, but there is a kind of a softness of this kind of application. What will be positive on automotive is clearly what is around, let's say, the electronic architecture, the new software-defined electronic architecture calling for more complex MPU, MCUs definitively. So this will be an important growth driver. But we know that the electrical powertrain will be still an important driver. But here, it is more the competition landscape that changed completely compared a few years ago because you see that out of, let's say, more than 30 million vehicles produced in China, more than half are battery based compared to America, where it is more marginal in terms of production. And in Europe, it is below 1/3. So here, it's more a question of the competition is in China. So you know that in China is more complex to compete. But the powertrain electronics, the demand is there. So, all in all, I think the automotive market based on 90 million, 92 million, 93 million vehicles out of which 17 million to 18 million vehicle battery based and similar number in hybrid is still changing in terms of mix as well from the car classification is more middle end or premium car, even this car now embed some electronics. So the market is not yet stable. So that's the reason why we have to be, let's say, cautious to adapt ourselves. But we see a different situation compared entering in '25, where we faced very strong inventory correction in Q1 last year, if you remember, from our main customer, this will not be repeated. It is more, let's say, a progressive stabilization of the market in terms of mix of car electrical hybrid thermal combustion engine and mix of car between high premium, premium and middle class and mix between China, APAC, Europe and Asia. So this is something we have to, of course, closely monitor and adapt ourselves with our supply chain. So this is how we see the automotive market. Andrew Gardiner: Just a quick follow-up, given you mentioned China at length there. How is the partnership with Sanan progressing? Is that going as you anticipated? Is it helping your competitiveness in that market? Or is it still too early? Jean-Marc Chery: No. Clearly, so we will start to ramp up the facilities now, okay? We have modernized. We know exactly the efficiency of this fab. And clearly, it will be a key success factor in our capability to compete on the Chinese market. Operator: The next question comes from Joshua Buchalter from TD Cowen. Joshua Buchalter: I actually wanted to drill into the Personal Electronics segment a little bit more. I think there's some concerns of disruption or even pull-ins in the short term due to higher memory costs. It came in better in the quarter. Maybe you could walk through what the drivers you're seeing are there and if you're seeing any changes in order pattern. And I believe you called out higher silicon content in 2026. Was that referring to expectations for your largest customer this year? Jean-Marc Chery: Yes, you know that our revenue are mainly driven by our biggest customer and more on the high-end kind of product, which are, in some extent, less sensitive to the memory price. So, at this stage, with the visibility we have, first of all, we don't see significant impact detected by us. And I confirm that we expect to keep growing in personal electronics driven by our main customer in 2026, thanks to our increased device based on silicon and not module content increase in '26. So far, PE will be a growth driver for us in '26. Joshua Buchalter: And then I think the last couple of quarters, you've been kind enough to give us your book-to-bill ratios in auto and industrial. It seems like things are getting better on the industrial side in particular. Can you update us, I guess, on those metrics and whether you're mostly done with the channel inventory clearing on the industrial side? Congrats on the solid results. Jean-Marc Chery: No. In Industrial, the book-to-bill was well above parity. Clearly. Also, beyond your question, I can tell you that the POS were growing, let's say, between low teens, mid-teens, which is a good news. So we continue to decrease our inventory. But on automotive is the book-to-bill is a little bit more complex because we have some few key customers that are putting order in one shot for six months. So the book-to-bill must be, let's say, assessed on one-year moving average or six months moving average. So corrected from this, let's say, abnormal, let's say, process, the book-to-bill was parity on automotive. Operator: The next question comes from Stephane Houri from ODDO BHF. Stephane Houri: I just wanted to come back a bit on the scenario for the year, and I know you're not guiding. But historically, you've been saying that the second half is like 15% above the first, that's normal seasonality. And then on the top of that, you may have some specific programs. With the sting point you guide on Q1 and we look at -- when I look at the consensus for the full year, it seems to be banking on something lower than that because of the starting point in Q1. So can you just confirm that you see now that the inventory correction is done normal seasonality throughout the year and maybe give some comments about the adds of some customer engage program? Jean-Marc Chery: No. On the inventory correction, what we communicated, okay, I and Lorenzo and myself is to say by end of Q2, we believe we will be hold the excess of inventory. And this today, I can confirm -- it's already the case for many product family. We are still here and there some pockets of excess inventory versus what we see. But looking at the current dynamic, POS, POP by end of Q2, this will go. So now it's sure that in H2, we will be exposed directly to the end demand. Now about again, what we consider engaged customer program be the cycle, let's say, we can split I have to say. One is the usual personal electronics, and why we say it's cycle is because silicon content increase, okay? So we have the visibility with the current visibility we have, okay? So this will help us to grow the cycle of personal electronics and assuming our main customer will perform in market share really well performed in 2025, okay? So this will drive our growth. Moving to communication equipment and computer peripheral, well, communication equipment. Communication equipment, it is clear that for the lower or satellite communication is an important driver because thanks to our capability to supply and compete, our growth is driven by our largest customer in this field of activity. And as we see is pretty successful. And certainly this year, will be another demonstration of the success. Now since two quarters, we are supporting our second largest customer that is growing as well. So it is clearly beyond the cycle. So this will be a significant growth driver beyond the cycle for ST. Last but not the least is AI data center. You know AI data center, okay, we were, let's say, a bit delay for what call the device addressing the power station we are in, let's say, process to close the gap and offer solution to our customers. But clearly, we will be at of the business dynamic, it is the optical engine or the cloud optical interconnect. So its photonics ICs, MOCs and high performance general microcontroller. And this will contribute to the growth of ST significantly in 2023. Then moving to the more, let's say, traditional market focus we have, so automotive industrial. For ADAS, ASIC, last year was a challenging one because we saw some inventory correction on, let's say, some legacy ASIC. But this year, okay, clearly, with the visibility we have, this will be a booster of growth. Finally, our SiC MOSFET, about the difficult year of '25 will grow again. And I can confirm to you that up to now in Q1, we have a good book-to-bill on silicon carbide that is very encouraging. And definitely, our sensor contribution with the acquisition of NXP MEMS plus the existing imaging sensor, existing MEMS we have. And I am very pleased that beyond the inventory correction done on general purpose microcontroller, the proliferation of our new products are really paying back very well. And I am really confident that in '27, we come back to our historical market share and '26 will be an important step to demonstrate it. So this is actually in a few words how we can describe '26. Stephane Houri: I have a small follow-up on the gross margin comments. I think last quarter, you said that you think you would end up Q4 2026 above the level of Q4 2025 in gross margin. Do you still feel confident with what you see developing the mix, the underloading charges, et cetera, et cetera? Lorenzo Grandi: Yes. Yes, I confirm that at this stage, the expectation is that Q4 this year '26 should be better than Q4 '25. Operator: The next question comes from Domenico Ghilotti from Equita. Domenico Ghilotti: A couple of questions. The first is on the unloaded charges. You are guiding for a significant drop in Q1. trying to understand despite the lower sales, I'm trying to understand if you see this number at the bottom and if you are already benefiting from, say, the efficiency plan that you carried out. And second is some color on, if you can, on the second client in low earth orbit. So should we assume that it is a significant number or just starting entrance of new clients or an add-on, but not particularly relevant? Lorenzo Grandi: Maybe I'll take the one of the unused charges. Yes, unused charges are declining in the first quarter. There are -- the reason -- the main ingredient of the declining in this quarter is the fact that, as you know, we are progressing with our programs to reshaping our manufacturing infrastructure. This program is progressively reducing our capacity in 6-inch for silicon carbide, 150-millimeter for silicon carbide and 200-millimeter for silicon. And we start, let's say, to move ahead on this plan. So this is, if you want, is something that is mechanical. At the end, the capacity is reduced. We are now moving our product on the existing capacity on one side, 8-inch for the silicon carbide and the 300-millimeter for the silicon. So that's why we see the level of unused capacity, notwithstanding that the revenue are lower in respect to the previous quarter to reduce. This trend will continue. Unused capacity will not disappear in the year, but will significantly reduce in the year and will be one driver for our improvement in the gross margin in the course of 2026. Jean-Marc Chery: About the second question, yes, it's significant. If not, we will not mention. But I can just confirm you to number in Q4, our CCP segment grew sequentially 23% and year-over-year 22%. Definitively, it is linked to the low or satellite business we have, and it is driven both by our first customer and then by the second one. So at 22%, 23% growth sequential and year-over-year, so you can conclude it is significant. Operator: The next question comes from Sandeep Deshpande from JPMorgan. Sandeep Deshpande: My question is about your fab loading into the current quarter. Given what is happening with the gross margin in the current quarter, how is the fab loading going through in the quarter? And how is the mix shifting overall in terms of the gross margin? Because you have a revenue decline, but the gross margin is declining. So are you reducing your fab loading this quarter? Or are you increasing your fab loading? And my follow-up question associated with that is how the mix, particularly associated with your better margin microcontroller products is shifting? Lorenzo Grandi: In the quarter, as I was saying before, the unloading charges is mainly related to the fact that we are moving out capacity, reducing capacity in certain specific fabs. where, of course, we are now moving production in different fabs, 300 millimeters, so reducing our capacity. So at the end, when you look at the level of loading, we are not overloading our production, let's say, in the quarter. Clearly, if you look the inventory and you look where it will be the dynamic of the inventory in the quarter, as usual, you know that there is this seasonality in our inventory in which in the first half, our inventory is somehow increasing and then decreasing in the second part of the year. So, at the end, what it will be the impact is that now the expectation is end the quarter Q1 in the range of 140 days of inventory compared to the 130 days where we stand today. But I repeat that this is more related, let's say, to the normal dynamic of our inventory over the year than, let's say, loading our manufacturing infrastructure in a way that is -- the impact on unloading charges is mainly related to the fact that we started with our programs to reduce capacity in some specific areas. Clearly, the impact -- the positive impact, let's say, of this in terms of gaining efficiency and so on will come probably later, as you know, in our, let's say, manufacturing infrastructure. We do expect our program to be -- to start to yield a positive impact in our -- in our manufacturing efficiency more in 2027 than this year. But one of the impact that visible is the reduced level of unloading. Together also with the expectation of growth in terms of revenues. This we will see during the year, let's say, depending on the level of growth. Sandeep Deshpande: And my follow-up question is regarding about your microcontroller business, which is if you look at the Embedded Processing segment, it grew 1.2% year-on-year. I mean, many of your peers in this market are seeing better growth at this point. So why is ST growth in a key segment for ST lagging at this point or something else happening in that division? Jean-Marc Chery: So, embedded processing segment, clearly, the growth dynamic we have on the general purpose microcontroller is, let's say, at least consistent with our peers. Why it is a little bit offset? It is offset by our automotive microcontroller because, okay, up to now, our automotive microcontroller are more the microcontroller that will be, let's say, for some model of car moving to the software-defined vehicle architecture removed clearly. And I already explained that we have done a strong effort in 2025 to rework the road map of our micro, but this will be paid back, okay, more, let's say, end of '27 and '28. For the time being, yes, we suffer on the automotive microcontroller that is, let's say, optically offsetting the real good health of the general purpose. But the general purpose microcontroller, let's say, maybe I can share with you one number, okay, for Q1, the embedded processing solution segment will grow up low 30s. So above 30% year-over-year. So you can imagine that the growth of general purpose will be really, really strong more than, let's say, the secure microcontroller are growing a little bit less because driven by the market. And okay, of course, we have some offset linked to the automotive micro. But I can confirm to you that our general purpose microcontroller are performing or overperforming the market. Jerome Ramel: Mona, I think we have time for one more question. Operator: Next question comes from Sébastien Sztabowicz from Kepler Cheuvreux. Sébastien Sztabowicz: Coming back to the transformation program, have you made any specific progress so far? And notably on the manufacturing front? And are you still on track to reach your savings ambition for the end of '27? And the second one is more on the OpEx trend. So Q1, we know where it will stand. But for the full year, where do you see OpEx trending? And how do you see the start-up costs impacting the OpEx 2023? Do you plan to accelerate a little bit further the cost-cutting actions for OpEx? Lorenzo Grandi: In terms of our reshaping programs, I would say that is progressing in line with the expectation. In the course of 2025, the main, let's say, impact was related to the savings in our OpEx that indeed, when you look at the overall are declining, notwithstanding, let's say, the negative impact of the euro dollars. So at this stage in the course of 2026, as I said, we will start, let's say, progressively to transfer some activity from -- in silicon carbide to 8-inch in silicon to the 300-millimeter. As I was saying before, is now expected to yield the benefit in our manufacturing infrastructure efficiency of this program towards the second part of 2027 and 2028. So my short answer is, yes, we are on track in respect to what we have communicated previously. So, this is the situation. In respect to the expenses of 2026, now the expectation remains substantially the same, means that at the end, at this level of exchange rate, including the impact of the hedging, we should be able to stay with a net OpEx means including other income and expenses on a low single-digit increase, something in that range, mainly driven by the fact that we will have a reduction in other income and expenses in respect to the one of 2025 due to the phaseout cost because, of course, let's say, from the one side, we reduced the capacity in our manufacturing 6-inch, 8-inch. But on the other side, we have a progressive phaseout from these steps that will be reported in this line. It's a temporary effect, but it will be there during 2026. Jerome Ramel: Thank you, Sébastien, and thank you, everyone. I think this is ending our call for this quarter. So, thanks very much all of you for being there, and we remain here at your disposal should you need any follow-up questions. Thank you. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Ladies and gentlemen, welcome, and thank you for joining Eurofins 2025 Full Year Results. Please note that this call is being recorded and will be -- will later be available for replay on the Eurofins Investor Relations website. [Operator Instructions] During this call, Eurofins management may make forward-looking statements, including, but not limited to, statements with respect to outlook and the related assumptions. Management will also discuss alternative performance measures such as organic growth and EBITDA, which are defined in the footnotes of our press releases. Actual results may differ materially from objectives discussed. Risks and uncertainties that may affect Eurofins' future results include, but are not limited to, those described in the Risk Factors section of the most recent Eurofins' annual and half year reports. Please also read the disclaimer on Page 2 of this presentation, subject to which this call and Q&A session are made. I would now like to turn the conference over to Dr. Gilles Martin, Eurofins' CEO. Please go ahead. Gilles Martin: Thank you, Andrew, and hello, everybody, and thank you for joining our full year 2025 results call. I will keep -- we have a long slide show, but I will not go through every slide. I have to give apologies for Laurent Lebras, our CFO, who is not well today. So I will not go in great detail through the financial slide and leave time for questions. If I start on Page 5, or the Slide 2. I'm happy to report on a strong year 2025, where we achieved all our objectives or exceeded [Technical Difficulty] Eurofins, as you know, is every 5 years defining a plan for the next 5 years and sharing with investors what we are trying to do, what we will do in the next 5 years. We just completed year 3 of that 5-year plan, where we are building a truly global network, fully digital network of laboratories organized in a hub-and-spoke structure. So we get the benefits of scale in our large hub laboratories. And we have a network of local laboratories to collect samples close to our clients, serve our clients in their country, their language and yet be able in the large laboratories to implement automation, artificial intelligence and all the things that make our services much more unique and faster and more reliable than what others do and we do. So this is continuing to proceed at pace. I'm happy to report that I can confirm we should be done by 2027. There's been massive investments. And we start to see some of the benefits of that in our operating leverage, which has continued to improve every year. It improved well in 2025. Overall, our margins -- reported margins and our adjusted margins continue to improve year-on-year. Our EPS has shown a remarkable growth, 24%. And I think it's just the beginning because we still have heavy investment, heavy OpEx investment, especially in our deployment of digital solutions, development of digital solutions, which should give us significant [Technical Difficulty] and the cost of which will go down. We have generated before those investments to buy our sites because we prefer to own our sites. This is linked to the long-term view that we have. We think over the long term, although they provide a lower immediate return on capital deployed over the long term, we're going to use them forever. It's a great benefit to have them because we can expand on those sites. But before those investments, we have generated more than EUR 1 billion of free cash flow to the firm. So our group is starting to generate serious cash and it's just the beginning of that. And if I move to Page 6, the nice thing is that is accelerating in the second half. Organic growth is still not where it will be, we think, when -- and we'll talk about that later, but it's still accelerating quarter-on-quarter and half year-on-half year. Our EPS growth in the second half even reached 30%, which is quite remarkable. And our free cash flow has grown also much faster in the second half than in the first half. On our investment program on Page 7, you see that we are starting to be done. We still have massive IT investments that post 2027 should be less. And more importantly, we should get the benefit of that. We're still adding some start-ups, but you see the investment has started. We've done the peak of it, so it's starting to be less. So all of that is running according to plan. We still will add a few large and very efficient sites to our network over the next 2 years. They are being constructed right now, and we think the delivery will take place over the next 24 months, more or less for in our current perimeter that should take what we need in our program. On Page 8, we provide a bridge on the evolution of margin. And you can see we've had a nice underlying operating leverage. As we had flagged, we have some dilution from the acquisition for a very low amount as compared to the profits we think we can generate in 2 or 3 years of the network of clinical laboratories of Synlab in Spain. We are merging it with our network, and we're taking a lot of cost out. We've had a lot of exceptional costs for that. And that should -- the first phase should be completed by the middle of next year. We think we will create significant value from this combination. But nonetheless, short term, it has been dilutive, especially in the second half. First half, we only had 3 months. Second half, we had 6 months. We have a bit of an impact from the FX because we make more profits in North America, although we want to improve profits in Europe as we finalize this IT program and site consolidation. So a good improvement of margin, good drop-through on Page 9. If you see the trend, well, the COVID peak is well behind us, but we are catching up. Our revenues now are over the peak revenues from COVID. Our margin is catching up. It's -- and I think we are very confident in exceeding 24% margin in EBITDA -- adjusted EBITDA in 2027. And considering the benefit of that beyond 2027, I think there is some room to, at some point, maybe achieve or get close to the margins we had during COVID. So that's also encouraging. On the -- if you see -- if we look at the CAGR, we've had since 2019, 8% revenues CAGR, 35% CAGR of free cash flow to shareholders. So -- and that's ultimately the most important thing, while we still carry huge amounts of investments. And I think those investments, once we have built our network of labs, we have them for the next 20 or 30 years. So the growth of the EPS and the cash flow per share should be for quite some time over proportional to our total revenue growth. On the financial numbers on Page 11, you have a breakdown. I think I will go back to that as part of the question and answers. Main point is our profits are going in the right direction, are growing, growing faster than revenues and the EPS is growing also faster than revenues. We took the opportunities for us, the fact that our share price is massively undervalued is actually an opportunity, and we took advantage of that opportunity to acquire a lot of shares last year, which is even further boosting our EPS. And the impact of that, once we hit in 2027, our target -- margin targets and cash flow targets will be compounded. On Page 12, you have a bridge of our revenue evolution. We generated EUR 250 million of organic growth. Of course, it has been a bit diluted by the FX impact. And we have a sequential increase quarter-on-quarter of growth. And I think that will continue because now the comps that were strong in some areas, I can talk about it a bit later, will not be there next year as we enter -- or this year as we start 2026. On the Page 13, we give a bit more breakdown by area. I think all our areas are doing well. Life areas are doing well. Food & Feed and Environment are growing both in Europe, North America and Asia. BioPharma, and I'll come to that on the next slide, is starting to recover. It is still being soft, it is still being far from what we think we can achieve long term. Diagnostics could do a little bit better, but it's starting to show in many areas, some recovery. Q4, of course, didn't get the negative base effect of tariff reductions in France. Consumer. Consumer has been hit because consumer and technology includes some material science testing, microscopy, et cetera. This had a big boost in 2024 from the -- a lot of tools companies were looking at potential stricter export restrictions, both from Europe and North America to China. And there was a lot of anticipated buying of tools from our clients in 2024 that gave us a bit of boost on that in 2024, which is not -- has not recurred in 2025, but now we think '25 has hit a plateau and we should grow from there. But that explains the only 2.3% growth in Consumer & Technology. Consumer was better than that. On BioPharma. And here, we have, I think, the last year was a mixed picture. The bulk of it is our BioPharma product testing, where Eurofins is a global leader, and that has continued to do well, mid-single digits. We have done at times better, close to double digit or double digit on that. There is some potential upwards. And we have a good outlook for next year. We are adding a lot of capacity where we will be adding -- expanding our big site in Lancaster, expanding our site in the Netherlands. So we'll have more capacity coming online in the next couple of years. So there is some upside potential on BioPharma product testing, but the growth has stayed solid -- quite solid during the time where BioPharma is reevaluating its pipelines, hasn't been affected like Discovery. In Discovery, this is, we think, plateauing now. It's still a little bit down in the second half of the year. Genomics is still hurting from cuts in research fundings. But again, we think we're hitting now a plateau and we can grow from there. Agroscience is part of the ancillary activities, and that is still down significantly. So we have made significant efforts to cut our footprint. There has been massive restructuring for the size of that business, significant restructuring. That's also part of our SDI. We've closed a number of field stations to basically fit our capacity to the demand. There could be at some point upside when the agrochemical companies, Agroscience companies and the seed company have more visibility on regulations to get their products approved, especially in Europe. So we keep that activity where we are a global leader, but that has suffered. And between Genomics and Agroscience that explains a large part of the overall softness of BioPharma. Otherwise, BioPharma will be at the same level of growth as our Life activity -- area of activity. So our CDMO did well in the first half of the year in the U.S. because we -- or in Canada because we filled a tranche that got completed at the end of the year before. It's a bit less in the last quarter because now it's full, and we're going to have a next tranche coming up online in the next, I think, 24 months. CDMO was a bit softer in Europe. It was a bit more on smaller biologics clients, but we think this will pick up in the next few quarters, too. So that's for the ancillary activities for BioPharma. We have, of course, in BioPharma, some clinical works, large contracts and our clients are positive. on the start of those programs. And of course, that would switch completely the growth of the ancillary activities. If we look at the -- especially Central Laboratory, Bioanalysis, we do think that some point in '27, we will have -- we should have a significant boost from those activities. That's also hurting our profits because we keep capacity that is in excess of what we have as volume right now because studies should start relatively soon. We have significant demand from clients. So we're optimistic on that. And in any case, the -- we're now at a baseline where we don't think that would go down anymore and affect our BioPharma growth anymore in 2026. On Page 15, you've got a split of the margins. So the margins are growing everywhere, especially in the rest of the world. The rest of the world is catching up with U.S. margin. Europe has not been improving as much as we wanted. We've had an impact, of course, in Europe of the reimbursement cuts in clinical diagnostic in France that occurred in 2024 that affected the comparable with 2025. We've got the dilution from Synlab. We've got a number of other things. We think we have a big upside in Europe to increase the margins and make them move much closer to U.S. margins, which will also reduce the FX impact on the translational results and margin. So we're optimistic over the next 2 years to significantly increase the margins in Europe. Another thing that we do is described on Page 16. So we have labs that are well integrated, where we have deployed our IT solutions, where we -- that have been in the group for a long time. And then we have a number of start-ups that we launched over the next few -- the last few years. The peak start-up investment is behind us and the start-ups of the peak start-up years are starting to be profitable. As I mentioned earlier, we are opening fewer start-ups now. They have a smaller impact on our results. So that's part of our nonmature scope. On that scope, we also have companies like Synlab that we just bought and we are restructuring. And what is interesting to see is the impact of that nonmature scope on our overall results is starting to be less and less -- it's -- we have a target that SDI at EBITDA level will be less than 0.5% of our revenues, and we think we will achieve that by 2027 as planned. Anyway, even in 2025, the impact on the group EBITDA is starting to be negligible at 2.7%. But we will continue to show it separately and our reported results and the mature scope result will converge. It's nice to note that our mature scope is already achieving the 24% margin we are targeting for 2027. So overall, very encouraging results. On Page 17, you see that we are self-financing all our investments, including our M&A in -- with EUR 150 million left after that. And we've had, of course, in 2015, the purchase of our -- of the related party buildings. I'll come to that in a minute. But -- and that was an exceptional one-off investment. We spent EUR 540 million to buy back our own shares. And from next year, our cash flow should be such that we will have a lot of headroom for our cash flow to finance further share repurchase, for example, building repurchase is done. We won't have to spend money on that. So we can have a very compounding -- very well compounding model where with our cash flow, we can continue to do M&A, finance not only our CapEx, but our CapEx will be less. So we'll have more room for M&A financing and even more room for returning to shareholders and preferably through share buybacks as long as our share price remains so seriously undervalued in our opinion. On Page 18, you see that our teams are starting to do a better job in managing net working capital. We've got a good result this year in managing net working capital. And there is still potential of improving things further. We're not -- certainly not best-in-class there, but we're making progress, and we think we can do more. On funding on Page 19, we've continued our prudent financing management. We are well funded for the next few years. Our leverage is very reasonable considering our cash flow. Also, our EBITDA will increase over the next 2 years, we believe. So that will naturally bring the leverage down. We will generate some cash. So we're confident on maintaining our leverage between the 1.5 to 2.5 multiple range that we have set for ourselves as an objective. On Page 21, I illustrate some of the new sites that came online. We can talk about that. On Page 22, we can have a summary of our footprint. We have a quite large lab footprint. We are very far along in building our -- and completing our hub-and-spoke laboratory network in Europe and North America, especially. We still will have opportunities in Southeast Asia and Asia generally for the next 10 years or 20 years, also a little bit in Latin America. We can still add a few locations in North America. We're not -- we don't have 100% coverage yet, but the impact of what we need compared to what we have is -- will be very modest past 2027. And now we own most of our big sites. And what is planned for the next couple of years will mean that by 2027, we will own our big sites, and we usually have land next to that existing building so that if the demand increases for those hubs, we don't have to move. We don't have to lose all the investments we did in those buildings, which was our life for the last 10 years as we had to consolidate a lot of acquisitions that were not -- where we found them, they were not necessarily where they should be, and they didn't necessarily have the focus that we wanted or that was optimal for best efficiency. Now we have that footprint, and that will stay, and we can just incrementally add capacity on the same site as we need. So we're quite pleased about the progress. That was a 10 years program. Now we own what we need to own. On Page 23, some discussions on return on capital employed. I think that would be more for one-on-one meetings for those of you who are interested. But obviously, we have a mix of assets on our balance sheet. We have the labs that have grown organically and that have a very high return on capital employed. We have the lab that we acquired. And until 2018, we built Eurofins through a lot of acquisitions. So we incurred goodwill. And of course, that provides lower return on capital. We have a substantial amount of our capital on our balance sheet, which is those buildings that we own that have a book value of EUR 1.3 billion. Probably if we were to do a sale and leaseback, it would be more like EUR 2 billion or more. And that has, of course, a lower return. So we give on Page 23, an analysis of the returns of our business as we can see it. But it confirms that the business we run has a very high return on capital employed. And if we deploy additional capital, especially if we deploy it organically, we're looking at very significant returns. On Page 24, it covers the start-ups that we've made over the last few years and peak start-ups of '22, '23 as a whole are starting to be profitable. So we have -- and that can only amplify going forward. So we are very satisfied with what we have built and the impact it should have on our performance, our service to clients and financial results over the next 2 years and later. On Page 25, we give a list of some of the acquisitions we did. So we continue to be active. We think we also should add about EUR 250 million of revenues next year from acquisitions at reasonable multiple. That means a lot of small bolt-on acquisitions, maybe not the bigger ones that would be sold at a much higher multiple. But the world is big enough, and we have enough opportunities. We continue to be innovative. Our labs invent a lot of new tests and new capabilities. That's on Page 26, and I will not go through all of them. You probably have heard of the baby food -- latest baby food contamination with cereulide, which could be caused by Bacillus toxin. This is not a test that people were doing routinely most of the time. It normally doesn't happen. So -- but when the crisis started, we developed the test very quickly. We developed a test that's actually more sensitive than what was available before in the market because most of those things come from encapsulated in this specific contamination, it comes from oil that is added to vitamins or that is added in the form of oil encapsulated. And measuring it, you have to break the encapsulation to get to the full amount and the true amount. So we make a nice breakthrough here in developing within a very short time when the crisis started, the right test and the most sensitive test in the market, we believe. But we can go deeper on that if some of you are interested in Q&A. Page 28. We basically, we can only confirm that our objectives for 2027 are realistic. We think we will exceed them. The plans for CapEx are unchanged. And BioPharma will pick up in the next few quarters, we believe. So we're still confident that we can revert to the typical organic growth we've had for decades of 6.5%, just to give a number, but higher mid-single digits, mid- to high single digits. And we are building the network for that. And also the efficiencies and quality of service we are building should enable us to grow significantly faster than our competitors and than the market. On Page 29, we give some ideas about the returns that we are generating. So we were -- we are pleased to have returned EUR 1.5 billion to shareholders since 2021. So not only are we quite profitable, but we returned a lot of cash to our shareholders already, although we are still building the house, we return a lot. And we built Eurofins for a lot of acquisition until 2018, which caused us to incur a lot of goodwill on our balance sheet. But since then, we bought some companies, but much less. And if you look at the return on capital -- on the incremental capital we've added since then, after this big M&A phase, and you see that even including the goodwill, we already have 23% return on the incremental capital, which shows that we are reasonable in what we pay for acquisitions. We create value from our acquisition and our stock of businesses continue to improve. So we're very satisfied about the performance of 2025. We're very optimistic about what we think we will generate over the next 2 years and especially beyond. In fact, I think we are building something that's going to be quite extraordinary in our markets, more and more focused. We've been also reviewing our portfolio, shedding a few small things. So over the next 2 years, we'll continue to do that to be a true leader in our industry, to the most innovative in our industry. I don't have time to talk about it now because it's a result presentation, but we're investing a lot in new technologies, in AI, in automation to create real competitive advantage, a real differentiation in the speed and quality of our service, which should make us really the partner of choice of all the multinationals around the world in the industries we are serving. And I don't think anybody else is doing the type of investments we're doing. So I'm very positive and optimistic as to our performance post 2027 when we are done building that. When we are building that, this causes a lot of disruption to service when you deploy new IT solutions the last 2 years where we started deploying heavily new IT solutions. We've had a lot of disruption to service to clients. This is not the best when you change the digital tools in the company to show the best performance to clients. But this is now more and more working, and we see -- we're going to see the back end of that. And then we see the opposite, much better performance, faster performance, and that should help us also in growth and gaining market share post 2027 and where we have in the countries where we are done already, already in '26 and '27. So that's my introduction for today. And sorry for the very quick speed of my speech and presentation. Now I'm happy to answer questions, and [ Busi ] is here too, if we have some financial questions that I don't know the answer of. Operator: [Operator Instructions] Our first question is coming from Tom Burlton with BNP Paribas. Thomas Burlton: I've got a couple just on BioPharma to kick off and then one on capital allocation. So on BioPharma, specifically within ancillary activities and the Central Lab, Bioanalysis business, you referenced these awards. Is there anything you're able to give us in terms of additional details on sort of how big, anything slightly more granular about phasing and so forth? Because I was originally expecting some of these to start coming through in sort of mid-2025, and it feels like they got pushed to the right, I guess, because of client decisioning and things like that. And in your opening remarks, you talked about anticipating potentially a significant sort of boost in demand. But you said by 2027, and then you went on to say that some of those could ramp up quite soon. So I'm just trying to understand the timing there and what's going on? Because it feels like that when it does come through, it could be quite a big driver to Biopharma and then to group organic growth. The second one, still within BioPharma, just on the discovery part of the business. It looked like through the back end of last year, we've seen a bit of a pickup in terms of the biotech funding. And I think that only really accelerated to kind of through Q4. We don't have the kind of longer run, I guess, data on your discovery business by quarter. How would you think about the sort of normal lead lag time as to when that should flow through to your business, your network and we really start sort of seeing it in numbers? Just still trying to gauge the sort of, I guess, the cadence of BioPharma growth as we go through 2026. And then just on capital allocation, keen to understand kind of how you're thinking about buybacks. So you mentioned towards the end of your remarks, you've been very -- you've been active in buying back shares and returning cash to shareholders and the share price has developed, I guess. You've got fairly fixed targets in terms of your added M&A revenues and your leverage is, I guess, within the target range. Would you expect buybacks to be a kind of ongoing feature, maybe not at the levels they were in 2025, but how should we think about kind of ongoing return of cash and whether you'll be kind of pragmatic or consistent about that? Gilles Martin: Thanks a lot, Tom. On BioPharma, yes, Central Lab and Bioanalysis, we have some fairly large contracts. And our best guess now maybe would be H2 -- that we are talking about would be H2 2026 for start of that. It's always difficult to time. They have to recruit patients, et cetera. So that's our best guess as we can see. What is clear is the comp has eased now. So going forward, we don't expect anywhere those revenues going down. And if you do the math, if you have a negative 20% or negative 30%, even on a small part of the scope, that has a big impact on the average growth of that scope. So that -- we don't think we're going to have any negative, especially not of that magnitude going forward, and that should have an impact on the overall growth of BioPharma this year. And in the second half, hopefully, if we get those programs to kick in, it could become quite substantial. And well, maybe if I said 2027, I think overall, BioPharma, even our core BioPharma product testing could grow more than the mid-single digits where it is now. And that could also increase. When would that be? That's what maybe I said '27. But overall, BioPharma, I don't see why BioPharma as a whole shouldn't grow faster than life. It has been the case for decade. And this -- we've had phases like this again in 2012, where the pharma industry was reevaluating pipelines and so on. The industry was a bit soft for a couple of years, and then we've had a decade of much faster growth. So I think that will return. And why will it return? Because simply, the research is providing so many new products that are so powerful that it's just worth it for the pharma industry to spend money to develop those drugs because they will make a lot of profit with it. Even at lower reimbursement, they will make a lot of profits. Discovery, yes the lag time, that goes from company to company, project to project, but it's not immediate indeed before a project starts. What is it 6 months, 12 months to get things to flow through depending on the project and the products in actual work for even the coding, it takes 2, 3 months to design a study to design a project. It's not something that you buy off a catalog. All those studies for BioPharma, they are bespoke and they take time to define. It's like you build a house, you need to get the plans, get the plans approved before you can start building it. Capital allocation. Well, if you look at -- we're an active buyer in the market, and we also have our own assets that sometimes we get approached by people who would like to buy some of our potentially noncore assets. So we know what those assets are worth. If you look, ALS is trading at 15x EBITDA, UL is trading at 19 or 20x EBITDA. A lot of transactions are in that range between 15 and 20. Even with the recent rerating, our stock is trading at 10x. So obviously, if I have extra capital to deploy, it's a no-brainer to buy back our shares. I know what I buy. I know the potential of the profit increase of what I buy. I don't have to do -- we don't have to do a due diligence on it. We know what we're buying. And so once we've done the M&A, we think it will be accretive, and we think we can get our return over our hurdle rates. And if we have extra possibilities, we are going to continue to do buybacks. And I think we will generate a lot of cash. And actually, we might buy even more this year as we bought last year. Of course, that will depend on how the market view our share and share price, et cetera. But in spite of the recent good run of our shares, on those metrics, if you just look like the multiples of, that people pay for assets in the market, either public assets or private assets, we have -- we're anywhere between 30% and 60%, 70% undervalued. And in the capital allocation policy that our Board follows and we talk about, buying back our shares appears very attractive at the moment. To us, we're insiders. So we -- maybe if you're an outsider, there are other considerations that apply. As an insider, we will continue the buybacks. Operator: Our next question is coming from Suhasini Varanasi with Goldman Sachs. Suhasini Varanasi: A few from me, please. So you mentioned the cereulide testing that you had launched in January. Have you seen increased demand for that testing given the recalls seen in the market? And is it possible to quantify the proportion of benefit to revenues? That's the first one. Second one is on the margins. Your reported EBITDA margins have seen very strong underlying improvement in 2025. Can you perhaps provide some color on the scale of the expansion that you expect in 2026 and maybe the key risks around this. FX, obviously, is a little bit of a risk. We can't quantify that. Synlab, maybe the drag is a little bit less than last year. Or maybe additional M&A? Just some color around that would be helpful. Thank you. And I think in your prepared remarks, you had indicated something around EBITDA margins could potentially return to peak COVID levels beyond '27. Just wanted to understand -- get some clarity on that. And is it the medium-term target potentially beyond '27? Gilles Martin: Yes. cereulide, it is just starting. We don't know how big this crisis will be, how many charges, how many lots were affected. I'm not sure it will become a routine test because that was apparently caused by a contamination from contaminated oil from China. So hopefully, that will stop and be put under control. So we -- and considering the size of Eurofins, for something like that to become material, it would have to be a really massive, massive global recall of all the milk in the market. So we don't expect any impact -- any material impact on our revenues. But still, it's good for our clients to know that when there is something like that, we are there and we have the most sensitive methods, much more sensitive than the ISO method. So if they want to check their supplies, we can do that for them very well. Yes, we've gone on the advice of many of our investors and potentially analysts, we've gone away from giving specific margin targets. And some companies do that. We've done it for 2027, and we stick to that because they were there and we believe in it. And hopefully, we can do better than that. So for this year, what we've said we will improve. And as you say, some of the factors that you mentioned will play a role. FX, we don't exactly know what it will be. M&A, we don't exactly know. We have a number of start-ups. We have to see exactly how fast they ramp, new buildings when they come online, et cetera. So what we can say is we think we will improve. We think we'll achieve or do better than the 24% margin next year in '27. I can't be more specific this year. What is clear is we have massive investment in IT that we hope to largely complete this year. So that should help definitely next year. How fast all those programs get deployed, all those software gets deployed, how fast do they get -- do we start to accrue the benefits of it is also a little bit difficult to plan quarter-by-quarter. And what I said about margin, maybe don't get too excited too quickly. But it has always been the case that our best scopes have -- EBITDA margin in excess of 30%. The whole of Eurofins will never be there, but there's no reason why 24% should be a cap. Of course, we will talk about that once we complete that period. And depending on our perimeters then on potential M&A, we might do then, et cetera, we'll try to set objectives beyond 2027 when we publish 2027 results. But all things being equal, staying in our market, staying in our current perimeter, there's no reason why we shouldn't go beyond that because every year, we're improving. And there's a very long -- if I look at what we plan to achieve this year, there's a very long list of things we are doing that will improve our results substantially. And if on top of that, BioPharma starts to pick up a bit, it could be even more faster and more meaningful. Operator: Our next question is coming from Delphine Le Louet with Bernstein. Delphine Le Louet: A couple of questions on my side and a bit of a clarification regarding the infant baby formula product and how big that is actually today into the food business. And sticking with the food business with a broader vision, where are you taking the most market share? Or where have you been taking the most of the market share over the course of '25 when it comes to segments or region into that field? And second question, dealing with the CapEx envelope for next year and probably the year after in the range of EUR 400 million. I was wondering how much of that is dedicated to the regular, let's say, IT ongoing and to the IT transformation you're coming to a close now. Can you detail that a bit more, please? Gilles Martin: Thank you. It's really hard to say where we gain share or where we don't. I think we gained share, especially in the markets where we are strong in North America. I think we continue to gain share in the many European countries we do too. And this baby formula testing, this test is not something we were doing in the past. By the way, we just developed the test, but it's not going to be a huge market, a huge -- I hope so for the milk industry. Although from time to time, there are issues in the milk industry, and there were issues in North America and a lot of recalls in North America. We helped our clients a lot to go through the shortages to help them mitigate the shortages of the milk powder in North America over the last few years. So this is -- we work -- what we do is essential. People forget it, but there are segments of the population who are very fragile. And when they eat contaminated food, it can be fatal and especially babies. And we also test a lot of supplements, sport supplements. If you put not enough or too much vitamin in certain products, it can be toxic. It's not only the bacteriological contaminants. So this is more like a reminder of you can't stop testing food. If you stop testing food, bad things happen. And actually, it shows maybe nobody could have guessed that, that would happen. But it shows you have to have very broad testing programs because even if a contamination hasn't happened in 5 years, it doesn't mean it won't happen again. And if you have a brand that is valuable, you don't want to be the one whose products are contaminated. I think that's maybe one of the many wake-up calls. It's not because you haven't had a problem with your products in the last 5 years that you won't have one tomorrow. So testing is important. It's like having a fire detector, maybe you haven't had a fire in 20 years, but you best [Technical Difficulty] detector in your house or in your [Technical Difficulty] that can still happen. On the [Technical Difficulty] Operator: Apologies ladies and gentlemen. We have appeared to have lost our speaker line. One moment, please, while we try to get them back. Once again, apologies, ladies and gentlemen, we are trying to get the speaker line back in, one moment, please. Okay. Ladies and gentlemen, we have just heard from the speakers. They are trying to reconnect. So please hold, they would be with us momentarily. Okay. Ladies and gentlemen, I believe they will be with us in one moment. Once again, apologies for the slight delay in getting our speakers reconnected, but they will be with us shortly. Okay. I believe we have our speakers back with us. Gilles Martin: Thank you. Sorry, everybody. I don't know what happened with the telephone line. So I was answering the answer -- the question on IT CapEx and indeed, maybe EUR 50 million of the IT CapEx is linked to this development of new IT solutions for digitalizing our full network of laboratories. I think we can take the next question. Operator: Our next question is coming from Remi Grenu with Morgan Stanley. Remi Grenu: Just one last question remaining on my side. I think there's been press coverage around the potential divestment of part of your consumer and tech product testing business. So can you maybe tell us how you're thinking about that division in the context of the perimeter of the company? And if overall divestments are still very much on the table as you flagged on previous call and how we should think about you going into 2026? Gilles Martin: Thank you. Well, we get a lot of inbound calls. There are things businesses that we look from inside what we like, what we don't like. As I mentioned, there are smaller businesses in Clinical Diagnostics last year that we closed or sold in countries where we had no path to become market leader. We like our consumer product testing. We like our material science testing, although material science was softer in '25, we see a great potential with all the AI chips and the memories now that are in great demand and the needs for tools that's going to pick up. So we like that division. We like consumer products, and we'll never part with certain elements of it. They are very close to the core of our business of medical device and testing for life, et cetera. But we do get inbounds. And then we are -- when our boards get inbound, we have a duty to look at it because, of course, we get very attractive offers sometimes, extremely attractive compared to our current valuation. And so we have to look at it. What comes out of those reviews, we never can know, and we'll look at it. But I'm running a company as a CEO, but also as a member of the Board, I'm a capital allocator, and we have to look where we put our shareholders' capital to work. We have no limitation. We're not limited by the amount of capital we have to invest in our core sector, but maybe there might be at some point, M&A opportunities in our core area of business that are larger that we want to take on. And then maybe it's worth to have an active review of the value of all our assets. That's all I can say about that. Operator: Our next question is coming from Allen Wells with Jefferies. Allen Wells: A couple from me, please. Firstly, just maybe a financial question. I just wanted to understand some of the moving parts on the free cash flow for the business. Obviously, solid reported number, but it does include another working capital inflow in Q4 and obviously, year-on-year reduction in CapEx. I just wondered how you guys are thinking about the sustainability, particularly of those two variables as we move back towards the ambition of a mid-single-digit growth level business. Maybe you can talk a little bit about the drivers of that working capital movement because I think it's the second year in a row you've had an inflow at the full year? And likewise, on the CapEx side, it sounds like you expect similar levels of CapEx in 2026 versus 2025 or maybe even slightly lower. Can that level of CapEx support an acceleration in growth up to the kind of 6.5%? That's my first question. And secondly, just a follow-up question on [Technical Difficulty] net-debt-to-EBITDA towards the upper end of your, I guess, preferred range. You talked about the potential to do more buyback of shares in 2026. But if I assume a similar CapEx and M&A trends, it doesn't look like that will be self-funded at least on my back of the envelope calculation says. So are you happy to run net-debt-to-EBITDA up towards the top or even above the top end of that range? Gilles Martin: Very much. Yes. Well, we did a good job in working capital this year. And of course, that is finite. We're not going to get very big negative net working capital. I think we might still have a little bit of room over the next 2 or 3 years to be better at collection. We're not as good as maybe we should be at collection. And so -- but that's always a fight, of course, with our clients who want to pay later. And we -- but they don't always pay on time like in any business. So I think we can be better at getting our clients to pay on time. And we're kind of kind to many suppliers. So we pay maybe a bit too fast. So I think I couldn't tell how fast net working capital will be improving, and it can maybe 1 year be a bit less good and so on. So that element, I think it was a good year of EUR 40 million or EUR 50 million this year and last year will not be a gain of EUR 50 million every year forever, obviously. I think long term, we can do a little bit better. That's what I can say on the net working capital. On CapEx, I think we have a high CapEx at the moment. Our maintenance CapEx is 2% or 3%. And with that, we can grow mid-single digit. And so with CapEx at EUR 400 million ex investment in own sites, we have headroom. We didn't quite spend the EUR 400 million in the last couple of years in '24 and '25. So we're a little bit below in '24 and '25. But we are confident our EBITDA will increase. If you run the numbers, we don't want to give a number, but if you put 24% of whatever revenues you model based on M&A, et cetera, you're getting close to EUR 2 billion or around EUR 2 billion of EBITDA. And if the free cash flow conversion is over 50% -- significantly over 50%, that's a lot of cash to use for buybacks and M&A. So we have headroom -- and as we talked about assets, when we look at certain assets that could give even more headroom. But we cannot predict the future. A lot of those things look at what we could buy for M&A. I don't know what is going to come our way at a value where we find we can get a good return. That is definitely very hard to plan. And the same thing, are we going to keep all our assets or maybe some marginal ones we will dispose of for very high multiples. We did it already for the -- what is it called our software testing business and media testing business. I think we sold it for 18x EBITDA because we've got a really good offer. This is -- there's a bit of opportunism on that level of capital management depending on our own M&A opportunities and the level of our share price. So net-debt-to-EBITDA, on the other hand, we don't want to exceed the 2.5x. That's clear. And I think overall, if you look at all the cash flow we should be generating this year and next year, unless our share price would be very depressed for that period, we should rather move down than up on the net-debt-to-EBITDA multiple. Allen Wells: Can I ask one kind of additional question? Just looking at the numbers around Europe as well. We know obviously that growth accelerated in Q4 to 5%. That was on a slightly easier comp. It looks like a chunk of that improvement was the diagnostics business, which we know there was a bit of comp effect. Was there any contribution in that Diagnostics business from the organic growth in Synlab or maybe what's the organic contribution from Synlab in there? Because obviously, I know that you account for the organic growth from day 1. Gilles Martin: I think it was 0 in Synlab. It's negative actually because we are shedding some contracts that were loss-making. So... Allen Wells: Just the Diagnostics, the underlying Diagnostics business coming back, nothing from Synlab? Gilles Martin: And I think also Synlab is part of M&A. And so it's -- so no, Synlab is not-- another thing, I think looking at figures after the comma in organic growth per quarter and trying to analyze changes that post-comma changes on organic growth quarter-to-quarter is not really meaningful. It can be one contract, it can be just when something finishes, the contract finishes, doesn't finish. I wouldn't extrapolate too much, especially if you look at it at smaller slices like one activity in one continent. Operator: We will take our final question today from François Digard with Kepler Cheuvreux. François Digard: I will -- maybe just a follow-up on cereulide analysis. Could you share with us how quickly you were able to roll out these tests? You shared already that the commercial implication is limited, but it's interesting to understand how you have processed through that, the first question. The second question is on BIOSECURE Act in the U.S. Do you expect it to be a tailwind for you? Or could your France, European nationality in state prove to be a disadvantage in the U.S.? Gilles Martin: Well, we have several labs around the world doing this test at the moment, and some are still setting it up, and they are cooperating to exchange method because that could be also an issue for clinical diagnostics in human health. I don't know if you heard, but in some countries, even the government labs didn't have a proper test to test the stool of the babies that were affected. So I don't know the exact minute how many of our labs are actually doing it. But when it all started, I think within a week, there was a test running at one of our labs. And maybe we might have had a lab that was already able to do it, but was not performing the test routinely because the demand was not there. And BIOSECURE Act, I don't know that it will have any impact. I mean I'm not sure I've heard from anyone in our company that would have an impact one way or another. No, we do our own testing locally in every country. So we have local companies that do testing in Europe, others do -- are based in China, the local testing in China, local companies in the U.S. doing testing in the U.S. I have to conclude -- sorry operator. Yes, I have to conclude and thank everybody for joining our call. It was a long presentation. I apologize, but I tried to give some color from the management perspective on our numbers. I will be happy to meet some of you in London and for other meetings over the next couple of weeks and later during the year. Thanks a lot for your support, and have a great day. Goodbye. Operator: Thank you, Dr. Martin. Ladies and gentlemen, the floor -- sorry, the call is now concluded, and you may disconnect your lines. And we thank you for joining us, and have a pleasant day.
Operator: Ladies and gentlemen, welcome to the STMicroelectronics Full Year 2025 Earnings Release Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Jerome Ramel, EVP, Corporate Development and Integrated External Communications. Please go ahead, sir. Jerome Ramel: Thank you, Maura, and thank you, everyone, for joining our fourth quarter and full year 2025 financial results call. Hosting the call today is Jean-Marc Chery, ST President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, President and CFO; and Marco Cassis, President, Analog, Power and Discrete, MEMS and Sensor Group and Head of ST Microelectronics Strategy, System Research and Application and Innovation Office. This live webcast and presentation materials can be accessed on ST Investor Relations website. A replay will be available shortly after the conclusion of this call. This call will include forward-looking statements that involve risk factors that could cause ST results to differ materially from management's expectations and plans. We encourage you to review the safe harbor statement contained in the press release that was issued with the results this morning and also in ST's most recent regulatory filings for a full description of these risk factors. Also to ensure all participants have an opportunity to ask questions during the Q&A session, please limit yourself to one question and a brief follow-up. Now I'd like to turn the call over to Jean-Marc Chery, ST President and CEO. Jean-Marc Chery: Thank you, Jerome. Good morning, everyone, and thank you for joining ST for our Q4 and full year 2025 earnings conference call. I will start with an overview of the fourth quarter and the full year 2025, including business dynamics, and I will hand over to Lorenzo for the detailed financial overview. I will then comment on the outlook and conclude before answering your questions. So, starting with Q4. We delivered revenues at $3.33 billion, above the midpoint of our business outlook range, driven by higher revenues in Personal Electronics and to a lesser extent in Communication Equipment and Computer Peripheral and Industrial, while Automotive was below expectations. Gross margin of 35.2% was also above the midpoint of our business outlook range, mainly due to better product mix. Excluding impairment, restructuring charges and other related phaseout costs, diluted earnings per share was $0.11, including certain negative one-time tax expenses impact of $0.18 per share. Q4 revenue marked the return to year-over-year growth. During the quarter, we further worked down inventories, both in our balance sheet and in distribution, and we generated a positive $257 million free cash flow. Looking at the full year 2025. Net revenues decreased 11.1% to $11.8 billion, mainly driven by a strong decrease in Automotive and to a lesser extent, in Industrial, while Personal Electronics and Communication Equipment and Computer Peripheral both grew. Gross margin was 33.9%, down from 39.3% in full year 2024. Excluding impairment, restructuring charges and other related phaseout costs, diluted earnings per share was $0.53. We invested $1.79 billion in net CapEx, while generating free cash flow of $265 million. Let's now discuss our business dynamics during Q4. In Automotive, during the quarter, we grew revenues 3% sequentially. Year-over-year revenues declined, but with continued improvement in the trend. Automotive design momentum progressed with design wins across both electric and traditional vehicle domains for applications such as onboard chargers, DC-DC converters, powertrain and vehicle control electronics. These included design wins for power semiconductors, smart power devices, automotive microcontrollers, analog and sensors. These awards supported by engagements with various OEMs and Tier 1 ecosystems, strengthen our position as a key supplier to the automotive industry. Regarding the acquisition of NXP's MEMS sensor business, the transaction we announced in July is still expected to close in H1 2026. In Industrial, revenues were better than expected, showing increases of 5% sequentially and 5% year-over-year. Importantly, inventories in distribution further decreased and are now normalizing. In Industrial, our portfolio of microcontrollers, sensing technologies and analog and power devices is strongly positioned to support industrial transformation trends and the need of physical AI. During the quarter, we saw design wins across industrial automation and robotics, building automation, power systems, health care and home appliances. In November, we held our STM32 Summit where we announced several key innovations, including the first microcontroller built on the 18-nanometer process, a next-generation wireless microcontrollers and an updated suite of edge AI software tools. Personal Electronics, fourth quarter revenues were above our expectations, down 2% sequentially, reflecting the seasonality of our engaged customer programs. During the quarter, we strengthened our position in mobile platform and connected consumer devices, both with our engaged customer programs as well as our open market offering for devices such as our sensors, secure solutions and power management products. Revenues for communication equipment and computer peripherals were up 23% sequentially, better than expected. In AI and data center infrastructure, we continue to reinforce our position supporting the increasing demand for higher power density and energy efficiency. During the quarter, we secured multiple design wins for silicon and silicon carbide-based power solutions, supporting next-generation AI compute architectures. We also continue to work with customers to bring our silicon photonics technology to the market. The strong momentum in optical connectivity technologies for data centers also contributed to a significant rise in demand for our high-performance microcontroller used in pluggable optics. The low-earth orbit satellite business based on our BiCMOS and panel level packaging technologies continued to progress during the quarter with shipments ramping to our second largest customer. Moving to sustainability. We remain on track for our key 2027 commitments. Carbon neutrality in all direct and indirect emissions from Scope 1 and 2 and focusing on product transportation, business travel and employee commuting emissions for Scope 3 and 100% renewable energy sourcing. A major milestone this year was the launch of Singapore's largest industrial district cooling system at our Ang Mo Kio facilities in Q4. We also continue to maintain our strong presence in the major sustainability indices where we were honored to be recognized in the Time world's most sustainable companies list for the second consecutive year. Now over to Lorenzo, who will present our key financial figures. Lorenzo Grandi: Thank you, Jean-Marc, and good morning, everyone. Let's have a detailed review of the fourth quarter. Starting with revenues on a year-over-year basis by reportable segment. Analog products, MEMS and sensor grew 7.5%, mainly due to Imaging. Power and Discrete products decreased by 31.6%. Embedded Processing revenues were up 1% to 2% with higher revenues in general purpose and automotive microcontrollers, offsetting declines in connected security and custom processing products. RF and optical communication grew 22.9%. By end market, communication equipment and computer peripheral and personal electronics both grew by about 17%. Industrial grew by about 5%, while automotive decreased by about 15%. Year-over-year, sales increased 0.6% to OEM and decreased 0.7% to distribution. On a sequential basis, Power and Discrete was the only segment to decrease by 3.9%. All the other segments grew, led by RF and optical communication up 30.5%, while Embedded Processing and Analog products, MEMS and sensor were up, respectively, 3.9% and 1.1%. By end market, sequential growth was led by communication equipment and computer peripherals, up 23%. Industrial was up 5% and automotive was up 3%, while Personal electronics declined 2%. Turning now to profitability. Gross profit in the fourth quarter was $1.17 billion, decreasing 6.5% on a year-over-year basis. Gross margin was 35.2%, decreasing 250 basis points year-over-year, mainly due to lower manufacturing efficiencies and to a lesser extent, negative currency effect and lower level of capacity reservation fees. On a sequential basis, gross margin improved by 200 basis points. Q4 gross margin included about 50 basis points of negative impact resulting from a nonrecurring cost related to our manufacturing reshipping program. In the next few quarters, we expect a similar negative impact on gross margin from the just mentioned nonrecurring costs. Total net operating expenses, excluding restructuring, amounted to $906 million in the fourth quarter, slightly increasing year-over-year due to unfavorable currency effect. They were slightly better than expected, reflecting our continued cost discipline and the initial benefit from our cost savings initiative. For the first quarter 2026, we expect net OpEx to stand at about $860 million, decreasing quarter-on-quarter. As a reminder, these amounts are net of other income and expenses and exclude the restructuring. In the fourth quarter, we reported $125 million operating income, which included $141 million for impairment, restructuring charges and other related phaseout costs. These charges are related to the execution of the previously announced company-wide program to reshape our manufacturing footprint and resize our global cost base. Excluding the nonrecurring items, Q4 non-U.S. GAAP operating margin was 8%, with Analog product MEMS and Sensor at 16.2%, Power and Discrete negative 30.2% Embedded Processing at 19.2% and RF and Optical Communication at 23.4%. Fourth quarter 2025 net loss was $30 million, including certain onetime noncash income tax expenses of $163 million compared to a net income of $341 million in the year ago quarter. Diluted earnings per share was negative $0.03 compared to $0.37 of last year. Excluding the previously mentioned nonrecurring item related to the impairment, restructuring charges and other related phaseout costs, non-U.S. GAAP net income stood at $100 million and non-U.S. GAAP diluted earnings per share stood at $0.11, including certain negative onetime tax expenses impacting of $0.8 per share. Looking now at our full year 2025 financial performance. Net revenue decreased 11.1% to $11.8 billion. In terms of revenue by end market, Automotive represents about 39% of our total 2025 revenues. Personal Electronics about 25%; Industrial, about 21% and Communication and Computer Peripheral about 15%. By customer channel, sales to OEMs and distribution represent 72% and 28%, respectively, of total revenue in 2025. By region of customer region, 43% of our 2025 revenues were from the Americas, 31% from Asia Pacific and 26% from EMEA. Gross margin decreased to 33.9% for 2025 compared to 39.3% for 2024, mainly due to lower manufacturing efficiencies and to a lesser extent, the price and mix, lower level of capacity reservation fees, negative currency effect and higher unused capacity charges. Operating income stood at $175 million compared to $1.68 billion in 2024. Excluding $376 million for impairment, restructuring charges and other related phaseout costs, non-U.S. GAAP operating margin was 4.7%. On a reported basis, net income was $166 million and EPS was $0.18. On a non-U.S. GAAP basis, they stood respectively at $486 million and $0.53. Net cash from operating activities totaled $2.15 billion compared to $2.97 billion in 2024. Net CapEx expenditure was $1.79 billion in 2025, in line with our revised expectation and lower than the $2.5 billion of 2024. Free cash flow was $265 million positive in 2025 compared to the $288 million positive of the previous year. Inventory at the end of the year was $3.14 billion compared to the $3.17 billion at the end of the third quarter and $2.79 billion one year ago. Days sales of inventory at quarter end were 130 days, slightly better than our expectation compared to the 135 days for the previous quarter and 122 days in the year ago quarter. Cash dividends paid to stockholders in 2025 totaled $321 million. In addition, during 2025, ST executed share buybacks totaling $367 million. ST maintained its financial strength with a net financial position that remains solid at $2.79 billion as at end of December 2025, reflecting total liquidity of $4.92 billion and total financial debt of $2.13 billion. Now back to Jean-Marc, who will comment on our outlook. Jean-Marc Chery: Thank you, Lorenzo. Now let's move to our business outlook for Q1 2026. We are expecting Q1 '26 revenues at $3.04 billion, a decrease of 8.7% sequentially, plus or minus 350 basis points. We expect our gross margin to be about 33.7%, plus or minus 200 basis points, including about 220 basis points of unused capacity charges. This business outlook does not include any impact for potential further changes to global tariffs compared to the current situation. In terms of net CapEx for 2026, we plan to invest about $2.2 billion to support capacity addition for selected growth drivers like those for cloud optical interconnect and our manufacturing reshaping plan. To conclude, 2025 turned out to be a challenging year for the end market we serve, characterized by continued inventory correction in automotive and industrial, in particular, the first part of the year. The second half was better with gradual improvement of the revenue trend and a return to a year-on-year growth in the fourth quarter. We are entering '26 with a better visibility than entering '25 with the inventory correction in distribution progressively improving. Beyond the evidence of a cycle recovery, ST will benefit from the following company-specific growth drivers. In automotive, we see solid momentum in our engaged customer programs in ADAS, where we expect to grow this year and in the coming years. In silicon carbide power devices, following a significant contraction in 2025, we anticipate a return to revenue growth in 2026 with revenues projected to recover to 2024 levels by 2027. In sensors, we see strong demand, both in MEMS and imaging sensor and our planned acquisition of NXP MEMS business will strengthen our leading position across the automotive and industrial segment. In industrial, in general purpose MCUs, building on market share gains 2025 and a road map of new product launch for 2026, we are on track to return to our historical market share of about 23% by 2027. In Personal Electronics, where we continue to see strong momentum in our engaged customer programs in sensors and analog, we should keep on benefiting from increased silicon content in 2026 and beyond. In communication equipment, computer peripheral, in data centers, including cloud, optical interconnect and power and analog for AI servers and data centers, with the current market dynamic, we believe we can deliver $1 billion revenue before 2030 with already USD 500 million in 2026. In low-earth orbit satellites, we are expanding our customer base, and we anticipate continued revenue growth as low earth orbit constellation projects expand globally and penetrate new applications such as direct-to-cell constellation. Lastly, ST is uniquely positioned to address human wind robotics through our broad portfolio, spanning MCUs, MEMS, optical sensors, GNSS and power management. We are already generating revenues through engagements with major OEMs, and we estimate our current addressable bill of material at about $600 per system. Thank you, and we are now ready to answer your questions. Operator: [Operator Instructions] Our first question comes from Francois Bouvignies from UBS. Francois-Xavier Bouvignies: My first question maybe for Jean-Marc, I wanted to come back to what you said about the outlook. I mean, if we look at your revenue guidance down 8.7% quarter-on-quarter, this is below seasonal -- better than seasonal, sorry, of minus 11%. And if we take into account less days, it's actually significantly above seasonal. So, I was wondering, I mean, this is looking quite interesting. And if we compare to other peers like TI yesterday or ADI and Microchip, you see a number of your peers talking about above seasonal. I mean what's your view on the trajectory from here? Do you think this above seasonal trend can carry on a little bit? Or we shouldn't get carried away like we did in the last two years where we have many fall starts? Do you see like a very genuine evidence of a cycle recovery from here? Jean-Marc Chery: Well, we will not guide for 2026 today, clearly, but we are confident in our ability to grow organically for next year. But it's clear that we enter in a better and healthier situation compared to '25. If you remember last quarter, okay, I already shared with you that we were seeing a backlog that were reading during the quarter better than the usual seasonality. And today, with the visibility we have on Q2 that generally speaking, okay, is plus, let's say, low mid-single digit, but we absolutely see no reason that we will not be at least capable to deliver it. More important, I think, beyond the cycle is to share with you that we see for the company some specific growth driver. First of all, in automotive, clearly, we will have the sensor. And at a certain moment, when we will complete the acquisition of NXP, of course, it will bring additional revenues. This is obvious. But we see also positive momentum on ADAS ASICs and the silicon carbide after last year that was pretty challenging. Well, in industrial, clearly, the dynamic is really strong, thanks to the inventory correction gone, but more important is our portfolio. So we have done a tremendous effort in introduction of new products in '25 and '26, and this will contribute beyond the cycle. For Personal Electronics, our engaged customer program, you know that we have the visibility, okay? So I confirm to you. So we confirm that it will support us beyond the cycle. And last but not the least, data center. But clearly, in 2026, cloud optical interconnect, so means both photonics ICs and analog mix signal by CMOS ICs plus our high-performance general purpose microcontroller will contribute because you know that the connectivity engine of the server will move to optical one. So this will be certainly an acceleration. And as well, we will start to contribute to the power supply unit and to the server from the green to the processor. Last but not the least, beyond the cycle in '26, we see also low earth orbit satellite communication with our engaged customer program, so with our ASICs really positive. This will be a bit offset by the capacity fee reservation. But all in all, I confirm really our confidence level to grow organically in 2026 and because we have, let's say, significant growth driver beyond the cycle of the market. Francois-Xavier Bouvignies: Very clear. And yes, maybe on the gross margin side, I mean, with it, I mean, obviously, it's a concern for the market. You delivered the guidance is in line on the gross margin, but 33.7%. But when I look at the consensus, it has 35.6% of gross margin for the year. So it would assume a recovery from here. So with the top line that you described nicely, should we see as well an improvement of gross margin from the level in Q1? Lorenzo Grandi: Maybe I take this one, Jean-Marc, about the gross margin. But today, of course, the gross margin will depend on the evolution of the revenue in the course of the year. As explained by Jean-Marc, we expect, let's say, to increase. But the gross margin today that we see in Q1, we believe is clearly the lowest point in the year, this expectation of 33.7%. So we will see some increase. This increase is also driven by the fact that we expect to have constantly reduction in our unloading charges during the year. So we expect some mild increase for the second quarter and then a more significant increase also driven by the seasonality of the revenues in the second half of the year. Yes, at this stage, we can say that the expectation for us is to have increase in our gross margin all over the year. Operator: The next question comes from Andrew Gardiner from Citi. Andrew Gardiner: I was interested, Jean-Marc, in digging a bit deeper into the automotive space. Clearly, your largest end market and the one where we're still seeing the most difficulty in terms of getting through the bottom of this cycle. There's a number of sort of end market data points out there that are, I suppose, still causing investors' questions in terms of the health of the market, tariff threats back and forth admittedly, but also not helping. I'm just wondering how -- can you give us a bit more detail in terms of how you're seeing your customers behave? Do you think inventory is absolutely at a bottom in terms of the automotive channel and at the OEMs and the Tier 1s. What kind of confidence do you have as we look into the future quarters that we can return to stronger demand trends? Jean-Marc Chery: Well, first of all, clearly, when we see our Q4 revenue in automotive, it was slightly below our expectation and mainly, in fact, driven by the pulling from inventory a little bit lower than expected from some Tier 1 means that the automotive market for, let's say, legacy application, clearly is pretty soft. Inventory correction is certainly gone, but there is a kind of a softness of this kind of application. What will be positive on automotive is clearly what is around, let's say, the electronic architecture, the new software-defined electronic architecture calling for more complex MPU, MCUs definitively. So this will be an important growth driver. But we know that the electrical powertrain will be still an important driver. But here, it is more the competition landscape that changed completely compared a few years ago because you see that out of, let's say, more than 30 million vehicles produced in China, more than half are battery based compared to America, where it is more marginal in terms of production. And in Europe, it is below 1/3. So here, it's more a question of the competition is in China. So you know that in China is more complex to compete. But the powertrain electronics, the demand is there. So, all in all, I think the automotive market based on 90 million, 92 million, 93 million vehicles out of which 17 million to 18 million vehicle battery based and similar number in hybrid is still changing in terms of mix as well from the car classification is more middle end or premium car, even this car now embed some electronics. So the market is not yet stable. So that's the reason why we have to be, let's say, cautious to adapt ourselves. But we see a different situation compared entering in '25, where we faced very strong inventory correction in Q1 last year, if you remember, from our main customer, this will not be repeated. It is more, let's say, a progressive stabilization of the market in terms of mix of car electrical hybrid thermal combustion engine and mix of car between high premium, premium and middle class and mix between China, APAC, Europe and Asia. So this is something we have to, of course, closely monitor and adapt ourselves with our supply chain. So this is how we see the automotive market. Andrew Gardiner: Just a quick follow-up, given you mentioned China at length there. How is the partnership with Sanan progressing? Is that going as you anticipated? Is it helping your competitiveness in that market? Or is it still too early? Jean-Marc Chery: No. Clearly, so we will start to ramp up the facilities now, okay? We have modernized. We know exactly the efficiency of this fab. And clearly, it will be a key success factor in our capability to compete on the Chinese market. Operator: The next question comes from Joshua Buchalter from TD Cowen. Joshua Buchalter: I actually wanted to drill into the Personal Electronics segment a little bit more. I think there's some concerns of disruption or even pull-ins in the short term due to higher memory costs. It came in better in the quarter. Maybe you could walk through what the drivers you're seeing are there and if you're seeing any changes in order pattern. And I believe you called out higher silicon content in 2026. Was that referring to expectations for your largest customer this year? Jean-Marc Chery: Yes, you know that our revenue are mainly driven by our biggest customer and more on the high-end kind of product, which are, in some extent, less sensitive to the memory price. So, at this stage, with the visibility we have, first of all, we don't see significant impact detected by us. And I confirm that we expect to keep growing in personal electronics driven by our main customer in 2026, thanks to our increased device based on silicon and not module content increase in '26. So far, PE will be a growth driver for us in '26. Joshua Buchalter: And then I think the last couple of quarters, you've been kind enough to give us your book-to-bill ratios in auto and industrial. It seems like things are getting better on the industrial side in particular. Can you update us, I guess, on those metrics and whether you're mostly done with the channel inventory clearing on the industrial side? Congrats on the solid results. Jean-Marc Chery: No. In Industrial, the book-to-bill was well above parity. Clearly. Also, beyond your question, I can tell you that the POS were growing, let's say, between low teens, mid-teens, which is a good news. So we continue to decrease our inventory. But on automotive is the book-to-bill is a little bit more complex because we have some few key customers that are putting order in one shot for six months. So the book-to-bill must be, let's say, assessed on one-year moving average or six months moving average. So corrected from this, let's say, abnormal, let's say, process, the book-to-bill was parity on automotive. Operator: The next question comes from Stephane Houri from ODDO BHF. Stephane Houri: I just wanted to come back a bit on the scenario for the year, and I know you're not guiding. But historically, you've been saying that the second half is like 15% above the first, that's normal seasonality. And then on the top of that, you may have some specific programs. With the sting point you guide on Q1 and we look at -- when I look at the consensus for the full year, it seems to be banking on something lower than that because of the starting point in Q1. So can you just confirm that you see now that the inventory correction is done normal seasonality throughout the year and maybe give some comments about the adds of some customer engage program? Jean-Marc Chery: No. On the inventory correction, what we communicated, okay, I and Lorenzo and myself is to say by end of Q2, we believe we will be hold the excess of inventory. And this today, I can confirm -- it's already the case for many product family. We are still here and there some pockets of excess inventory versus what we see. But looking at the current dynamic, POS, POP by end of Q2, this will go. So now it's sure that in H2, we will be exposed directly to the end demand. Now about again, what we consider engaged customer program be the cycle, let's say, we can split I have to say. One is the usual personal electronics, and why we say it's cycle is because silicon content increase, okay? So we have the visibility with the current visibility we have, okay? So this will help us to grow the cycle of personal electronics and assuming our main customer will perform in market share really well performed in 2025, okay? So this will drive our growth. Moving to communication equipment and computer peripheral, well, communication equipment. Communication equipment, it is clear that for the lower or satellite communication is an important driver because thanks to our capability to supply and compete, our growth is driven by our largest customer in this field of activity. And as we see is pretty successful. And certainly this year, will be another demonstration of the success. Now since two quarters, we are supporting our second largest customer that is growing as well. So it is clearly beyond the cycle. So this will be a significant growth driver beyond the cycle for ST. Last but not the least is AI data center. You know AI data center, okay, we were, let's say, a bit delay for what call the device addressing the power station we are in, let's say, process to close the gap and offer solution to our customers. But clearly, we will be at of the business dynamic, it is the optical engine or the cloud optical interconnect. So its photonics ICs, MOCs and high performance general microcontroller. And this will contribute to the growth of ST significantly in 2023. Then moving to the more, let's say, traditional market focus we have, so automotive industrial. For ADAS, ASIC, last year was a challenging one because we saw some inventory correction on, let's say, some legacy ASIC. But this year, okay, clearly, with the visibility we have, this will be a booster of growth. Finally, our SiC MOSFET, about the difficult year of '25 will grow again. And I can confirm to you that up to now in Q1, we have a good book-to-bill on silicon carbide that is very encouraging. And definitely, our sensor contribution with the acquisition of NXP MEMS plus the existing imaging sensor, existing MEMS we have. And I am very pleased that beyond the inventory correction done on general purpose microcontroller, the proliferation of our new products are really paying back very well. And I am really confident that in '27, we come back to our historical market share and '26 will be an important step to demonstrate it. So this is actually in a few words how we can describe '26. Stephane Houri: I have a small follow-up on the gross margin comments. I think last quarter, you said that you think you would end up Q4 2026 above the level of Q4 2025 in gross margin. Do you still feel confident with what you see developing the mix, the underloading charges, et cetera, et cetera? Lorenzo Grandi: Yes. Yes, I confirm that at this stage, the expectation is that Q4 this year '26 should be better than Q4 '25. Operator: The next question comes from Domenico Ghilotti from Equita. Domenico Ghilotti: A couple of questions. The first is on the unloaded charges. You are guiding for a significant drop in Q1. trying to understand despite the lower sales, I'm trying to understand if you see this number at the bottom and if you are already benefiting from, say, the efficiency plan that you carried out. And second is some color on, if you can, on the second client in low earth orbit. So should we assume that it is a significant number or just starting entrance of new clients or an add-on, but not particularly relevant? Lorenzo Grandi: Maybe I'll take the one of the unused charges. Yes, unused charges are declining in the first quarter. There are -- the reason -- the main ingredient of the declining in this quarter is the fact that, as you know, we are progressing with our programs to reshaping our manufacturing infrastructure. This program is progressively reducing our capacity in 6-inch for silicon carbide, 150-millimeter for silicon carbide and 200-millimeter for silicon. And we start, let's say, to move ahead on this plan. So this is, if you want, is something that is mechanical. At the end, the capacity is reduced. We are now moving our product on the existing capacity on one side, 8-inch for the silicon carbide and the 300-millimeter for the silicon. So that's why we see the level of unused capacity, notwithstanding that the revenue are lower in respect to the previous quarter to reduce. This trend will continue. Unused capacity will not disappear in the year, but will significantly reduce in the year and will be one driver for our improvement in the gross margin in the course of 2026. Jean-Marc Chery: About the second question, yes, it's significant. If not, we will not mention. But I can just confirm you to number in Q4, our CCP segment grew sequentially 23% and year-over-year 22%. Definitively, it is linked to the low or satellite business we have, and it is driven both by our first customer and then by the second one. So at 22%, 23% growth sequential and year-over-year, so you can conclude it is significant. Operator: The next question comes from Sandeep Deshpande from JPMorgan. Sandeep Deshpande: My question is about your fab loading into the current quarter. Given what is happening with the gross margin in the current quarter, how is the fab loading going through in the quarter? And how is the mix shifting overall in terms of the gross margin? Because you have a revenue decline, but the gross margin is declining. So are you reducing your fab loading this quarter? Or are you increasing your fab loading? And my follow-up question associated with that is how the mix, particularly associated with your better margin microcontroller products is shifting? Lorenzo Grandi: In the quarter, as I was saying before, the unloading charges is mainly related to the fact that we are moving out capacity, reducing capacity in certain specific fabs. where, of course, we are now moving production in different fabs, 300 millimeters, so reducing our capacity. So at the end, when you look at the level of loading, we are not overloading our production, let's say, in the quarter. Clearly, if you look the inventory and you look where it will be the dynamic of the inventory in the quarter, as usual, you know that there is this seasonality in our inventory in which in the first half, our inventory is somehow increasing and then decreasing in the second part of the year. So, at the end, what it will be the impact is that now the expectation is end the quarter Q1 in the range of 140 days of inventory compared to the 130 days where we stand today. But I repeat that this is more related, let's say, to the normal dynamic of our inventory over the year than, let's say, loading our manufacturing infrastructure in a way that is -- the impact on unloading charges is mainly related to the fact that we started with our programs to reduce capacity in some specific areas. Clearly, the impact -- the positive impact, let's say, of this in terms of gaining efficiency and so on will come probably later, as you know, in our, let's say, manufacturing infrastructure. We do expect our program to be -- to start to yield a positive impact in our -- in our manufacturing efficiency more in 2027 than this year. But one of the impact that visible is the reduced level of unloading. Together also with the expectation of growth in terms of revenues. This we will see during the year, let's say, depending on the level of growth. Sandeep Deshpande: And my follow-up question is regarding about your microcontroller business, which is if you look at the Embedded Processing segment, it grew 1.2% year-on-year. I mean, many of your peers in this market are seeing better growth at this point. So why is ST growth in a key segment for ST lagging at this point or something else happening in that division? Jean-Marc Chery: So, embedded processing segment, clearly, the growth dynamic we have on the general purpose microcontroller is, let's say, at least consistent with our peers. Why it is a little bit offset? It is offset by our automotive microcontroller because, okay, up to now, our automotive microcontroller are more the microcontroller that will be, let's say, for some model of car moving to the software-defined vehicle architecture removed clearly. And I already explained that we have done a strong effort in 2025 to rework the road map of our micro, but this will be paid back, okay, more, let's say, end of '27 and '28. For the time being, yes, we suffer on the automotive microcontroller that is, let's say, optically offsetting the real good health of the general purpose. But the general purpose microcontroller, let's say, maybe I can share with you one number, okay, for Q1, the embedded processing solution segment will grow up low 30s. So above 30% year-over-year. So you can imagine that the growth of general purpose will be really, really strong more than, let's say, the secure microcontroller are growing a little bit less because driven by the market. And okay, of course, we have some offset linked to the automotive micro. But I can confirm to you that our general purpose microcontroller are performing or overperforming the market. Jerome Ramel: Mona, I think we have time for one more question. Operator: Next question comes from Sébastien Sztabowicz from Kepler Cheuvreux. Sébastien Sztabowicz: Coming back to the transformation program, have you made any specific progress so far? And notably on the manufacturing front? And are you still on track to reach your savings ambition for the end of '27? And the second one is more on the OpEx trend. So Q1, we know where it will stand. But for the full year, where do you see OpEx trending? And how do you see the start-up costs impacting the OpEx 2023? Do you plan to accelerate a little bit further the cost-cutting actions for OpEx? Lorenzo Grandi: In terms of our reshaping programs, I would say that is progressing in line with the expectation. In the course of 2025, the main, let's say, impact was related to the savings in our OpEx that indeed, when you look at the overall are declining, notwithstanding, let's say, the negative impact of the euro dollars. So at this stage in the course of 2026, as I said, we will start, let's say, progressively to transfer some activity from -- in silicon carbide to 8-inch in silicon to the 300-millimeter. As I was saying before, is now expected to yield the benefit in our manufacturing infrastructure efficiency of this program towards the second part of 2027 and 2028. So my short answer is, yes, we are on track in respect to what we have communicated previously. So, this is the situation. In respect to the expenses of 2026, now the expectation remains substantially the same, means that at the end, at this level of exchange rate, including the impact of the hedging, we should be able to stay with a net OpEx means including other income and expenses on a low single-digit increase, something in that range, mainly driven by the fact that we will have a reduction in other income and expenses in respect to the one of 2025 due to the phaseout cost because, of course, let's say, from the one side, we reduced the capacity in our manufacturing 6-inch, 8-inch. But on the other side, we have a progressive phaseout from these steps that will be reported in this line. It's a temporary effect, but it will be there during 2026. Jerome Ramel: Thank you, Sébastien, and thank you, everyone. I think this is ending our call for this quarter. So, thanks very much all of you for being there, and we remain here at your disposal should you need any follow-up questions. Thank you. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.