加载中...
共找到 24,885 条相关资讯
Operator: Good day, and thank you for standing by. Welcome to the Central Bancompany Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, John Ross, President and CEO. Please go ahead. John Ross: Good morning, and thank you for joining our inaugural earnings call. With me in the room today is our Chief Financial Officer, Jim Ciroli; Chief Customer Officer, Dan Westhues; and Chief Credit Officer, Eric Hallgren. Before we begin, I'd like to point out that today's discussion is subject to the same forward-looking considerations outlined on Page 4 of our press release. While the format of our calls may vary over time, today, we plan to be very brief in our discussion of fourth quarter highlights before opening the line for Q&A. Before doing that, however, please allow me to thank our team for their tireless contributions. In 2025, they delivered for their communities with over 28,000 hours of community service. They also delivered for their customers with our Net Promoter Score improving 2 points to 73 on a consolidated basis across our business lines. And finally, to our shareholders, with significant progress made in our technology modernization program and our financial results, which I will turn to now. For the fourth quarter, Central Bank posted net income of $107.6 million or $0.47 per fully diluted share. Return on average assets of 2.17%, net interest margin on an FTE basis of 4.41% and an efficiency ratio on an FTE basis of 47%. Our asset quality remained in line with 10 basis points of net charge-offs and our allowance covered 131 basis points of total loans. While too early to call it a trend, we are also encouraged by the resumption of balance sheet growth with ending loans up 1% quarter-over-quarter and nonpublic deposits up 1.7% quarter-over-quarter. Lastly, capital levels at the holding company remained well above target with approximately $1.8 billion of excess or $7.50 a share. We look forward to the challenge of repeating our historical earnings growth in 2026, including the critical objective of prudently deploying our ample excess capital. With that, I'd like to open the line for questions. Operator? Operator: [Operator Instructions] And our first question comes from Manan Gosalia with Morgan Stanley. Manan Gosalia: First off, congratulations on your inaugural earnings release as a public company. And JR, maybe to start with, M&A has always been in the DNA of Central, and you guys have been pretty clear that M&A is a core part of your strategy here as you look to deploy some of this excess capital. I guess my question is, can you give us an update on the opportunity set that you're seeing as it relates to M&A right now? John Ross: Yes. I'll try to answer your question in a second. But for the broader group, let me just kind of level set for a few things that I know that you know. But over the last 50 years, we've done 47 acquisitions. So we do consider this a competency of the company. We have laid out in the context of our IPO very clearly what we're hoping to do, and we're looking to both grow in our existing markets, but also potentially expand into Texas as well. We're hoping to do that with deals of size, which we've roughly equated to $2 billion in assets. And we're looking for high-quality targets, both in terms of their deposit franchise and their credit franchise with cultures compatible to ours. And we outlined a list of about 30 names on that list that we think meet our criteria, and we are in a process and have been for a few years now of making introductions and having good conversations with at least half of the folks on that list. We do -- we are broadly encouraged by the environment. There is a lot of activity and conversations going on, which does on the margin help Boards think about their opportunity set more than they do, generally speaking. And we do have a currency now, which makes those conversations a lot more interesting to those who are more inclined to participate in the upside of the company that we've enjoyed for so long. Having said that, we're not going to go into this call or any other call in a lot of detail other than to tell you, we continue to diligently prosecute against that opportunity set, and we will likely have no specific update or detail for you until we're actually announcing a deal, which we look forward to do and hopefully in the not-too-distant future. But as we've said before, we're much more focused on doing the right deal than doing a timely deal. So no real estimate or guidance on when that might be. James Ciroli: Yes. And we're just going to -- we're going to be that way, Manan. And I think you guys can appreciate, we just don't want to leave any breadcrumbs or any signals when something might be or might not be happening. So we prefer to just continue to talk about what our target set is, but not really make any other comments. Manan Gosalia: Fair enough. And maybe as it relates to fourth quarter earnings, you spoke about the resumption of balance sheet growth. And I think in the slide deck, you noted less payoff activity as a tailwind to loan growth in the fourth quarter. How should we think about the pace of balance sheet growth from here? And where do you see the most opportunity? James Ciroli: So we're also not going to provide forward-looking guidance. What I will say is when you look at the detail of where our loan growth came from, it was pretty broad-based. And one of the things I'll point out to you that wasn't growing was our installment loan portfolio. And if you take out installment loans, and you look at loan growth, when you annualize those numbers for just the third quarter, you see a number that's kind of mid -- maybe even a bit over mid-single digits growth. But we -- look, we serve our markets and our customers are really going to dictate where that is. The one thing I would point out that is when we're in a risk-on environment, I think we're going to probably grow a little bit slower than average when we're in a risk-off environment because we don't really change our credit underwriting standards through the cycle. We've tried to be as consistent as possible. In a risk-off environment, we'll see more opportunities come to us, and we like that. We like sticking to our knitting and doing our things. So we're happy to see the loan growth. We think it's going to continue, but we're not going to provide any guidance as to how much and where it comes from is as much up to our customers as it is up to us. Manan Gosalia: Got it. Very helpful. I guess just without providing forward guidance, if you can just talk about the environment in the fourth quarter? And was that any different from the environment that you saw in the second and third quarter of 2025? James Ciroli: I would not say. So what we saw was there was just an abatement of some of the higher refi activity. We were pretty clear when we did the IPO roadshow that we thought that origination volume kind of year-to-date in 2025 was pretty robust and pretty strong, but it was muted by a higher level of payoffs that we saw earlier in the year. We think the payoff -- we think the pipelines continue to be strong and the payoffs have muted, and that's what's translated, especially when you look at the commercial numbers, that's what's translated into like the commercial and C&D growth that you're seeing at the period end balance sheet. Eric, is there anything that I'm leaving out there? Eric Hallgren: No, I don't think so. I appreciate the question, Manan. Operator: Our next question comes from Nathan Race with Piper Sandler. Nathan Race: Congrats on a nice quarter out of the gates here. Curious if you can just provide some color just in terms of how you're seeing spreads hold up on new loan production in the quarter and just maybe what kind of the weighted average rate on new loan production was in the quarter relative to the 630 portfolio yield, give or take? James Ciroli: Yes. So there's a lot there. So keep track of how much I answer here. So we're not seeing spread compression. We keep in mind that in general -- I'll make two comments about our portfolio. In general, it's more granular. So i.e., look the median ticket size is probably lower than comparable $20 billion oversized banks. And we probably over-index on the fixed side. But we continue to see if you're comparing with the treasury curve, we're seeing spreads of around 300 basis points, and we've seen that for a long, long time. And we don't, especially in our markets, expect that really to change much. So whether that's variable or whether that's the fixed rate product typically with a kind of a 2- to 5-year tenor, we're seeing about 300-ish bps in spread over comparable treasuries. Nathan Race: Okay. Great. That's helpful. And then just maybe turning to the right side of the balance sheet. Your deposit growth in the quarter was quite strong. Curious if you can just remind us how much of that may be somewhat seasonal in nature versus just kind of blocking and tackling and taking market share or just growing balances across the existing client base? James Ciroli: Very good, Nate. I appreciate you remembering the seasonality. We've got a very large public funds-oriented deposit gathering business. It's about 17% of our deposit portfolio. And in the state of Missouri, property taxes are collected at the end of the year. So really, I'd say, focused in the December time frame, and I'm learning this myself being somewhat new to the company, deposit balances grow. So if we try to normalize for that, we'd say nonpublic deposits grew about 1.7% in the quarter. When you look at a year-over-year basis, we also saw some pretty nice growth. We saw about 6% growth on a comparison to prior year-end. That does include some of the seasonality, but it also shows you that even with that seasonality, we're growing deposits in the kind of mid- to upper single digits. I want to go back one comment, I forgot to give you on loan yields. When you look at the loan yield, it came down like a bp. So amazingly stable in light of the 75 basis points of rate cuts that we had at the end of the year there. And that kind of underscores what we continue to say in terms of our sensitivity to the front end of the curve is relatively neutral. Nathan Race: Okay. That's very helpful. Jim, if I could just sneak one more in for you. Just any update in terms of how you've contemplated or redeployed some of the capital or liquidity raised in the IPO? James Ciroli: It's early days, right? So we just raised that less than a quarter ago. I will still say our primary focus is looking at M&A opportunities. We think that's probably our greatest opportunity to add shareholder wealth. JR mentioned $7.5 a share represents excess capital, and we think we can deploy that in M&A transactions and earn something significantly above that $7.5. But look, everything remains on the table that in terms of deploying that capital, and our Board is very aware of its obligation as being good stewards of capital as to how best to deploy that. So we would look at every tool on the table from dividends and buybacks. When the time comes and when it's appropriate, we'll continue to evaluate what the best way to deploy that capital is. Nathan Race: I apologize, Jim. I was actually asking in terms of how you're managing the liquidity that you raised in terms of just keeping in cash or maybe investing in some short-term treasuries. James Ciroli: I'm sorry, I'm mishovered. That's my bad, Nate. Yes. So we look at some of the seasonality in the deposits. And we would expect that the seasonality we see picking up in December kind of runs out kind of -- it stays on the balance sheet through the second, maybe a little bit into the third quarter. And we'll keep the appropriate powder dry from a cash perspective and look to invest the rest. Now down to a certain level. Given the shape of the curve right now that -- and with that cash current earning, whatever the Fed is willing to pay us, there's not a real imperative to putting that out to use a little bit longer. But in terms of where the curve goes, if the forward curve is to be believed, and that's what we look at, we're not expecting to see a rate cut in the overnight rate until the second half of the year. So we're going to deploy that excess cash patiently in a disciplined way, the way we always have into safe risk -- relatively risk-free opportunities. Nathan Race: Got it. That's, again, very helpful. I appreciate all the color, guys. Congrats on all the accomplishments over the last 90 days or so. Operator: Our next question comes from Terry McEvoy with Stephens. Terence McEvoy: Maybe first question, could you just provide an update on the wealth and treasury management initiatives? And I'm not sure you'll answer this question, but when you think about growth in those two business lines in '26, do you see similar growth within the brokerage and fiduciary services and payment services has been a little flat. When would you expect some of those initiatives to translate into organic growth? James Ciroli: Great question, Terry. I appreciate that. From a wealth perspective, I would point out to you that at the end of the quarter, our assets under advice grew to $16 billion, which was a nice pickup. That was the product of both investment performance, and I'd say investment outperformance because our guys are beating their relative benchmarks as well as we saw strong net new money coming into AUM all throughout the year, especially in the fourth quarter. And I continue to say our wealth business can compete with anyone out there. And I truly mean anyone. And so some of the other providers that are simply doing something that's simpler, but maybe even charging more, I think we win against every day. So wealth continues to be a great opportunity for us. From a treasury management side, I'm going to point out there's a couple of things that you're probably looking at. So from a payments perspective as well as a service charge perspective, we generally see a little bit of falloff going from Q3 to Q4, so there's some seasonality in those numbers. Not as much on the commercial side from a service charge perspective, but certainly, payments volume falls off in the fourth quarter. We continue to make investments in that business that we think are going to lead to us continuing the growth rate you've historically seen in our company. Terence McEvoy: And maybe just a follow-up, stepping out of the model. Could you discuss branch expansion plans in 2026? James Ciroli: We think there's tremendous opportunities, and we've got a number of things in the pipeline. I'm going to give Dan Westhues, a chance to speak because he's eager to and talk about where we're looking at putting those branches. Daniel Westhues: For 2026, we have two major locations where we know we are having branches come online at St. Louis and Colorado or Denver, Colorado. The first branch comes online here in the next couple of months in St. Louis with at least two more for sure in 2026 in St. Louis, and then we are negotiating some other spaces still looking. So branch expansion in St. Louis, we are finally trying to kind of rightsize that -- our footprint up there. We have one coming on in Colorado, and that should be on by the second quarter of this year as well. So two for sure, two more coming after that and the negotiations for the rest. Terence McEvoy: Congrats on your first company as a public company -- first quarter. Operator: [Operator Instructions] Our next question comes from Chris McGratty with KBW. Christopher McGratty: Jim, maybe a question on Slide 5, if you could. The lower right part of Slide 5 gives you kind of the net interest income outlook with a static balance sheet and also kind of alternative rate scenarios. I'm interested in how we should interpret this given the conversation this morning. Obviously, loan growth little bit better, forward curve maybe having a cut or two. The base case would seem kind of where you'd want us to kind of land, but any kind of inside baseball on the nuances would be great. James Ciroli: Yes. I don't know that there's much in the way of nuances there. We show the steepener curve because, look, rates never -- we show the parallel moves, right, but rates never move in parallel. When we look at the forward curve, we think we're looking at more of a steepener scenario with two rate cuts. This is -- wasn't the modeling, two rate cuts later in this year, and that's just not in the steepener model. It's more of an instantaneous shock. But we see the forward curve having two rate cuts later this year. So we are looking at the steepener where we dropped the front end of the curve. And from about the 2-year point on out, we gradually increased that so that we've got a full 50 basis points baked in on the longer part of that curve, but 45 of that 50 is already baked in by the 5-year mark in the steepener scenario. So as we look at that, what we wanted to show is really that we're not really -- we don't think there's much impact to us. We go from a -- we go from 6% up in net interest income next year with that steepener scenario to a 3% up, which is very similar to what we were showing at the time of the IPO. And again, we don't have much sensitivity to the front end of the curve. Our exposure is really more in the intermediate part of the curve. And to the extent that rates are up, they're up this morning, they continue to rise a little bit in that part of the curve, we're going to see a net interest income benefit. Christopher McGratty: Okay. It feels like the base case is a fair place to start and then you make my assumptions on the balance sheet growth. James Ciroli: Balance sheet too, it doesn't include growth. Christopher McGratty: That's right. Yes. And on, I guess, credit, anything on the margin incrementally that you're hearing from customers, you're keeping your eye on? I mean you guys are a good barometer of credit. So I'm interested in your thoughts if anything has changed in the last 90 days. James Ciroli: Yes. I think those are fairly pristine numbers, Chris, especially with our net charge-off rate coming down. But I'll turn to Eric and see if there's any additional color he can add. Eric Hallgren: Yes. Thanks, Jim. So we haven't really seen anything specific that I would say points to weakness or pockets of weakness in the portfolio. On the watch list side, we've seen some evolution or composition shift from criticized into classified categories. But again, as we think about loss content, we don't see anything significant or moving in the portfolio. We are traditionally patient with our relationships and our loan relationships, but we're not holding or harvesting, delaying any potential resolutions. Markets are really diligent and focused on managing outcomes to the best possible extent for both the bank as well as the client. I think that's all I've got, Jim, did I miss anything that you want to add? James Ciroli: No. Christopher McGratty: Okay. And then what have you -- Jim, why the tax rate this quarter fair for going forward? James Ciroli: So you said the tax rate? Christopher McGratty: Yes. James Ciroli: So we did call out that there was about 40 bps of unusual items in the effective tax rate. So of that, I'd guess that 30 of that 40 is out of period and 10 of that is native to the period. That should be helpful to you. Operator: I'm showing no further questions at this time. I would now like to turn it back to John Ross for closing remarks. John Ross: Thank you, operator. Just over 20 minutes that might be a record short earnings call, and I'm going to attribute that to solid numbers and a really good job that Jim did on his first call for us, having been here less than a year. So well done, Jim. I'd also like to thank the participants on the call for their time and interest and our investors more broadly for their support. We look forward to any opportunity to serve you better as we mature as a public company. Thank you again. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, and welcome to the NextEra Energy, Inc. Fourth Quarter and Full Year 2025 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Mark Eidelman, Director of Investor Relations. Please go ahead, sir. Mark Eidelman: Good morning, everyone, and thank you for joining our fourth quarter and full year 2025 financial results conference call for NextEra Energy. With me this morning are John Ketchum, Chairman, President and Chief Executive Officer of NextEra Energy; Mike Dunne, Executive Vice President and Chief Financial Officer of NextEra Energy; Armando Pimentel, Chief Executive Officer of Florida Power and Light Company; Scott Borys, President of Florida Power and Light Company; Brian Bolster, President and Chief Executive Officer of NextEra Energy Resources; and Mark Hickson, Executive Vice President of NextEra Energy. John will start with opening remarks, then Mike will provide an overview of our results. Our executive team will then be available to answer your questions. We will be making forward-looking statements during this call based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements, including if any of our key assumptions are incorrect because of other factors discussed in today's earnings release, the comments made during this conference call, and the Risk Factors section of the accompanying presentation or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found on our website, www.nexteraenergy.com. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of historical non-GAAP measures to the closest GAAP financial measure. With that, I'll turn the call over to John. John Ketchum: Thanks, Mark, and good morning, everyone. NextEra Energy had strong operational and financial performance in 2025, delivering full-year adjusted earnings per share of $3.71, up over 8% from 2024 and slightly better than what we communicated as the top end of our range at our investor conference in December. Our expectations are to grow adjusted earnings per share at a compound annual growth rate of 8% plus through 2032, and we are targeting the same from 2032 through 2035, all off the 2025 base. As we enter a new year, we're focused on the opportunity in front of us. America needs more electrons on the grid, and America needs a proven energy infrastructure builder to get the job done. That's who we are, and that's what we do. NextEra Energy develops, builds, and operates energy infrastructure across the energy value chain, whether it's power generation, storage, or linear electric and gas infrastructure. It's why I believe we are well-positioned for the future as we execute against our strategic plan with the over 12 ways to grow that we presented in December. Importantly, our forecasted growth is visible and balanced between our regulated and long-term contracted businesses. Last year was about laying the groundwork for the future of our business. This year is about execution, which is our strong suit. Let's start with FPL, which begins the year with a new four-year rate agreement that runs through the remainder of the decade. The Florida Public Service Commission unanimously approved the agreement in November and issued its final order last week. The agreement allows us to make smart, long-term infrastructure investments on behalf of our customers while keeping bills well below the national average. FPL expects to invest between $90 billion and $100 billion through 2032, primarily to support Florida's growth while continuing its track record of keeping customer bills low and reliability high. While customer affordability is a major concern throughout many parts of the U.S., FPL's typical retail bill today is more than 30% lower than the national average. And FPL expects typical residential customer bills to increase only about 2% annually between 2025 and 2029, which is lower than the current inflation rate of about 3%. Keeping customer bills low is our number one priority, and we do that by continuously investing in and executing against the best-in-class operating model. That discipline delivers real results. FPL's non-fuel O&M is more than 71% lower than the industry average, reinforcing our position as the lowest-cost electric utility operator in the country. The four-year rate agreement also provides an allowed midpoint regulatory return on equity of 10.95%, with a range of 9.95% to 11.95%. FPL's equity ratio remains at 59%, and the agreement includes a rate stabilization mechanism. FPL's agreement also includes a large load tariff. We believe the tariff strikes the right balance by providing hyperscalers with speed to market at a competitive price while just as importantly protecting our existing customers from bearing infrastructure build-out costs needed to support hyperscalers. FPL's speed to market advantages combined with its best-in-class service is creating significant large load interest to the tune of over 20 gigawatts to date. Of that, we are in advanced discussions on about nine gigawatts, a portion of which we now believe we could begin serving as soon as 2028. For context, every gigawatt is equivalent to roughly $2 billion of CapEx and earns the same return on equity as other FPL investments. Florida's growth requires continued investment in energy infrastructure. The state is expected to surpass 26 million by 2040. But it's more than just people moving into the state. Today, Florida is a $1.8 trillion economy, the fifteenth largest economy in the world if the state were a standalone country. Florida leads the nation in key economic indicators like income migration, manufacturing job growth, and corporate headquarter relocations. And that's what makes Florida's growth different than in the past. A diverse set of high-growth industries is bringing new businesses to the state from the Space Coast to Miami and all across Florida. It's why Florida expects to add 1.5 million new jobs by 2034. This is high-quality economic development with high-wage jobs and innovative industries. FPL's continued infrastructure investments help make this economic transformation possible. Energy Resources also continues to grow its regulated portfolio, electric and gas transmission. NextEra Energy Transmission is one of America's leading independent electric transmission companies with total regulated and secured capital of $8 billion. In fact, it's almost twice the rate base size of Gulf Power when we bought the company in 2019. Our scale and experience position us well as we execute on new transmission opportunities across America. NextEra Energy Transmission has secured roughly $5 billion in new projects since 2023. This includes PJM's recommendation in December that NextEra Energy Transmission and Exelon be selected to develop a new $1.7 billion high-voltage transmission line, which is expected to enhance the flow of more than seven gigawatts of power across the region. We expect PJM to make a decision on this project next month. We also continue to execute against our plan to grow our gas transmission business. Energy Resources has ownership interests in more than 1,000 miles of FERC-regulated pipelines, a portfolio with organic expansion opportunities. For example, Mountain Valley Pipeline has multiple ways to grow and is ideally positioned to bring gas from the Marcellus shale even further into the Southeast, where gas demand is already high. It's why we acquired a portion of ConEd's interest in MVP earlier this month. We'll continue to look for opportunities to optimize and expand our regulated gas pipeline portfolio as we provide energy infrastructure solutions to enable large loads across the country. Putting it all together, we expect our combined electric and gas transmission business at Energy Resources to grow to $20 billion of total regulated and invested capital by 2032, a 20% compounded annual growth rate off a 2025 base. Energy Resources had another record year originating new long-term contracted generation and storage projects. We added approximately 13.5 gigawatts to our backlog, which includes a record quarter of origination of 3.6 gigawatts since our last call. We have now originated approximately 35 gigawatts over the last three years. To put that into context, 35 gigawatts of power generation would rank as the fourth largest public utility in the U.S. What's also important is adding electrons to the grid. Again, that's what America needs right now. And that's what Energy Resources did, putting 7.2 gigawatts of projects into commercial operations since last year, an Energy Resources record for a single year. Together, FPL and Energy Resources placed into service approximately 8.7 gigawatts of new generation and storage projects in 2025. We continue to be well-positioned to build more renewables, which remain the lowest-cost and fastest solution to meet our customers' immediate needs. We've secured solar panels to meet our development expectations through 2029, and we've begun construction on those projects too. We've also secured 1.5 times our project inventory against our forecast, providing us permitting protection. Few companies in our industry are positioned like us. We've taken the same approach for battery storage, securing a domestic battery supply through 2029. That's important because battery storage now represents almost one-third of our 30-gigawatt backlog, with nearly five gigawatts originated over the past twelve months. We don't see this demand slowing. Nearly every region in the country needs electrons, and battery storage is the only new capacity resource available at scale. With a national footprint and large land position, we can work with customers across the country on standalone storage. But that's just the beginning. We can also take advantage of our existing footprint by co-locating storage where we already have connections to the grid, effectively doubling down or doubling capacity at a site. While it's the early innings, we're looking at long-duration opportunities too. In all, if you just look at standalone and co-located battery storage assets, we have a 95-gigawatt pipeline. If you assume we can ultimately expand each of these sites, we could potentially double our total backlog. It's a huge competitive advantage and positions us well in a market that's showing strong demand. We also continue to advance our potential gas-fired generation build with a pipeline that's now topped 20 gigawatts. To get us started, we've secured gas turbine slots with GE Vernova to support four gigawatts of gas-fired generation projects. We have a lot of experience building gas-fired generation, as no one has built more in the last twenty years than NextEra Energy. Energy Resources remains focused on both optimizing and adding generating capacity to its nuclear fleet. We continue to advance the recommissioning of our Duane Arnold nuclear plant in Iowa, made possible by the twenty-five-year power purchase agreement with Google we announced last year. Our nuclear fleet outside Florida is also ripe for advanced nuclear development. That's why we are spending time closely evaluating the capabilities of various SMR OEMs. All told, we have six gigawatts of SMR co-location opportunities at our nuclear sites and are working to develop new greenfield sites. Of course, any nuclear newbuild would have to include the right commercial terms and conditions with appropriate risk-sharing mechanisms that limit our ultimate exposure. In addition to Duane Arnold, we have capacity available at our nuclear plant in New Hampshire and Wisconsin. Last year, Point Beach received a subsequent license renewal to operate for another twenty years in Wisconsin and then signed a PPA extension for 14% of the plant's capacity. That deal alone contributes $0.03 of annual adjusted earnings per share. Extrapolate that to the rest of the plant, and you would get $0.21 of annual earnings per share, which is a meaningful increase to the annual earnings per contribution from the current contract. We are also seeing similar interest at our Seabrook nuclear plant in New Hampshire. Between the two of them, we have 1.7 gigawatts of capacity we're offering to the market. Our ability to build all these forms of energy infrastructure is why Energy Resources continues to be a partner of choice for hyperscalers. Remember, companies investing tens of billions of dollars in technology infrastructure don't have time and can't afford to take a chance on a failed project. We come to the table with a national footprint, decades of development experience, unmatched energy infrastructure capabilities, and a strong balance sheet to support their needs. Our breadth and depth allow us to have a multi-year, multi-gigawatt, multi-technology discussion with hyperscalers. These data center hub opportunities, as we call them, represent a powerful channel to originate large generation projects with expansion opportunities where we can grow alongside our hyperscaler partner rather than building on a project-by-project basis. As we discussed in December, our data center hub strategy is all part of our new 15 by 35 origination channel and goal for Energy Resources to place in service 15 gigawatts of new generation for data center hubs by 2035. This dedicated work stream to power data center hubs is expected to help us achieve our existing development expectations through a mix of new renewables, battery storage, and gas generation. And it gives us one potential path to achieve the six gigawatts, the midpoint of our development expectations, of new gas-fired generation build through 2032. We currently have 20 potential hubs we are discussing with the market. We expect that number to rise to 40 by year-end. We won't convert every single hub, but I'll be disappointed if we don't double our goal and deliver at least 30 gigawatts through this channel by 2035. To get there, Energy Resources is laser-focused on positioning the company to where we see the large load market going, and that's to bring your own generation or BYOG. And it makes sense given affordability concerns across the U.S. Hyperscalers can solve that problem by bringing and paying for their own power generation infrastructure. In fact, this issue took center stage earlier this month when the White House and a bipartisan group of Mid-Atlantic governors came forward with the framework of a potential solution to address the mounting affordability challenges in the PJM market. We believe we are uniquely positioned to deliver for the BYOG market across America. That's because, at our core, Energy Resources is a builder. We also have a strong balance sheet, and we have decades of experience and the team required to get the job done. Here's what also separates us. We can work with hyperscalers and the local service provider, whether it's an investor-owned utility, a municipal utility, a cooperative, or a retail electric provider in a competitive market. We have deep, long-standing relationships across the board. That matters. On top of that, our renewables and storage portfolio provides us with a speed-to-market solution to get the initial phase of the data center off the ground and built. Think of it as a hook, so to speak. That's important for two reasons. First, it means the hyperscaler doesn't have to wait. Second, it allows us to then grow with our data center customers over time by providing additional capacity through other power generation solutions like new gas-fired generation or SMRs. Importantly, we've done the work to make sure we are ready to build what our customers need when and where they need it. We're not just building new infrastructure; we are also working to maximize the value of our existing assets. I talked about our recontracting opportunity at our nuclear sites. It's the same story across our renewables fleet, where we have up to six gigawatts of recontracting opportunities through 2032. The PPAs for these projects were signed more than a decade ago during much different market conditions. As the PPAs begin to expire over the next several years, we believe recontracting will command a higher price. Energy Resources' customer supply business also creates a key competitive advantage, providing significant market insight. And that portfolio and knowledge base is growing. On January 9, we successfully closed on our acquisition of Symmetry Energy Solutions, which is one of the leading suppliers of natural gas in the U.S. and an ideal addition to our footprint. Symmetry operates in 34 states and provides us access to additional physical assets, enabling us to deliver a broad range of solutions for our customers. We expect more gas-fired generation to be built across America, including by NextEra Energy, so having the ability to move molecules around the country is a critical skill set. We are also spending a considerable amount of time accelerating our use of artificial intelligence. In fact, I expect our team to leverage AI better than anyone in America. As we announced at our investor conference last month, NextEra Energy and Google Cloud have entered into a landmark strategic technology partnership to redefine the future of the electric industry. Google Cloud is helping us drive and accelerate our own enterprise-wide AI transformation called Rewire. And Rewire will also help us identify and ultimately build AI-first products leveraging Google Cloud's platform. The plan is for our first products to help enable dynamic AI-enhanced field operations and a more reliable and resilient grid. In fact, we expect to launch our first product at an industry event in early February as our partnership with Google is off and running. As I said at our investor conference last month, past performance doesn't guarantee future results, but I believe it's a strong indicator when the road ahead looks a lot like the road NextEra Energy has already traveled. Across economic cycles, NextEra Energy's financial performance has remained consistent. The difference today is that we have more ways to grow and an opportunity like never before to build new energy infrastructure to meet growing power demand across our country. As we move forward, we will remain focused on what has long defined us: being America's leading utility company and leading energy infrastructure developer and builder of all forms of energy. I couldn't be more excited about our future. With that, I'll turn it over to Mike. Mike Dunne: Thanks, John. Let's begin with FPL's detailed results. For the full year 2025, FPL's earnings per share increased $0.21 versus 2024. The principal driver of FPL's 2025 full-year performance was regulatory capital employed growth of approximately 8.1%. FPL's capital expenditures were approximately $2.1 billion in the fourth quarter, bringing its full-year capital investments to a total of roughly $8.9 billion. FPL's reported return on equity for regulatory purposes is expected to be approximately 11.7% for the twelve months ending December 31, 2025. During the fourth quarter, FPL utilized approximately $170 million of reserve amortization, resulting in a remaining pretax balance of approximately $300 million at year-end 2025. Consistent with prior rate agreements, the Florida Public Service Commission approved a rate stabilization mechanism that allows us flexible amortization over the four-year period. Under FPL's new rate agreement, this $300 million will be available for future amortization through the approved rate stabilization mechanism. When combined with the other components of the rate stabilization mechanism, which are maintained on an after-tax basis, FPL will have an aggregate after-tax balance of approximately $1.5 billion available over the term of the agreement. This compares to the pretax balance of $1.45 billion that was approved in our prior four-year settlement in 2021. Key indicators show that the Florida economy remains strong, and Florida's population continues to be one of the fastest-growing in the country. Its annual gross domestic product is now roughly $1.8 trillion, or the fifteenth largest economy in the world if Florida were its own country. For 2025, FPL's retail sales increased 1.7% from the prior year on a weather-normalized basis, driven primarily by continued strong customer growth. In 2025, we added over 90,000 customers as compared to the prior year comparable quarter. For the full year 2025, FPL's retail sales increased 1.7% from the prior year on a weather-normalized basis, also driven primarily by the strong customer growth in our service territory. Now let's turn to Energy Resources, which reported full-year adjusted earnings growth of approximately 13% year over year. For the full year, contributions from new investments increased by $0.47 per share, reflecting continued demand growth for our generation and storage portfolio. Contributions from our existing clean energy assets decreased $0.04 per share. Increased contributions from our nuclear fleet were more than offset by the absence of earnings due to the minority sale of certain pipeline assets in 2024 and other headwinds, including wind resource. Our customer supply and trading business increased results by $0.04 per share, driven by increased origination activity and higher margins. Other impacts decreased results by $0.30 per share year over year. This decline reflects higher financing costs of $0.17 per share, mostly related to borrowing costs to support our new investments, as well as increased development activity to support business growth and higher state taxes. For the fourth year in a row, Energy Resources again delivered our best year ever for origination, adding nearly 13.5 gigawatts of new generation and battery storage projects to our backlog. This includes approximately 3.6 gigawatts since our last call. 1.7 gigawatts, almost 50% of our fourth-quarter additions, were solar projects. Our 2025 origination performance reflects growing demand, including from hyperscalers that are looking for speed-to-market power solutions. Our backlog now stands at approximately 30 gigawatts, after taking into account roughly 3.6 gigawatts of new projects placed into service since our third-quarter call. In 2025, we placed over two gigawatts of battery storage into service, increasing our annual battery storage build from 2024 by roughly 220%. We believe our 30-gigawatt backlog provides terrific visibility into Energy Resources' ability to deliver attractive growth in the years ahead. Turning now to the consolidated results for NextEra Energy. For the full year, adjusted earnings per share from our Corporate and Other segment decreased by $0.12 per share year over year, primarily driven by higher interest costs. NextEra Energy delivered three- and five-year compound annual growth rates in operating cash flow of over 14% and over 9%, respectively. Our 2026 adjusted earnings per share ranges of $3.92 to $4.02 per share remain unchanged, and as we said in December, we are targeting the high end of that range. NextEra Energy has met or exceeded its annual financial expectations since 2010, which is a record we are proud of. This provides us confidence in our ten years of financial visibility that we shared with you at last month's investor conference. We expect to grow adjusted earnings per share at a compound annual growth rate of 8% plus through 2032, and are targeting the same from 2032 through 2035, all off a 2025 base of $3.71 of adjusted earnings per share. From 2025 to 2032, we expect that our average growth in operating cash flow will be at or above our adjusted earnings per share compound annual growth rate range. And we also continue to expect to grow our dividends per share at roughly 10% per year through 2026, off a 2024 base, and 6% per year from year-end 2026 through 2028. As always, our expectations assume our caveats. That concludes our prepared remarks. And with that, we will open the line for questions. Operator: We will now begin the question and answer session. If you're using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed, The first question comes from Steven Fleishman with Wolfe Research. Please go ahead. Steven Fleishman: Great. Thank you. Hi, John and Mike. So subsequent to your Investor Day, I think Google announced the acquisition of Intersect, the renewables developer. So I'm curious kind of how does that fit in with how you're thinking about your partnership with Google, and if we do see other hyperscalers acquire developers, kind of how do you think about that as a competitive risk? Or how are you just thinking about that if that becomes a thematic? John Ketchum: Yes, Steve, it's John. Thank you for the question. And first of all, the short answer is it has no impact on our partnership. You know, Google called us, you know, in advance of the announcement and said as much, you know, to us. And here's why. I mean, we have a lot of respect for Intersect, but you know, they're a smaller developer. They're really concentrated in two states, you know, California and ERCOT. And when you buy into a smaller developer, you're buying into their existing position, and you really gotta think through what that existing position comes with. Where are they on safe harbor? Right? Those deadlines have already passed for tax credits. So you're stuck with whatever safe harbor position that they have. A smaller developer is always going to have a small safe harbor position just given the obvious limitations. FIAK, right, is another safe harbor where the deadline has passed as well. We are in an outstanding position in both of those areas, you know, and have a ton of flexibility to add a lot of generation. You're also kind of stuck with their inventory. You know, where are their permitted sites? We have permitted sites across the United States. We have 1.5 times coverage on those sites. You're also kind of stuck with their supply chain position and their relationship. Have they remembered long lead time equipment that has to be secured? So if you weren't planning on an acquisition, you probably didn't have a lot of inventory to start with to go engage in a large build. And so I think that's certainly a limiting factor. We've been very vocal. I mean, we've been out buying equipment for, you know, across the energy value chain. Secured our solar and storage inventory through 2029. I don't think many small developers can say that. And then experience across technologies, you know, you gotta really find somebody that knows all 50 states, that can do business in 50 states, understands the ISOs in and out, working with FERC, working with Washington. And experience across wind and solar and storage and transmission, whether it's electric or gas, all of those things are nuclear and gas-fired generation. Very rare and unusual and unique, the position that NextEra is in. And so I think when you put all those factors together, addressing your other question, the competitive risk, I just don't see it. You know, we are in a period of significant power demand, needing to put electrons on the grid. We have great sites, have 20 data center hubs, you know, that we're developing currently trying to expand that to 40. Small developers just don't have that. And so we're in a great spot, and I couldn't be less concerned. Steven Fleishman: Understood. One other question just on we've seen a little more noise just on kind of data center fighting opposition or concerns about causing rates to go up and including some, I think, in Florida. Just could you maybe just talk to how you're feeling about that overall, but maybe specific in your Florida plant? John Ketchum: Sure. I'll turn that over to Scott Borys to address the Florida question, and I'll come back and talk about what we're seeing on the national level. Scott Borys: Hey, Steve. It's Scott. In Florida right now, we are in legislative session. There are two pieces of legislation out there. One by the house, one by the senate. The senate is the one that's advanced through already through a committee. I will say it's the more constructive legislation. What that is really pushing for is, I'll say, a lot of what our tariff already does, providing protections to the general body of customers. And so we are gonna continue to support that legislation as it advances, and I think ultimately, that is gonna allow us to continue to move our tariff forward and hopefully, continue to get some customers signed up and move that forward, but nothing we're concerned about in Florida. John Ketchum: Yeah. And when I look at things nationally, that's what's so beneficial about what NextEra Energy brings to the table, right? One, we have a national footprint. Two, we have the ability to really help our customers design affordable and reliable solutions given what we can bring to the table across the energy value chain. We really can help them actually come up with a solution that really threads the needle, you know, around affordability. But also bringing the necessary electrons that are required to create that job creation, create that property tax base. And, you know, like I said in my prepared remarks, I mean, we really see this heading more towards bring your own generation. And I think that's how we've set up our entire pipeline and our developed effort. And, you know, we are one of the very few companies that are out there. And, you know, and if investors are looking for a way to get exposure to a builder, I think we're the perfect answer for that. And I think that's where Washington is heading. I think that's where the various ISOs are heading because it's gonna be really important that the hyperscaler shoulder, you know, the cost associated with the incremental generation that has to be built, the power the data center. And I think we're the perfect partner to do that given the relationships that we have. Given our ability to do things at a much lower cost than our competition. And so feel good about where things stand outside of Florida as well for those reasons. Steven Fleishman: Okay. Thank you very much. Operator: The next question comes from Julien Dumoulin-Smith with Jefferies. Please go ahead. Julien Dumoulin-Smith: Hey. Good morning, team. Thank you guys very much for the time. I appreciate it. Maybe pick it up where Steve left off. I mean, look. I'd love to hear a little bit about how you think and what's the expectations on the cadence of announcements to hit these targets, whether the 15 or 30 gigawatts? And specifically, what does success in 2026 look like in order to ensure you're tracking against those, you know, 15 plus or what have you? And then within that, John, how do you think about the kinds of resource mix? Like, is 15 what's the composition of gas versus renewables, etcetera, etcetera, if you can? And then maybe a sub part of that to tie back what Steve said. How would you set milestones or expectations in FPL specifically? I know you guys talked about the 2028 starting time on a data center. Is that coming sooner or later relative to the near efforts on the hubs? John Ketchum: Yeah. Let me go ahead and take those in order, Julien. Yeah. So first of all, let's just talk about the development expectations that we laid out at the investor conference. As I've said before, they're not heroic. Right? I mean, they're basically as long as we can do, you know, through 2032 what we've done over the last ten or twenty years, we're gonna be in great shape. Right? I mean, we're counting on, you know, market share that is very consistent with what we've been able to achieve over the last one to two decades. In renewables, it's about 15% to 20%. In storage, about 20% to 30%, and in gas, through 2032, it's only 5% to 10%, you know, market share. You know? So we feel very good, first of all, with the base forecast. Second, when you mentioned the 15 by 35, one of the things that I wanna make really clear is that 15 by 35 is just an origination channel. Right? That's a program that we have on the origination side to hit those very reasonable, very realistic development expectations. It's one of many ways to get there. And when you unpack that 15 to 35 gigawatts, the composition of it is roughly six gigawatts of gas-fired generation by 2035, and it's going COD by 2035, you know, to hit that. And it's a mix of renewables and storage for the balance. So we feel good about where we stand. We hope to be able to do, you know, a little bit better than that. Actually, let me make one clarification. That's six gigawatts of gas by 2032. I said 2035. By 2032. Julien Dumoulin-Smith: And second, let me talk about the milestones for Florida real quick, and then we'll turn things over to Armando to add some points on Florida. For FPL, we feel really good about where things stand. Right now, we have, you know, 20 gigawatts of interest in Florida. And we have advanced discussions with, you know, customers on roughly nine gigawatts for all the reasons that I had in my prepared remarks. Florida is a terrific data center opportunity for the right partner. I think folks see that. And they realize the benefits and the growth that we're gonna be seeing in Florida, the fiber latency issues, the need to be close to where business is developing in South Florida, all the development that we're seeing across the state. But second, what's really attractive and what's really appealing, I think, for hyperscalers is, look. We have a really, you know, we have a low bill. We know how to get things done. We have a long track record of being able to work with the state, you know, at all levels. And but most importantly, from a customer standpoint, we have a large load tariff that makes sure that the hyperscaler is paying the cost of the additional build, not the customers in Florida. Armando, do you have anything you'd like to add? Armando Pimentel: Yeah. Just real quick, Julian. So John has in the prepared remarks a sentence that said 2025 was about laying the groundwork and 2026 is about execution. That applies to both companies and certainly to FPL. To answer your question as specific as I can, my expectations is that in 2026 that there will be announcements regarding large load in our service territory. That's certainly what we are shooting for and working for. And that's what 2026 for us is all about. Julien Dumoulin-Smith: And Julian, just on the question around what does 2026 look like for us for success, I'd just go back to 'thirteen. Comment about '13 is our expectations. This is our kind of road map. That we're gonna track against from the standpoint of where do we think we'll be developing. And so this is the channel feeds into this as John mentioned. So we're looking at the expectations that we're laying out here on page 13 and continue to track against those. Julien Dumoulin-Smith: Awesome. And just as a quick follow-up in terms of disclosures maybe. And not to put you down too much on twenty-sixth, how do you think about, say, chunkier announcements, you know, say, Google here making specific announcements around that versus, you know, their typical quarterly announcement cadence of singles and doubles to kind of, quote unquote, chip away against that 15 plus gigawatt target on the near side. Should we expect bigger announcements here or is this going to be more of a regular quarterly cadence of tipping away? John Ketchum: Yeah. I mean, I'll say two things about that, Julien. I mean, first of all, we have a lot going on as a company, a lot of opportunities, a lot of discussions that we're having with customers that are in various stages. You should not expect us to wait for quarterly calls to announce those things. So as they happen, you know, we will, you know, come forward with them on those chunkier deals as you call them. Julien Dumoulin-Smith: Actually, guys, leave it there. All the best. Good luck. John Ketchum: Thanks, Julien. Take care. Operator: The next question comes from Shahriar Pourreza with Wells Fargo. Please go ahead. Shahriar Pourreza: Hey guys, good morning. Good morning, Shahriar. Good morning. John, just in terms of the nuclear recontracting, maybe just an update in Wisconsin since the existing counterparties need to make a resource decision kind of soon. I guess where do we stand on marketing the open capacity? And just given the amount of acreage that's around the site, could we see sort of a behind-the-meter deal structure there or should we continue to assume a virtual deal just given the BOIG initiatives etcetera? John Ketchum: Yeah. I mean, you know, first of all, on Wisconsin and Point Beach, I'd say this about all of our nuclear plants. We saw how much interest there was around Duane Arnold. There's a lot of interest, you know, around Point Beach. Wisconsin's in a great spot for data center, you know, build-out. You know, it's no secret, you know, how much interest there's been there, Foxconn and Cloverleaf and, you know, some of the other, you know, expansion opportunities around the state. Very conducive to data center build-out. And so with that, comes a lot of interest, you know, around power generation solutions. And given the relationships that we have with utilities in the Midwest region and with cooperatives in the area. You saw the Whippy deal that, you know, we announced with 14% of the generation already having been secured is one example of that. We feel very good about how that asset is positioned. We're going to be careful and methodical about our approach and, you know, make sure that, you know, we're doing the right thing by our shareholders in terms of what we ultimately do with that asset. Shahriar Pourreza: Got it. Okay. Appreciate that. And then just on PJM, specifically, a lot of different data points there. But would you participate in the backstop auction there just either on the renewable or gas side? Is it sort of becoming a little bit more constructive as a solution? Thanks. John Ketchum: Yeah. I think Shahriar, the way I would answer that is still a lot to play out. Right? And you got to have regulatory certainty before you allocate capital against any investment. And so we would have to have real regulatory certainty around outcomes here in order to drive new investment. And I think that is exactly what the administration is trying to do, and I think that's what the 13 governors that signed on to the recent framework agreement or framework proposal that was announced. But PJM has more work to do in terms of coming up with what exactly they plan for the future of that market. But certainly, under the right construct, it could be attractive for new generation, but you have to have, you know, long-term certainty around what capacity prices are going to be. They have to be at the right level in order to support, you know, new investment in that area. And as I look at it, with how we're positioned around BYOG, we have so many opportunities in the United States right now that we are pursuing. But certainly, we have a close keen eye on PJM as well and are watching to see how things play out. Shahriar Pourreza: Got it. Perfect. That's all the questions I had. Thanks. John Ketchum: Thank you, Shahriar. Operator: The next question comes from Nicholas Campanella with Barclays. Please go ahead. Nicholas Campanella: Hey, good morning. Thanks for taking my questions. Just wanted to come back to the FPL large load discussion. Just I wanted to just understand, you have the tariff framework in place. What is the kind of gating item more on the customer side? Like, what are your customers telling you they're still trying to get done before being able to kind of move forward with an agreement? Is it, like, water, land permitting, zoning? I guess just what needs to kind of fall into place to see some announcements here in '26? Appreciate it. John Ketchum: Thanks. So look. Customers want to make sure that when they're plopping down the $10 billion or so for all the capital that's needed for one of these that they're in a place that they feel comfortable long-term. And while we have a tariff, there is current legislation being discussed up in Tallahassee that may make a difference in terms of water usage, may make a difference in terms of items that hyperscalers or large load company entities can get from local municipalities or from the state. And waiting to see how that shakes itself out. Scott answered a question before, what's going on in Tallahassee. We feel quite comfortable that we are going to get to a very constructive outcome in terms of what data centers have to look at in order to do business in Florida. But my expectation is, as I answered the question before, is that in 2026, based on what we are seeing, the interest that we are seeing on the ground here in Florida and particularly in the FPL service territory, that there will be some announcements in 2026. So again, I expect there to be a constructive outcome to the legislation that's being discussed up in Tallahassee. And I also think it's very likely that we will have announcements in 2026 regarding large load in our service territory. Nicholas Campanella: Great. Thanks. Sorry to make you repeat yourself. And then maybe just a quick update on supply chain. I know you have the four to eight gigawatt gas target, and you talked about having secured supply for four gigs. Just when would you kind of secure the additional four? And where do you see pricing right now through 2032? And availability? Thank you. John Ketchum: Yes, Nicholas. So first of all, we have the four-gig position on gas, which we would put against the opportunity set, mainly those data center hub opportunities that we see and are continuing to advance. I've talked a lot about on this call. From a, you know, when will we, you know, secure more, you know, as our discussions, you know, continue to advance. And we continue to have very good discussions kind of across the board on those 20 gigawatts of data center hubs that we hope to grow to 40 by the end of this year. And, you know, we always make prudent decisions around how we manage our supply chain position. I don't worry too much about it in terms of gas turbine though. I mean, given the relationship and partnership that we have with GE Vernova, our hands on gas turbines at an economic and competitive price is not the top of my list of things to be concerned about. And so I think that probably also addresses the pricing point. I can't give you specific pricing terms and conditions that we would get or that we would see. But I would say they just remain consistent with what we told you, you know, back in December. Operator: Thank you. The next question comes from Jeremy Tonet with JPMorgan. Please go ahead. Jeremy Tonet: Hi, good morning. John Ketchum: Good morning. Jeremy Tonet: Just want to start off with wind additions if I could. It looked like a little uptick there. Just wondering if you could frame a bit more what you're seeing. Are there some green shoots that could be developing there? John Ketchum: Sure. We had some wind additions that you saw in '28 and '29 if you're looking at the backlog page. And, listen, I we continue to see balance across our business from the standpoint of opportunities for people who are looking for electrons. And so I don't know, from a green shoots perspective, I do think we'll continue to see more solar, more storage, and then ultimately gas relative to wind. I think that's a trend that continues to move forward. But, you know, we still see interest across the various products. We got a, you know, national footprint and national customer base and the need for electrons kind of varies. So, you know, we're glad to add them, but I think the trend is still gonna be more towards solar and batteries as we think about those various products. Jeremy Tonet: Got it. Understood. And, if I could just pivot towards SMRs, I think we started to see hyperscalers and other, I guess, end users start to adopt, I guess, one technology to run with. And so, you know, granted it's ways off at this point, but just wondering your thoughts on this and whether you might look to partner with one technology here to go for it as everyone tries to go from a full to NOAC? And just wondering, rough timing and around design approval and then construction timelines, if you were to go in that direction? John Ketchum: Yeah. Good question. And, you know, we've done a lot of work, you know, around the OEMs. I think we said back in December, you know, we kind of took the 96 or so folks that call them SMR OEMs and called that down to about 12 and then did deep dives on technology commercial assessment around the balance. And, you know, we have a very good feel, you know, as to who may make sense to advance discussions with there. But, you know, whether or not we partner with one, you know, partnering is not something that, you know, we've historically done. We like to create competition, you know, amongst our suppliers unless one particular supplier has concentration in a specific area or has a unique technology offering, and we can enter into an attractive, you know, long-term, you know, pricing arrangement that creates win-wins. But, you know, we're always careful about locking ourselves in with just one counterparty. But obviously, for us to advance on SMRs, is something we are we have an SMR team, first of all, I should say. You know, we are taking this very seriously. We have a development a part of our development organization that is focused 100% on SMRs. So we're not only looking at development around our existing nuclear sites, but we're also looking at greenfield opportunities as well and how an SMR could fit into a long-term solution around a data center hub. As we look to the future. But, you know, any movement up from us on SMRs, I go back to what I said in prepared remarks, has to be under the right commercial terms and conditions where there's appropriate risk sharing, capping on financial exposure, because we're gonna be very prudent and careful how we approach that market. But excited about, you know, the potential. You also asked about some of these announcements where you see hyperscalers, you know, teaming up with one specific OEM. Not sure how much I would read into that. I, you know, I think, really, you know, folks are just trying to learn more and see, you know, who has viable solutions out there. We'll see which ones actually advance over time. But, you know, that's what we are keenly focused on. And in any discussion, it's not around SMRs. It's not only with the OEM. It's with the hyperscaler as well. It's with the government. Right? I mean, it's gonna take four parties coming together to come up with the right structure that makes sense, but it's something we're very focused on. Mike Dunne: Yeah. And then the only thing I'd add, which I know we've said before, is while we are spending a lot of time, it's not in our expected. That would be upside to our plan if we were able to put something together. We are spending all that time that John talked about, and it would be upside to our plan. But our base plan doesn't have SMRs in it. And so we but we do think it could be good upside. We're spending real time on it because I think there's an opportunity that we're excited about. Jeremy Tonet: Got it. Makes sense. One quick last one if I could. It does seem like the federal government is putting in very significant billions of dollars to support SMR, in nuclear development here. Just curious, think, if there's anything missing or what more could be put in there to get the market going in this direction? John Ketchum: Yeah. I think, first of all, I think the administration is doing all the right things. Like you said, I mean, they are really trying to enable American energy dominance across the board. And excited about many of the programs that are coming forward with around nuclear in particular and around SMRs advanced nuclear. I think that just those programs that they've already established create the opportunity for that four-way discussion, you know, that I just mentioned in a very constructive way that, you know, I think it, hopefully, get one of these projects off and off and running. Under the appropriate commercial, you know, structure. But more work to do there. Right? I mean, you know, you've I think we've made some very good progress, you know, in that area, and I think the government is doing the right things. And so, you know, up to developers and OEMs and customers to come together to work with the government on the right framework. Jeremy Tonet: Got it. Thank you. I'll leave it there. Operator: The next question comes from Carly Davenport with Goldman Sachs. Please go ahead. Carly Davenport: Hey, good morning. Thanks for fitting my question in. You had mentioned earlier the PJM recommendation for the transmission project with Exelon. I guess there's been some degree of pushback in Pennsylvania on that project given the cost and some of the shifts on the PJM load forecast. Can you just talk a little bit about that and your confidence in that project moving forward? Mike Dunne: Sure. Listen, I think our confidence continues to be high. PJM management continues to recommend we expect them to continue to recommend for the board and the ultimate board meeting up. We're listening to everyone, all the stakeholders, the OCA as they continue to think about this project. But we think this is important for reliability. It's the lowest cost to answer in the region to achieve that reliability, and then it continues to be supported by PJM. So we feel good and continue to feel good and we'll continue to listen to all the stakeholders throughout the process. Carly Davenport: Great. Thank you. And then just on the adjusted EBITDA outlook for '20 at near, if we look at the year-over-year guidance for both gas pipes and gas infrastructure, that looks down year over year. So just curious, given the asset purchases in that area this year, kind of what drives that decline? And if you see any potential upside, obviously recognizing that's a smaller piece of the pie today? John Ketchum: Yeah. I think as we've mentioned on the natural gas pipelines, it's going to be an area that we continue to grow over the course of the next decade. If you look at what occurred between 2025 and what we look at for 2026, simply as you looked at our proportionate ownership share in Explorer, they had a pipeline of mean that they divested at Explorer, and that brought down that EBITDA. But as we look on a go-forward basis, pipelines will be, you know, a critical piece of our growth trajectory for 2026 and beyond. And listen, as you look at gas infrastructure, I think the reduction in EBITDA is relatively small. $50 million or so. So as you look at that piece, we'll continue to see that have a place in our overall structure, but I wouldn't necessarily expect that to be a key piece of our growth trajectory. Carly Davenport: Got it. Thanks so much for the color. Operator: At this time, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to PACCAR's Fourth Quarter 2025 Earnings Conference Call. All lines will be in listen-only mode until the question and answer session. Today's call is being recorded. If anyone has an objection, they should disconnect at this time. I would now like to introduce Mr. Ken Hastings, PACCAR's Director of Investor Relations. Mr. Hastings, please go ahead. Ken Hastings: Good morning, and welcome, everyone. My name is Ken Hastings, PACCAR's Director of Investor Relations. Joining me this morning are Preston Feight, Chief Executive Officer, Kevin D. Baney, President, and Brice J. Poplawski, Senior Vice President and Chief Financial Officer. Preston Feight: As with prior conference calls, we ask that any members of the media on the line participate in a listen-only mode. Certain information presented today will be forward-looking and involve risks and uncertainties that may affect expected results. For additional information, please see our SEC filings and the Investor Relations page of paccar.com. I would now like to introduce Preston Feight. Preston Feight: Good morning. Kevin D. Baney, Brice J. Poplawski, Ken Hastings, and I will update you on our very good fourth quarter and full year 2025 results, as well as other business highlights. PACCAR's fourth quarter revenues were $6.8 billion, and net income was $557 million. In 2025, PACCAR achieved annual revenues of $28.4 billion and adjusted net income of $2.64 billion, which is the fourth highest profit year in company history and the eighty-seventh consecutive year of profits. Adjusted after-tax return on revenue was 9.3%. I am proud of PACCAR's outstanding employees who delivered these results by providing our customers with the highest quality trucks and transportation solutions in the industry. PACCAR Parts and PACCAR Financial Services each achieved quarterly and annual revenue records. PACCAR Parts and Financial Services represent an increasing percentage of the overall business and contribute to PACCAR's structurally stronger performance. 2025 was a dynamic year in the North American truck industry, with soft freight markets, tariffs, and emissions policy uncertainties. In this environment, Kenworth and Peterbilt made strong contributions to PACCAR's results. Importantly, we ended last year with tariff and emissions clarity. The Section 232 truck tariff policy that became effective on November 1 provides advantages to PACCAR, which produces trucks in the United States, Canada, and Mexico for each local market. I am proud of PACCAR's excellent team that has created this cost-effective, flexible, and robust manufacturing strategy. In late 2025, it was confirmed that the 35-milligram EPA 27 NOx limit will go into effect in January. This brings clarity to the market and helps customers make their buying decisions. PACCAR is wonderfully positioned for these changes with the newest lineup of trucks and engines that are the most efficient and highest quality in the industry. Last year, US and Canadian Class 8 truck retail sales were 233,000 units, and Kenworth and Peterbilt delivered a market share of 30%. The US economy is projected to expand this year. The less-than-truckload and vocational truck sectors, where Peterbilt and Kenworth are the market leaders, are steady. The truckload segment is beginning to accelerate, with industry customer demand and spot rates picking up in December. The 2026 US and Canadian Class 8 truck market is forecast to be in a range of 230,000 to 270,000 vehicles as economic growth, regulatory, and tariff clarity and improving freight conditions are poised to improve customer demand. In Europe, DAF trucks have a competitive advantage in the market with their innovative aerodynamic design that features the largest, most luxurious cab interior and the best powertrain choices. In recognition of this, the DAF team earned the prestigious International Truck of the Year award for the DAF XF and XD electric trucks. It is noteworthy that this is the third time in five years that DAF has won this award. In 2025, the European above 16-ton truck market was 298,000 units. This year, the European economy is forecast to grow modestly, and we expect the above 16-ton truck market to be in the range of 280,000 to 320,000 registrations. In addition to the excellent businesses in Europe and Brazil, DAF is also expanding in the Andean region of South America. Ken Hastings: Last year, the South American above 16-ton market was 115,000 vehicles and is expected to be in the range of 100,000 to 110,000 trucks this year. Other 2025 business highlights included PACCAR earning the elite A rating from the Climate Disclosure Project for its environmental performance, DAF being honored as the Fleet Truck of the Year in the UK, DAF, Kenworth, and Peterbilt introducing the next generation of battery electric trucks, PACCAR completing a new engine remanufacturing facility in Mississippi, and Kenworth completing a new chassis paint facility in Ohio. PACCAR delivered 32,900 trucks in the fourth quarter, and deliveries are forecast to be at a comparable level in 2026. Fourth quarter truck parts and other gross margins were 12%, and we estimate that first quarter gross margins will increase to 12.5% to 13%. We look forward to 2026 being a year of accelerated growth for our customers, dealers, and PACCAR. Kevin D. Baney will now provide an update on PACCAR Parts, Financial Services, and other business highlights. Kevin D. Baney: Thank you, Preston. In 2025, PACCAR declared dividends of $2.72 per share, including a year-end dividend of $1.40 per share. This resulted in a dividend yield of nearly 3%. PACCAR has paid a dividend for a significant eighty-four consecutive years. Last year, PACCAR Parts' annual revenues increased by 3% to a record $6.9 billion, and pretax profits were a strong $1.67 billion. Fourth quarter revenues increased 4% to a record $1.7 billion, with pretax profits of $415 million. PACCAR Parts' performance reflects the benefits of investments in connectivity and agentic AI that increase vehicle uptime and enhance the success of our customers. PACCAR Parts is continuing to expand and now has 21 distribution centers worldwide, including a new distribution center in Calgary. This new PDC enhances parts availability and delivery times to Canadian dealers and customers. The aftermarket parts business provides strong profitability through all phases of the business cycle. We estimate parts sales to grow by 4% to 8% this year, with growth accelerating as the year progresses. Last year, PACCAR Financial Services achieved record annual revenues of $2.2 billion, and annual pretax income grew 11% to $485 million. Fourth quarter revenues were a record $569 million, and quarterly pretax income grew 10% to $115 million. PACCAR Financial provides the highest quality service in the market and makes it easy for customers to do business with PACCAR through the use of technology in the credit application and loan servicing process. PACCAR Financial increased market share to 27%, a growth of two percentage points when compared to 2024. Capital project investments last year were $728 million, while research and development investments were $446 million. This year, we are planning capital investments in the range of $725 to $775 million and R&D expenses in the range of $450 million to $500 million. This year's investments in key technology and innovation projects include the creation of next-generation clean diesel, hybrid and alternative powertrains, battery cells, integrated connected vehicle services, flexible manufacturing capabilities, PACCAR's autonomous vehicle platform, and advanced driver assistance systems. PACCAR's independent Kenworth, Peterbilt, and DAF dealers consistently invest in their businesses, enhancing our industry-leading distribution network, and they make a significant contribution to PACCAR's long-term success. PACCAR is looking forward to a great year in 2026. Ken Hastings: Thank you. We would be pleased to answer your questions. Operator: Thank you. When preparing to ask a question, please ensure your device is unmuted locally. The first question comes from David Raso with Evercore ISI. Your line is open. Please go ahead. David Raso: Hi. Thank you for the time. I was just curious, can you walk us through the margin improvement you expect from 4Q to 1Q despite the flat deliveries? Preston Feight: The thinking is, David, there is a lot to unpack there. But one thing you should look at in the fourth quarter is we had the Section 232 go into effect. Obviously, that went into effect on November 1, so for a month, we had higher tariffs. So that happened in there. The other thing that was significant is our manufacturing teams in the fourth quarter did a really great job of being able to convert the factories over to build trucks local for local. For example, Chillicothe and Denton are now building the medium-duty trucks, and in Canada, we are able to build all of the product lines principally for Canada. So that was a lot of adjustment in schedules during the fourth quarter, which had some impact on margins. As we look forward, we get a full quarter in Q1 of margins that are benefiting from the Section 232 tariff. There is the clarity of NOx 27, which happens. So I think that is starting to have some improvement. Order intake has been very good, very strong in December and through January, so we are seeing some uptick in terms of customer demand, which is good for our business as well. And that is what is driving up the margin to 12.5% to 13% in Q1 compared to the 12% in Q4. David Raso: And that last point about orders, would have thought maybe the build sequentially could be up. What is the translation from those orders into when you expect to produce those trucks? Preston Feight: Yeah. I mean, you know the cadence of it is a lot of orders at the end of the year come in as fleets that are spread delivery throughout the year. So that is a little bit of what I think everybody saw in the fourth quarter. And then what we are seeing now is a little bit more close in terms of order intake, which is allowing us to build up our backlog a little bit, increase visibility a little bit, and then that is what is going to translate into higher build in the outer quarters. David Raso: And lastly, to quantify a little bit, 4Q to 1Q, can you give us some sense of the price-cost dynamic in truck in the fourth quarter and how to frame it with the Section 232 benefits for 1Q? Preston Feight: Yeah. I think you can see favorability coming in Q1 compared to Q4 in price-cost. Most significantly is cost reductions that we would expect to see again, doing that comparison of the work our factories did, that has some cost impact in the fourth quarter in terms of getting the right trucks in the right places. And then, again, we get the benefit of Section 232 in Q1, so it gets a lot more stable in that for a net positive price-cost on truck. Brice J. Poplawski: Yeah. We also had a higher level of overtime in the fourth quarter because of the events that Preston spoke to and getting all the trucks out at the end of the year. So our employees did a fantastic job getting all the trucks out that our customers desperately want to have. So we felt really good about that. That should not be recurring in the first quarter either. David Raso: Alright. Thank you for the time. Preston Feight: Yeah. Thanks, David. Have a good day. Operator: We now turn to Jerry Revich with Wells Fargo. Your line is open. Please go ahead. Jerry Revich: Hi, good morning and good afternoon, everyone. Kevin, congratulations. Kevin D. Baney: Thank you, Jerry. I am wondering if you could just talk about what you are seeing in the performance of your aftermarket business in January by region? Feels like there is an uptick in Europe in particular that is playing out. I am wondering if you could just provide the context you just provided on orders for aftermarket Europe and U.S., please. Kevin D. Baney: Yes, sure, Jerry. So the forecast for Q1 is 3% growth year over year. The team did a great job, let us say, in a soft parts market with record sales growth for last year and definitely for the fourth quarter. And what we are seeing is, you know, in a soft parts market, customers really are focused on required maintenance, and so we saw a mix shift towards that. We have great AI agentic tools to help identify that and how long we get that mix shift in our distribution centers, but also out with the dealers. And so, you know, we have got a forecast of 4% to 8% growth for this year. And, you know, we will see that, you know, definitely as we see the truck side accelerate through the year, we will see that on the parts side as well. Jerry Revich: Super. And then in Europe specifically split in... Kevin D. Baney: Yeah. That is what I was about to say. And then just the split in region is, I think, well, it will be consistent in North America as well as Europe. Jerry Revich: Very interesting. Thank you for the color. And then can we just double on Europe a little bit? So production was really high in the quarter versus normal seasonality, and you took up your outlook for Europe. Can you just expand on what you are seeing in terms of is it a particular set of countries that are driving the demand acceleration for you folks in Europe? Or how broad is the activity improvement? Kevin D. Baney: Yeah. The market finished at, I will focus on heavy-duty, at 297,000. And so a relatively strong market for Europe. No specific focus on any given region. Obviously, you know, it did depend on where you are in Europe, some markets are stronger than others. You know, we continue to focus on premium trucks. You know, Preston said we have been recognized as Fleet Truck of the Year in the UK. International Truck of the Year for the DAF XF and XD. And so we just, you know, we took the market up because we see, you know, a similar strong market this year as well. Jerry Revich: Yep. Good story. And lastly, can I ask on Section 232 as that starts to impact your competitors, how are you thinking about market share versus unit profitability from a PACCAR standpoint? As we look back historically, you folks have targeted improving unit profitability cycle over cycle. And so as we are thinking about the benefits from the rebate program as well as, you know, chatter out there for $9,000 type price increases, can you just provide a PACCAR perspective on where you see unit profitability going and how you folks are thinking about market share versus profitability given Section 232 evens the playing field for you folks? Kevin D. Baney: Yeah. I think, you know, the last statement you made is really instructive because throughout 2025, there was a bit of a disadvantage. And now I think we anticipate that to be an advantage. It does not come through quickly. Right? It is a competitive world out there. So in the first quarter, many of our competitors have not taken that to the market yet, those tariff costs to the market yet, which keeps things in a bit of a very competitive state. Maintains that dynamic nature we were talking about in our commentary. But through the year, we feel good about our opportunity to gain in terms of margin and market share. As the year progresses and things stabilize out. Because it does seem stable now, and because our teams have done such a good job getting the local for local manufacturing, it really should be an opportunity for us in both categories. Jerry Revich: Thank you. Kevin D. Baney: You bet. Operator: We now turn to Robert Wertheimer with Melius Research. Your line is open. Please go ahead. Robert, your line is open. Robert Wertheimer: I am so sorry. Just following up on Jerry, the cycle margins and where your kind of competitive and production position sits in North America now versus in the past. Is there any reason to think as things normalize over the next year or two or three that your truck margin should be, you know, anything different from average, you know, whether higher or lower? And I have one follow-up. Thank you. Preston Feight: You know, I would say, Rob, that predicting out one, two, three years in the operating environment we are in is a little bit challenging in terms of what things are going to look like. There is a USMCA negotiation that is going to take place probably later this year, so it will be instructive to look at that. So I think that could have an impact on how margins feel. What I think we are focused on is making sure that the trucks we are providing have the greatest value to our customers. And to that end, as you know, right, we have the newest lineup of trucks out there. And one of the things that we are now focusing on is how we are going to be able to help our customers be more profitable through the use of the AgenTic AI that Kevin mentioned but also maybe more generally in connected truck data. So our ability to have every truck be connected and gather, like, pentabytes of data from our trucks and then use that data to provide customer value is significant in the coming years. So that is what we can control, and that is where our focus is. It is high-quality trucks, lowest cost of ownership, highest reliability, and new transportation solutions for our customers to help them be more successful. Robert Wertheimer: Interesting. I look forward to hearing more about that. And then just a quick one. Did you mention your European market share for the year? Brice J. Poplawski: Yep. I had not yet, Rob, but it was 13.5% on the heavy-duty side. Robert Wertheimer: Perfect. I have a bunch of questions for you shortly, and thank you very much. Preston Feight: Thank you. Look forward to sharing more with you. Operator: We now turn to Steven Fisher with UBS. Your line is open. Please go ahead. Steven Fisher: Great. Thanks. Good morning. Just wanted to confirm some of the production dynamics in the quarter. The 15,000 in U.S. and Canada. I thought I heard you say that maybe that was affected by sort of shifting local for local. How much of, well, I guess, was the 15,000 less than what you expected? How did that compare? How much of that, if you could break it out, was tied to sort of shifting that production plans around? Or was there anything else going on in the quarter? Preston Feight: Yeah. I think it is not what we expected. It is kind of... Steven Fisher: Can you hear me? Preston Feight: Yeah. We can. Can you hear us? Steven Fisher: Okay. Preston Feight: Yep. Sure. Thank you. Yeah. So that 15,000 is kind of right where we thought it would be. Right in the range of where we thought it would be. Europe probably delivered a few more, maybe North America a little less. But what we really saw is a cadence change through the quarter. A cadence change continuing through the first quarter. Of stronger order intake, the ability for the truck plans, as we mentioned, keep mentioning because I am so proud of them. For them to be able to keep the build going while they were doing this transition to build was really impressive. If there was anything, a few hundred units might have been buried in there where they were working through bringing in trucks out of Mexico, bringing in trucks out of Canada. And bringing that flexibility, and then the team in Canada flexing into a wide variety of model mixes built in Sainte-Thérèse. There are some inefficiencies to that. But their ability to manage that was significant. And really impressive. So I do not think we are too surprised at all by it. What we feel good about is the stability we have going forward and how it is going to be helpful to the build cadence through the 2026 calendar year. Steven Fisher: Okay. That is helpful. And then I guess translating that into then the first quarter flat, can you just give us sort of the regional color there directionally? For US and US, Canada versus Europe? Preston Feight: Yeah. We see US Canada up some and then Europe down a little bit as it had higher deliveries in the fourth quarter at year-end in Europe. Steven Fisher: Okay. Preston Feight: You bet. Operator: We now turn to Angel Castillo with Morgan Stanley. Your line is open. Please go ahead. Angel Castillo: Hi, thanks for taking my question. Just wanted to unpack a little bit more on the order uptick. You noted continuation of maybe some of that into January. We saw strong December order data. Just expand maybe the shape of the strength in January and just maybe any details on what percentage of the order book or order slots are now filled for kind of 1Q and 2Q. And then maybe just related to that, like, you could expand on just the areas where you are seeing the uptick in orders, is there any kind of particular pockets, whether it is vocational or is it related to EPA pre-buy? Like, what are you hearing in terms of the strength in those orders? Preston Feight: Yeah. I think as you articulated the numbers for December, you know those order intakes. I would say January continued in that same level of cadence. Of significant overbuild rate order intake. Some spread delivery in there as you about fleets that are kind of putting in their buying decisions, but also some things that are closer in, as you mentioned, vocational. We are seeing some significant orders from bodybuilders coming into our mix now so they can replenish their inventory for 2026. And then a steadiness in the LTL market. So it is kind of a mixture. You articulated that well. And that is what we see. So strong order intake kind of across the board, which is helping us grow those backlogs, which is going to be positive for the year. And then I would say a big point to add is in Q1, we are mostly full. Then as you know, we will look at Q2 as we get to the next earnings call. Angel Castillo: That is very helpful. Thank you. And then maybe just along those lines on the North America truck outlook for the year, I guess, US and Canada, just expand on the rest? So you raised Europe and South America, but it sounds like the level of orders here is pretty robust, but you kept the North America unit outlook unchanged. How should we read that? Is there any nuances to, you know, what you are seeing maybe whether it is market share shifts or that dispositions you maybe better for or the industry better for the top end of the range of your provided? How should we kind of take that into context given the unchanged guide for the industry? Preston Feight: Well, I think that the truth is our unchanged is higher than maybe like ACT was previously. So we feel we felt good about 2026. We still feel good about 2026. And so there is really no change from our positive sense of what is going to come through the year and the fact that it is going to be a year of acceleration for us. And acceleration sequentially is what we would expect to see through the year. Angel Castillo: Very helpful. Thank you. Preston Feight: You bet. Operator: Our next question comes from Scott Group with Wolfe Research. Your line is open. Please go ahead. Scott Group: Hey. Thanks. So when truck rates start moving higher, we tend to see more truck orders. It feels like some of the reason why truck rates are going higher right now is that there are fewer drivers and the government is focused on non-domicile and things like that. If this is more of a supply-driven cycle with fewer drivers, how do you think about what that means for truck orders and this cycle going forward? Preston Feight: You know, I think it is a great point, Scott. I mean, obviously, you are dialed in on what is going on there. But if there are fewer drivers that maybe are not meeting the legal requirements, those drivers probably are working on the lower side of the contract rates and the spot rate businesses. And then what you see is those more established carriers tend to have probably somewhat higher rates. The fact that there are fewer of those low-side drivers enables them to probably command a better rate positioning. I think there is some of that going on right now. Obviously, as they get better rate positioning, their profitability will hopefully improve. Then that will drive their ability to have better cash flow and purchase more trucks. Scott Group: And then similar question. When you see this order pickup, do you have a sense is this more replacement, or is there any growth? And if it is sort of more replacement, I know, just thoughts on how you see the used truck market evolving over the course of the year? Preston Feight: Yeah. I think in the used truck space, it is kind of interesting. The kind of read-through to me is we think that as the year goes on, used trucks could become more valuable. Simply because of how things are shaping out in the marketplace. Even in the next year. So it should be positive. Right now, there has been a little bit of a downtick in used trucks because some of those buyers might be the people that are being affected by the CDL enforcement rules. Those might have been the buyers for the used trucks. So there is a temporary moment there. And, also, I think we have still seen the finishing up of rationalization of fleets that are going to be in the business and make it through this cycle versus those that are leaving the business. So all of that kind of put in, you would expect to see the number of delinquencies diminish as the year progresses as fleet profitabilities come up. And then used truck pricing follows that. Scott Group: And just so I understand, your point about used being more valuable, is that a sort of comment around EPA '27 and big increases in new truck prices coming next year? Preston Feight: Exactly. Yeah. That is part of it. Yeah. We saw a 4% increase in used truck values year over year. And we expect that to continue to increase for that reason. Scott Group: Thank you, guys. Appreciate it. Preston Feight: You bet. Operator: We now turn to Chad Dillard with Bernstein. Your line is open. Please go ahead. Chad Dillard: Hey, good morning, guys. Want to spend some time on parts gross margin. So first of all, fourth quarter, what was it? And then how do you think about that scaling in 2026 as that business reaccelerates? Kevin D. Baney: Yes, Chad, this is Kevin. So fourth quarter was 29.5%. And as I mentioned, on a soft parts market, I would say, you know, that is pretty good results. And, again, the team is doing a great job providing excellent customer service, getting the right parts to the right place, right time. And so, you know, in a soft parts market, customers are really focused on required maintenance. And so we were able to address that shift. And what we are forecasting going forward is, you know, a rebalancing of that mix as the market improves a higher take on proprietary parts. Chad Dillard: Got it. That is helpful. And then just really quickly, inventories. Can you just give us an update on where PACCAR is versus the market? And then just in terms of truck pricing, how are you thinking about that evolving as we go through '26? Kevin D. Baney: Sure. When you look at the industry inventory, I think the industry inventory for Class 8 is 3.2 months, and PACCAR is at 2.2 months. So we feel like we are in an optimal spot on our inventory positioning. And that at least for us, we would expect build registrations to be fairly aligned this year. So that gives us a good opportunity as well, and we are starting to see, like, we are starting to see dealers come in with stock orders. And as we mentioned previously, bodybuilders want to have their spots put in. So that is the way we see inventory and its relationship to our build. Chad Dillard: Got it. Thank you. Kevin D. Baney: You bet. Operator: Our next question comes from Jamie Cook with Truist. Your line is open. Please go ahead. Jamie Cook: Hi. Good morning, nice quarter. I guess my first question, understanding your retail sales forecast for North America and now that we have more clarity on EPA 2027, obviously, markets appear better versus where we were. But, Preston, to what degree are you concerned, you know, the supply chain cannot ramp if things really do improve and where would those bottlenecks be, and how are you handling that? And then my second question, which is my guess is you will not answer, but I am going to try. You know, the revenues were better. Deliveries were better. Your gross margins were in line with your forecast, but you said it was hurt by, you know, your shift in manufacturing local for local. Is there any way you will quantify, you know, what that impact was in the fourth quarter? Thank you. Preston Feight: Yeah. So your second question, you are right. You understand it was significant. I am not going to give you a number because there is a lot of gray in that number, so I would be taking a number that has multiple inputs to it. Say that it was a significant impact to us, and it is one that we do not expect to carry forward. As we look into the future quarters. From a bottlenecks of supplier standpoint, does that have an impact on the year? I feel like that is something that our customers are going to need to think about. We have great relationships with our suppliers. We have given them our forecast. We have given them that cadence of sequential growth and acceleration through the year and our expectations of our build. So they are aware of it. That helps them. Right? So having a good plan helps them. But it does mean that if we get into a third, fourth quarter where build is significantly higher, then it puts stress on their systems as well. And we have been through this cycle. You just articulated it. There comes a point where the ramp is too significant. It becomes bounded. Do not see that yet. But we do not rule out that that could happen in the second half of the year as well. And if that is what happens, then that is typically when price accelerates. Jamie Cook: Okay. Great. Thank you. Look forward to seeing you in February. Preston Feight: Yeah. I look forward to seeing you too. Operator: Our next question comes from Stephen Volkmann with Jefferies. Your line is open. Please go ahead. Stephen Volkmann: Hi. Thanks for taking the question. I wanted to stick with the 2027 NOx thing. Have you guys communicated to your customers and maybe even if you are willing to us what the price increase associated with that will be? Preston Feight: You know, we have talked in general, and the reason we speak to generalities is because I think the EPA has done a very good job of trying to let people know there would be 35 milligrams. But they also have stated that they are looking at useful life and warranty and what those impacts would be on cost. So those could still be subject to change. In general, I think the best number is to use, like, a plus or minus on $10,000. That is what we have been talking to customers about. It gives them a range to think about. They can kind of plan in with a new technology and a $10,000 increase. Does it mean they want to shift their buying pattern around? Stephen Volkmann: Great. That is helpful. And then this is, I am coming back to Jamie's question. But so presumably, there will be some sort of a pre-buy as we get toward the end of the year. I think you guys have been in that camp for a while now. But if the demand were stronger, would you be willing to flex up to meet it, or does the fact that '27 probably sort of comes back down fairly quickly post the change mean that it is sort of your appetite for building a lot in the second half is more limited? Preston Feight: You know, we serve our customers. And so if our customers are asking us for trucks, we do everything in our power to get them trucks. Stephen Volkmann: Okay. Great. Thank you. Preston Feight: Yeah. You bet. Operator: We now turn to Kyle Menges with Citi. Your line is open. Please go ahead. Kyle Menges: Thank you. I wanted to follow up on the last question. I guess more not as much on the customer side, but just from the standpoint of the potential of dealers stocking up. You may be willing to carry a little bit more inventory in 2027. You made a comment that you are seeing dealers ordering stock trucks right now. So, yeah, it would be helpful to just hear about how you are thinking of the potential for dealer stocking and I guess, risk of an inventory overhang exiting 2026? Preston Feight: Well, I mean, I think the statement of an inventory overhang has a negative connotation to it to me, and I am not sure that if they had inventory going in 2027, that would be necessarily too big of a problem. I think that it is a little early to predict what the fourth quarter is going to look like because, as I said, we have to see what the rules end up being from the EPA. Do think there will be an acceleration through the year. That seems obviously starting to happen to me. How big that is and how significant it is at the year-end, I think that is a lot of speculation that we cannot really get to yet. Kyle Menges: Got it. And then just on the parts guidance, the 4% to 8% and starting the first quarter at plus 3%. Just how much visibility do you have to that ramp going from three to, I guess, plus seven or 8% as we move throughout 2026? And just what are the key drivers of that acceleration in growth? Kevin D. Baney: Hey, Kyle. The key drivers are just the anticipated demand as we go through the year with the market. We have had, if you look at last year, it was a relatively soft market throughout the year. And so just with customers accelerating, putting trucks back into service, we are just anticipating kind of a steady growth as we go through the year. The other thing you can maybe think of is tariffs should be a favorability on the parts side, just like the truck side as you look at the year. Kyle Menges: That is helpful. Thank you, guys. Kevin D. Baney: You bet. Operator: Now turn to Tami Zakaria with JPMorgan. Your line is open. Please go ahead. Tami Zakaria: Hey. Good morning. Thank you so much. First question is on the tariff-related surcharges or price increases you talked about last year, are you rolling back some of those price increases or surcharges given that Section 232 eases some of the tariff cost burdens for you now? Preston Feight: Yes, Tami. We are. We have got rid of tariff surcharges for '26. So they sit in there in terms of what our actuals are because remember, IEPA is still sitting out. There is a tariff cost for everyone. That needs to be clarified still. But we are seeing some price slide in Q1 expectation. But more than offset by cost. So that gives us a positive in price-cost. Tami Zakaria: Understood. That is super helpful. And as a follow-up, I wanted to understand the first quarter gross margin guide a little better. Did you see at any point in the fourth quarter the gross margin rate being in that, you know, 12.5% to 13% range, meaning is it fair to assume that you exited 4Q at a 12.5% to 13% range, and what you are expecting for the full quarter in the first quarter. Given deliveries would be similar. Preston Feight: Yeah. I think what you are insinuating is are we seeing sequential improvement in margin by month, and we do not break it out that way, but in general, yes, we are seeing improvement in margin. As we go sequentially. Even within quarters. Tami Zakaria: Understood. Thank you. Operator: Our next question comes from Jeff Kauffman with Vertical Research Partners. Your line is open. Please go ahead. Jeff Kauffman: Thank you very much, and congratulations. I just wanted to think a little bit about margin opportunity or market share opportunity in 2026. Yeah. We have been speaking with some trucking companies that have said even now they still cannot really put in orders for Freightliners or Internationals because post the February tariffs, they are not really certain what those prices are. So you talked about the shift post-February and how that is an advantage for you. What are your customers telling you about their ability to those that have, say, more than one nameplate, more than just Kenworth and Peterbilt on their fleet, because we have seen the uptick in truck purchasing and to your point, that could be a combination of, okay. We got EPA clarity. We got February clarity on our domestic produced trucks. But our understanding is your customers are still having trouble putting in orders for their non-US built trucks post-February. So could there be a bigger opportunity for market share for you? And then when will you get some more certainty on that? Preston Feight: Jeff, I think you must be talking to the same people we are talking to. I think they would like to have that clarity as well in terms of what pricing is going to be from some of our competitors, and that will certainly find its way into the market in the coming months. We have been able to give them clarity from our standpoint. I think it is helpful. And so we feel like we should be able to meet their demand when they are ready to make those decisions, which should be good for us through the year, both, I think, from a market share standpoint and a margin standpoint. Jeff Kauffman: So just to follow up on that, the increased confidence you are seeing with their customers, and I know ACT Research just put the pre-buy back into their numbers. How much of this do you feel is increased confidence in the environment versus maybe just increased clarity on what is going on with EPA? Preston Feight: Yeah. I think it is both. I think that the clarity is helpful, but without the confidence in the freight market, without the rate increases, and without increased profitability for the carriers, the 40% of the truckload carriers being in the market, they need those things in order to be more than just tariff and regulatory clarity. So I do think it is a both thing, and I think that is where at the point where we have tariff clarity. We have regulatory clarity happening. I think we are just in the beginning parts of having the truckload carrier profitability return. So that has to continue to evolve, which will be positive for the year when that happens. Jeff Kauffman: Okay. Thank you very much. Preston Feight: Yeah. You bet. See you soon. Operator: And our final question comes from Michael Feniger with Bank of America. Your line is open. Please go ahead. Michael Feniger: Yep. Hey, guys. Thanks for squeezing me in. I appreciate it. Preston Feight: Yeah. You bet. Got called. Appreciate it. You guys touched on the price versus cost trending more favorably in Q1 versus Q4. It is mostly on the cost side. You commented on pricing is a little soft in Q1. You pointed out how competitors have not fully taken care of cost to market. We are hearing commentary out there on discounts. How do you see pricing in Q1 but beyond Q1 kind of playing out through the year, you know, as we start to get closer to that pre-buy? Preston Feight: Well, I think that is what is going to be telling us. Once price clarity from everybody in the market and the tariffs are affected into things, it is going to be there will be some costs that come along, and I think that is where price will start to become a favorable factor through the year. Michael Feniger: Alright. And when we think is there a rule of thumb we should think about your cost of goods sold? How much is raw materials? What we should be watching, what the lag is there. Brice J. Poplawski: Yeah. This is Bryce. The material in our product is the vast majority. It is 80, 85%. So labor and overhead are the remainder. So materials mean a lot in our pricing. Michael Feniger: Fair enough. And, look, you guys have an analyst day in a few weeks. I remember at the 2022 investor day, there was just a lot of focus from investors if PACCAR can drive higher margins cycle over cycle, and you clearly delivered in 2023 with strong profitability. Now as we are coming up this Investor Day in a few weeks, early innings of this, we are hoping a new truck cycle. Do you think we can see higher cycle over cycle profitability that continues? What are some of the factors we should be thinking about as we are assessing the profitability as we are moving to this next, you know, recovering truck cycle? Thanks, everyone. Preston Feight: Yeah. Thanks for the commentary, first of all, and then the question because the commentary is great. I think it is absolutely objectively true. Cycle over cycle performance that teams have delivered is really significant and outstanding. We will share more of that in the investor day. And then as we look to the future, we feel great about the opportunities in front of us. It is not just trucks, and it is not just parts, and it is not just financial services. But we think there are other new opportunities coming towards us in terms of how we support our customers with advanced transportation solutions, data, connectivity, and the interplay of all of those. So those are all positive for the business looking forward. So we feel great about not just this year, but the future. And look forward to seeing many of you in Denton. Operator: There are no other questions in the queue at this time. Are there any additional remarks from the company? Ken Hastings: We would like to thank everyone for joining the call, and we look forward to the upcoming Analyst Day on February 10. Please keep an eye on the PACCAR Investor Relations page for a link to the webcast. Thanks again. Operator: Ladies and gentlemen, this concludes PACCAR's earnings call. Thank you for participating. You may now disconnect.
Operator: Thank you for accessing Union Pacific Corporation's 2025 fourth quarter earnings call held at 08:45 a.m. Eastern Time on January 27, 2026, Omaha, Nebraska. This presentation and the accompanying materials include statements that contain estimates, projections, or expectations regarding the company's financial results and operations, and future economic conditions. These statements are forward-looking statements as defined by the federal securities laws. Forward-looking statements are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. The materials accompanying this presentation include more detailed information regarding forward-looking information, and these risks and uncertainties. In addition, please refer to the company's website and SEC filings for additional information about our risk factors. Greetings. Welcome to the Union Pacific Fourth Quarter 2025 Earnings Conference Call. Operator: At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. The slides for today's presentation are available on Union Pacific's website. At this time, it is now my pleasure to introduce your host, Mr. Jim Vena, Chief Executive Officer for Union Pacific. You, Mr. Gunnar. You may begin. Jim Vena: Thank you, Rob. Appreciate it. Let's keep going this morning. But maybe let's just take a second before we get into the prepared remarks. Then I'm really looking forward to the questions and answers. I'm sure there won't be anything on mergers. It will be all about how good Eric and the team are running the railroad. But thanks for joining us this morning. But I do need to call out the entire Union Pacific team. We've had a significant weather event that impacted a vast majority of The United States Of America from one end to the other. And we felt it in the southern region that has these storms come through, but I'm telling you, it used to take us weeks to recover. And Eric and the team have done a spectacular job. I wouldn't say that we're at 100% this morning recovered. But Eric's promised me by the time I look at the metrics on Thursday morning, we'll be back to normal. So, Eric, listen, you and the team, you wanna just give a quick update on some of the big impacts? What's left to do here in the next so the customers that might be listening can understand exactly where we are? Eric Gehringer: Yes. To your point, Jim, the team has done a heck of a job and it really is in that Texas and really in the Louisiana, Arkansas area. And really where we are, we're pretty much 70% recovered and that includes partnering with a lot of our customers who when this weather happens, they have to make adjustments to their operations as well. We welcome that. We work with Kenny's team to be able to do that. And like you said, we wake up Thursday morning, we should be back. Jim Vena: Perfect. So listen, Union Pacific and me specifically and the rest of the team with me, like, we like to deal with facts not how people feel. You know, one of my favorite sayings when somebody tells me, I think this, I tell them, tell me what the facts are. And the facts are the northern part of the railroad which usually gets impacted with real cold weather that did, has recovered really well. The western part of the railroad, in LA, I'll have to admit there wasn't very much of an impact. It was pretty clean, and they're operating like they should. And in that central east and south part, they've done a spectacular job of recovering where it would have taken us weeks to get us back to where we are. Nice to see that the short time after few days and that speaks to the facts of who we are and what we do with buffer of resources making sure we had locomotives in the right place that would help. And all the assets and the people that we need. And I've got to give the employees credit for coming out in weather that was pretty tough. Now I always try to tell people I've done it before. But, yeah, that was a long time ago. You know, right now, the toughest thing I have to do is drive out of my garage and drive into another garage. So it's pretty easy. But, I appreciate all the hard work by everybody. So why we get going? So I already said good morning and thanks for joining us on the Union Pacific's fourth quarter and full year 2025 results. I'm joined in Omaha by Chief Financial Officer, Jennifer Hamann, Executive Vice President, Marketing and Kenny Rocker and of course, Eric, who has already spoken. So nice to have the team with me here this morning. Let's dig into 2025. Throughout the year, we continue to build on what's possible. Quarter to quarter, we challenged ourselves and each other, the result excellence. Union Pacific team delivered our best ever full year across safety, service and operating. As we close out the year, it's clear the team is consistently delivering at the highest levels, and I am confident that what we'll continue to do. Let's discuss the highlights further starting on Slide four. This morning, Union Pacific reported 2025 full year reported net income of $7.1 billion, up 6% and earnings per share of $11.98, up 8%. 2025 freight revenue excluding the impact of fuel surcharge grew 3% versus 2024 and set a best ever full year record. Strong core pricing gains combined with an additional 113,000 cars more than offset business mix. Our annual operating expenses after adjusting for merger costs and other one-timers were roughly flat year over year. An excellent result against business growth as well as inflationary pressures. We remain disciplined setting the best ever full year record for workforce productivity as we utilize 3% fewer employees to move 1% more volume. And we further managed our costs by operating a very efficient network removing car touches and reducing dwell. We set best ever records in many areas, freight car velocity, locomotive terminal dwell, train length, fuel consumption. I'm going to stop there. Eric would like to 'd have another 10, but that's it. That's enough. To name a few. Importantly, we achieved these records while maintaining a buffer of resources as we safely delivered for our customers. Our 2025 full year adjusted operating ratio improved 60 basis points to 59.3% versus 2024's result. Reported net income was another best ever full year record in 2025 driven by increased other income and higher operating income from revenue growth and productivity. Other income grew in part from industrial parkland sales demonstrating that we will take advantage of opportunities to monetize assets and maximize value to our shareholders. Jennifer, how about you dig into the fourth quarter financials and then Kenny and Eric will quickly walk you through the marketing and operating details. Then I'll come back for a quick wrap up before we go to Q and A. Jennifer? Jennifer Hamann: Thank you, Jim, and good morning. Let's begin with our fourth quarter income statement on Slide six. Where operating revenue of $6.1 billion decreased 1% versus 2024 as freight revenue of $5.8 billion declined only 1% on 4% lower volume. Breaking down the drivers of freight revenue, the lower quarterly volume reduced freight revenue 400 basis points. Fuel surcharge revenue of $603 million increased $15 million as higher year over year fuel prices added 75 basis points to freight revenue. Core pricing gains combined with business mix to drive 275 basis points of improvement to freight revenue. Although still strong, quarterly pricing and mix were impacted by the competitive and global market environment, particularly in agricultural. We remain focused on selling our valuable service product at the right margins, we have to compete. Fortunately, our strong operating efficiency and continuous drive to improve allow us to compete and still generate strong cash returns. Fourth quarter mix dynamic was slightly positive although not as favorable as expected due to lower volumes in some of our higher average revenue per car or ARC businesses such as forest products, food and refrigerated and energy and specialized markets and higher volume in some of our lower ARC businesses such as coal and rock. Wrapping up the top line, other revenue declined 2 percent $326 million driven by lower revenue from the transfer of METRA operations. Switching to expenses, our appendix slides provide some more detail, but let me discuss the key drivers as total operating expense increased 2% to $3.7 billion. Reported compensation and benefits decreased 3% driven by the favorable comparison to the $40 million crew staffing agreement we had in the fourth quarter 2024. Our continued focus on operational excellence enabled record fourth quarter workforce productivity with workforce levels 5% lower than 2024. Fourth quarter compensation per employee increased 5% as a result of wage inflation and higher guarantee. For 2026, we expect our all in compensation per employee to be up around 4% to 5% as we continue to identify opportunities to offset increasing wage and benefit inflation with process improvements, technology and investments. Reported purchased services and materials increased 8% driven by merger related costs, higher inflation and increased maintenance and repair cost. Fuel expense grew 2%. Driven by a 3% increase in fuel prices from $2.41 to $2.49 per gallon partially offset by improved fuel consumption. Equipment and other rents declined 8%. Driven by lower operating equipment leases and improved cycle times that reflect our strong network fluidity. Finally, other expense increased 22% to $344 million on higher casualty costs and rising property taxes as well as the comparison to 2024's bad debt adjustment. Against our record fourth quarter 2024, operating income declined 5% to $2.4 billion. Below the line other income was the best ever quarter and increased $264 million driven primarily by industrial park land sales, Jim mentioned earlier. Reported net income totaled $1.8 billion and was a fourth quarter record with earnings per share of $3.11. Our adjusted earnings per share totaled $2.86 and adjusted operating ratio came in at 60%. Turning to shareholder returns and the balance sheet on slide seven, Full year 2025 cash from operations totaled $9.3 billion roughly flat to 2024, while our cash conversion declined 10 points as a result of higher cash capital and our significant gain on land sales at year end. Cash returned to shareholders grew 25% versus 2024 as we rewarded our shareholders by returning $5.9 billion in 2025 through both dividends and share repurchases. Our adjusted debt to EBITDA ratio finished the year at 2.7 times by our three credit agencies. as we maintain a strong balance sheet and continue to be A rated Return on invested capital improved 50 basis points to 16.3%. As we've discussed, our goal is to have industry leading operating ratio and ROIC, and I'm confident that when the dust settles after earning season, we will remain the leader in 2025. In 2026, we expect our cash balances to steadily grow as we first prioritize paying off the $1.5 billion of long term debt that comes due in the first half of the year and then conserve cash in anticipation of the merger closing. Now, I'll turn it over to Kenny and I'll come back in a little bit to discuss our outlook. Kenny? Kenny Rocker: Thank you, Jennifer and good morning. Before I dive into the fourth quarter results, I want to acknowledge the team's hustle and drive which helped deliver a best ever full year record for freight revenue excluding fuel. Now turning to the fourth quarter on Slide nine. Freight revenue was down slightly on a 4% decline in volume. Our strong service product allowed the team to offset that pressure with pricing. With fuel surcharges and business mix, we delivered a 4% increase in average revenue per car. Let's talk about the key drivers for each of these business groups. Starting with our Bulk segment, revenue for the quarter was up 3% compared to last year on a 3% increase in volume. While business mix held average revenue per car flat Strength in coal was driven by sustained demand favorable natural gas pricing. We're seeing smaller wins build momentum provide incremental volume in a mature market. In green, lower domestic demand and reduced soybean exports to China were partially offset by business development wins Mexico. And as Jennifer mentioned, the competitive and global environment also impacted quarterly pricing and mix. Grain products growth in renewable fuels and associated feedstocks was tempered by uncertainty around the renewables fuel tax credit. Food and beverage volumes remain pressured with softness in Mexico beer shipments. Fertilizer and sulfur finished the quarter strong driven by increased phosphate shipments and higher sulfur demand from the mining industry. Turning to Industrial. Revenue was up 1% for the quarter on a 1% increase in volume. Average revenue per car was flat. As strong core pricing gains were offset by business mix. Demand and business wins increased in petrochemicals and construction shipments partially offset by decreased volume in our forest and petroleum markets. Premium revenue for the quarter declined 6% on a 10% increase in volume and a 5% increase in average revenue per car. Reflecting business mix and higher fuel surcharges. Intermodal volumes were challenged by lower West Coast imports and customer shifts. Despite that, 2025 was the best ever year for domestic intermodal which also delivered another record breaking quarter driven by exceptional service and business wins. Automotive volumes declined due to reduced OEM production driven by softer consumer demand and ongoing quality hold. Now let's focus on 2026 and the macro indicators we're watching on Slide 10. Based on S and P Global's January outlook. At the start of the year, the indicators point to a softer environment. That said, it's still early in the year, and these forecasts can move as conditions evolve. We'll watch the data closely but we'll stay focused on what we can control. Delivering strong service, hustling to win and new business and partnering with our customers to grow. Looking ahead on Slide 11. While we've been seeing volatility, we remain optimistic about Kohl's potential with natural gas prices expected to remain favorable in the near term. Grain exports, mostly to Mexico and some to China, coupled with ongoing business development, should support growth. In Grain Products, we expect continued strength supported by aggressive business development and expanding markets for renewable fuels and feedstocks. And as the policy for renewable fuels becomes clearer, we expect that too further support growth. Moving to Industrial. We're planning for a challenging backdrop. Industrial production is forecasted to be flat. Halven stars are expected to decline by more than 2%. Our team is laser focused on business development and leveraging our strong service products to close gaps. We expect our petrochemicals markets to remain strong driven by investments we've made in our Gulf Coast franchise and winning with new and existing customers. Wrapping up with premium, we expect continued softness in international intermodal volumes in the near term as imports stay below last year's level. Later in the year, comparison but the import environment remains fluid. On the domestic side, we see continued opportunity and growth from over the road conversions enabled by our strong service product and multiple channels to win. Softening vehicle sales will pressure automotive volumes That said, team continues to hustle and recent business development wins will help offset some of that softness. Looking ahead, we're confident in our ability to compete with a strong business development pipeline and a service product that continues to differentiate Union Pacific we're focused on converting opportunities through strong customer relationships, commercial intensity and consistent execution. And with that, I'll turn it over to Eric to review our operational performance. Eric Gehringer: Thank you, Kenny and good morning. Moving to Slide 13, In the fourth quarter, we extended our safety performance delivering meaningful improvement in both personal injury and derailment rates compared to our three year rolling average. Importantly, for the full year 2025, we achieved best ever results in both areas, and we expect to lead the industry in employee safety. These outcomes reinforce our commitment to safety, and demonstrate the effectiveness of our training programs and technology investments. Freight car velocity of two thirty nine miles per day beat last year's record fourth quarter by 9%, set a best ever quarterly record. This result was driven by record quarterly terminal dwell of nineteen point eight hours increased train speed and continued process and technology improvements to remove daily car Truly exceptional work. for future growth. As we build further momentum to operate a safer railroad and drive capacity Our service product tracked ahead of what we sold our customers as fourth quarter intermodal and manifest service performance both improved to finish at 100%. As a reminder, Service Performance Index will be rebased to our best monthly performance as we continue to raise the bar for success. We will remain agile and maintain our buffer of resources positioning us to respond quickly to demand. Now let's review our key efficiency metrics on Slide 14. Quarter locomotive productivity improved 4% versus 2024, Additionally, our 2025 full year results set a record. Demonstrating the team's focus on further reducing locomotive dwell to maximize asset efficiency. Workforce productivity improved 3% and set a quarterly record for the sixth consecutive quarter. We continue to enhance and automate our operations while improving the safety of how we work. Train length in the quarter improved 3% versus 2024, a strong result against the mix headwinds associated with softer international intermodal shipments which were down roughly 30% year over year. All in, 2025 was a best ever year for TrainLink, averaging almost 9,700 feet. As we adapted our transportation plan for the business, and leveraged targeted investments to generate mainline capacity. With that, let's review our capital outlook for 2026 on slide 15. Our capital plan is developed through a disciplined multi year strategy to strengthen our infrastructure and generate strong returns. In 2026, we are targeting a capital spending of roughly $3.3 billion. As we've said before, our first capital dollars will support safe, reliable and productive operations. We are prioritizing our core infrastructure, modernizing our locomotive fleet, and acquiring freight cars to support both replacement needs and future growth. We're also investing in targeted capacity projects that align with our growth initiatives. These investments position us to capture additional volume opportunities drive meaningful productivity improvements across the network. A few examples include the continuation of our siding construction and extension projects in the Pacific Northwest and along the Sunset Route in the Southwest. We're also making terminal investments for our manifest network in and around Houston in the Gulf Coast region. On the intermodal front, we're planning additional investments at Inland Empire and Phoenix to increase capacity and support growth in those markets. Our focus is on aligning the right resources in the right places at the right times, so we can grow with our customers and continue driving efficiencies across the network. Before I pass it over to Jennifer, want to express my gratitude to the UP team and their unwavering focus on safety and service. By staying disciplined on the fundamentals of railroading, we expect our team to continue this momentum in 2026 and beyond. So with that, I'll turn it back over to Jennifer to review our initial financial outlook for the year. Jennifer Hamann: Thank you, Eric. Turning to Slide 17. Before I give our thoughts on 2026, let me just summarize what we achieved in 2025. The strong results we've reported today are on target with what we laid out last January. The path to achieving the results, however, was actually quite different. My point in highlighting that is pretty simple. We are executing our strategy of safety, service and operational leading to growth at a very high level. That level of execution makes us more nimble as a company and enables us to both win in the competitive freight transportation market as well as to take advantage of spot market opportunities. Whether that be higher than expected coal demand, domestic intermodal moves, or opportunistic real estate sales. The entire Union Pacific team is collectively driving for excellence and that's producing best in class industry returns. As we apply that mindset to 2026, our current plans do not anticipate a significant economic upswing. We are however confident in our operational capabilities as our network is running better than ever. Our service product creates value for customers and we are committed to outperforming the markets through our business development efforts. It's also important to note that since we laid out our three year targets in September 2024, several things have changed. Notably, S and P Global's 2026 economic estimates in key areas such as industrial production, housing starts and auto sales have deteriorated. In addition, rail inflation is ticking up again. We expect slightly over 4% inflation in 2026. Our commitment to yielding price dollars that exceed inflation dollars has not changed but price may not be a driver of our improving margins in 2026. And of course, in September 2024, we did not anticipate the impact of merger costs and pausing our share repurchases. Despite this different backdrop, we remain committed to attaining our three year CAGR of high single to low double digit EPS growth through 2027. Specific to 2026, our earnings outlook is in the mid single digit range as we continue to face volume and cost headwinds. As 2025 demonstrated, the year ahead will likely present some ups and downs, but I am confident that we can adapt and drive financial gains. We are planning $3.3 billion for 2026 capital improvements and we will continue to deliver value to our shareholders with consistent annual dividend increases. Importantly, we fully expect to improve our operating ratio versus 2025 and remain the industry leader in operating ratio and return on invested capital. The team's accomplishments in 2025 demonstrate the capabilities of our great franchise and we look forward to making further improvements in 2026 as a standalone company and in 2027 when we merge with the Norfolk Southern. It is truly a great time to be at Union Pacific. And with that, I'll turn it back to Jim to wrap things up. Jim Vena: Turning now to Slide 19. Before we get to your questions, I'd like to summarize what you've heard. First, Jennifer reviewed the fourth quarter financials. Lucado has declined 4% in the quarter driven by tough year over year international intermodal comparisons we had strong core pricing gains and continued to drive productivity throughout our network. Kenny gave an overview of fourth quarter volumes and laid out initial thoughts for 2026. We are focused on pricing to the value we provide and competing in the marketplace. It's clear our service execution over the last two years plus is helping us win with our customers. We see opportunities in several areas including chemicals and domestic intermodal to name a few, to leverage our diverse franchise to further grow our business. Eric reviewed our record safety service and operational results from a safety perspective we made strong improvements and expect that we will end the year as the industry leader in employee safety. On the service front, we have shown our customers what consistent reliable service looks like and how it drives value through the supply chain. On operational excellence, we more than met the challenges we set several quarterly and full year fluidity dwell and productivity records and the team is ready to drive further improvements in 2026. Lastly, Jennifer discussed our outlook for the upcoming year. Similar to 2025, we are focused on building on our safety performance, winning new business, controlling our costs. All to generate improved financials. Our diverse franchise brings us challenges and opportunities every day, and our job is to maximize what's possible. As we continue to successfully execute on our strategy, we will remain the industry leader that keeps raising the bar as we drive value for our shareholders. Before we open it up for questions, I'd like to make just a couple of comments on the merger. Job one for our team in 2026 is continue to improve and run a great railroad. I like where we are. I like what we have planned. And I love the way we've been able to increase productivity. And we've been able to adjust depending on where the business is and also what the impact of input costs are. Job two is working through the regulatory process to merge with the Norfolk Southern. I'll be honest, myself and we are disappointed that the STB determined we needed provide more information after providing close to 7,000 pages. And working with them and listening to them if they needed more information. But this procedural step that we've seen in previous acquisitions, which were ultimately approved. Let's be clear, this does not reflect the value of our combined railroad will provide America and our customers. We are confident that we will demonstrate our merger enhances competition is in the best interest of the public. Our combined railroad will move goods faster, while removing millions of trucks off the congested highways in several large cities. And customers will benefit from faster, more reliable service unlocks new markets. The STB's request is focused on three areas requiring clarification. Our response will take a few weeks to prepare, then we will refile our application as soon as possible. We view this as a short term blip and do not expect a significant change to the timeline as we are still targeting closing in the 2027. We are following the process and doing our part to move forward with transparency and speed. We are delivering at the highest levels. So fundamentally, I like where we are and aligned on what it takes to win. Driving safety service and operational improvements to support growth as we work toward combining with Norfolk Southern. So with that, Rob, we're ready to take questions if there's any. Operator: Thank you, Mr. Vena. We'll now be conducting a question and answer session. Due to the number of analysts joining us on the call today, we'll be limiting everyone to one question accommodate as many participants as possible. And our first question comes from the line of Jonathan Chappell with Evercore ISI. Please proceed with your question. Jonathan Chappell: Good morning, Jim. Gonna give you a break and go to Jennifer first today. Jennifer, I know there's a lot of fantastic. Go ahead. I know there's a lot of moving parts, and you got you know, where you where you end up in 25 in a different manner than you expected twelve months ago. But just help us understand a little bit. You said price may not be a driver of improving margins in 2026 and the accelerated inflation. You talked about 4% on the comp per employee, you're not expecting a macro recovery. So how do you get to OR improvement in in '26? Is this a a function of headcount, productivity, If there's any way to frame, the magnitude based on what you see today and, you know, if Kenny laid out from a macro standpoint. That'd be helpful. Jennifer Hamann: Yeah. Thanks for that question, Jonathan. So so you heard that right in terms of from what we're expecting today at least as we sit here from a price standpoint that while we absolutely believe that we will and have a plan to improve our operating ratio in 2026, we don't think that we're going to get any help from price. Of course, that's an early look. And really, it's a function of a couple things. We definitely benefited in 2025 natural gas prices and strong coal pricing. While that may hold, we're just not going to have that as a tailwind for us in 2026. And then you still have a pretty weak domestic intermodal market. Those two things really are what's reflected in that pricing commentary. Terms of productivity, Eric and his team did a fantastic job in 2025. Driving productivity, driving efficiency, and we have more ahead of us 2026. And so that definitely will be a continued tailwind for us as we move into 2026. That's going to be supportive of improving our margins. And then the last thing I'll mention is the business mix. It should be a more favorable business mix for us in 2020 than in 2025. Now, we were a little off in 2025. I it was gonna be a better mix in 2025 than it ended up being. But you still saw us make margin improvement. So that's where I think just the way that we're running and executing today is a huge benefit for us. We are moving every available carload there is, and I anticipate we'll continue to do that in 2026. So that's really how we're looking at it. Jonathan Chappell: Thank you. Operator: Our next question comes from the line of Jordan Alliger with Goldman Sachs. Please proceed with your question. Andre: Hey, morning. It's Andre on for Jordan. Thanks for taking our question. Good morning, Jim. I was just curious if you could dig a little more in on the $2 billion of targeted net revenue gains from the expected merger. I think about $4.2 billion of the increased traffic gains are being offset by $22 billion of costs associated with handling that traffic. The question is how variable can that 4 billion gross traffic number be, based on your planning assumptions? And then could you just discuss a little more related to how you project the associated costs of taking on that new traffic which altogether, I think it implies a pretty healthy EBITDA margin for the potential new traffic coming on board? Thanks for the question. Jim Vena: So if I have your question right, you're asking us when we put the merger application in, we talked about growth in the number of the carload growth. And you want to know if that's conservative or not or where the market is And you also want to understand whether how we're going to handle that business. So let's split that up in two pieces. We had experts. We looked at it before, of course, before we decided to cross the bridge and merge with Norfolk Southern. We did our own analysis of the traffic that's available both long haul intermodal that today we have a lower percentage than the mid length intermodal business just because of the handoff of what happens when have to hand off from one railroad to the other and it just does not open the market and penetrate it as well. So we're very comfortable that that 2,000,000 that we put into the application is there. And in fact, we are and always have been just like when we talked about price before, we're conservative. If anybody thinks we're going to let Kenny get away with being conservative internally, then dream on and you don't know who I am. Okay? The same thing with this, we're very comfortable. Then we had experts look at the market and they wrote in their best guesstimate or estimate at this point on what we're going to do. Anytime you increase business, you get that added on the trains that you have and what you need to do. So it's always much more efficient than running traffic that is in a decreasing position where you have to try to figure out how to adjust your network. So bottom line is, I'm very comfortable that the business is out there. Now, there has been some talk about this business. It's 2,000,000 and my God, how much is that? Well, if you do the math, it's just it's around 38,000 carloads You have to remember the way we all of us count intermodal So you can just about cut some of that in half because there's two containers at least on a on a railcar. And for us, we load up our trains. Also, we don't run 10,000 foot trains. We run our intermodal package because we have built the system to be able to do that somewhere between 14,018 feet. We do that every day and we've been doing it for now the last few years. So the total number of of of additional movements that we're going to have on the railroad that impact what capital we need to require is not as large as people think. And we know that it's not that large. Let me take one more step down If you take a look at the way we operate. The way we operate is this morning when I looked okay, like I do every morning, we have over 2,000 movements, foreign railroad, locals, trains running on our network. So if we add, you know, 10 more trains a day or 15 or 14 more trains a day, it's a pretty small rounding error on the impact to the network. So I'm very comfortable that when the merger gets finalized, which it will, just because of the enhanced product that we're offering our customers And just an end to end railroad from one end of the country to the other is enhanced all by itself. We're going to be able to provide seamless, faster service to our customers. Let alone in the watershed. So Eric, do you have anything more to talk about how the network is going to handle this little bit of we're going to bring on that we hopefully is more than 2,000,000 Yes, let's build on that where you started. So really we're talking about 6% increase in our operating inventory and the combined entity. And I want everybody to make sure you hear that 6%. So you have three things you do. Number one, you rely on the buffer of we already have. Right? We've talked all the time internally and externally about the fact that we keep a buffer of resources for locomotives, and cars, but we also do that for terminal capacity and mainline capacity. We don't run terminals up to 100% capacity. Heck, when we get to about 80%, we're already making investments. Second thing, when you look at the application, the base year is 2023. So we've made capacity investments. And independently, NS has made capacity investments as well in '23, '24, and '25, and those are all tailwinds for us to utilize. And then Jim hit the last one. Got to be honest with you. I totally agree with Jim when I don't remember what railroad said it, but something about 10,000 feet. And I had a hard time computing that because we don't run trains at 10,000 feet. Here at Union Pacific, we've invested in our people and the technology that allows us to safely and reliably operate those trains to the link Jim mentioned. So very comfortable with it. We'll work it through the integration process, and it'll be the most thoroughly planned and integration of two railroads. Jim Vena: Listen, sorry for the long answer. We will try to be shorter so this thing doesn't go too long, but great question. Thank you very much. Appreciate the color. Andre: Thank you. Operator: The next question is from the line of Ken Hoexter with Bank of America. Please proceed with your question. Jim Vena: Good morning, Ken. Ken Hoexter: Hey, good morning, Jim and team. Great job on the ops. I guess just a quick one just to clarify that the base rate your mid single digit growth, is that the 11.98% reported? Or it the normalized? I'm just getting a lot of questions on that. And then pre merger, you're now building to low single digit, mid single digit into 2027. Maybe you could just kind of are we really ramping that up for the 2027 outlook And And kind of what should expectations I know it's a year or two years ahead, but just because you've reiterated that target, just want to understand your thoughts there. In the face of $3.8 billion down to $3.3 billion CapEx, so why the reduction and what's getting pulled out? Thanks. Jennifer Hamann: Well, for one question Ken you managed to hit a lot points there. Let me see if I can hit them all. So our guide of mid single digits is off of the $11.98 Our EPS, which was up 8% year over year in 2025. You also asked in terms of the CapEx piece at the end there, We are sizing our CapEx relative to what the network needs. And Jim's talked about this before. CapEx isn't just a snapshot in time. It's not a single year. These are multi year investments Eric mentioned some of the investments that we're making in and around Houston. That's over $300 million in total, but that's going to be over many years. So we're looking ahead. We're looking at what we have ahead of us in terms of what we need, and we feel very comfortable with that. What was your middle question? I missed that one. Ken Hoexter: Just that sorry, that the middle part of it was the ramp into the low mid single digits into 2020 Yes. You could serve for the provision. Jim Vena: I mean, you're right. Mathematically, that does put a lot of pressure on 2027. Jennifer Hamann: Again, we're sitting here on January 27. It's tough to know exactly what's gonna happen. Economic indicators don't look great, but if that's different, we're positioned, we have the resources, and we're going to capitalize on that, absolutely. The market's not telling us that's available today, but the market's often wrong. Seeing ahead to 2027, again, continue to run well, we feel very comfortable with the guide, even though that does mean if we're right in the mid single digits for 2026, that puts a big lift on 2027 for us. And we stopped the share buyback. Jim Vena: $45 billion $4.5 billion this year. Just because we're making sure that we have the cash, as Jennifer spoke about. And Ken, you should know me by now and you should know this team. We'd rather be a little conservative in what we how we look at it and make sure that we over deliver on what we have. And that's our challenge all the time. So Cam, good question. You very much. Appreciate the time. Ken Hoexter: Thanks, Jim. Thanks, Jim. Operator: The next question is from the line of David Vernon with Bernstein. Bernstein. Please proceed with your question. Jim Vena: Good morning, David. David Vernon: Hey, Good morning, Jim. So a bigger picture question for you around of the the the access issues. Obviously, the the regulator came out with the decision to maybe change some of the the rules around switching. I'm not gonna call it reciprocal because it's totally reciprocal if two parties are involved, but about the switching, sort of regulation moving away from maybe the mid tech paper precedent, how does that change your perspective on the business? Or what kind of impact do you expect that to have as we think about, you know, a future either with or without the merger if we're gonna make it a little bit easier for shippers to petition for a switch. How does that change, the UP business? We've been getting a lot of questions on that from investors, and I'd love to get your thoughts on it. Thank you. Jim Vena: Yeah. Listen, I think it's a timely question, David. I appreciate it. Anybody who's heard me for the last son of a gun, okay? I was at CN ten years ago. So I was on calls twelve, thirteen years ago, I've been very consistent. I haven't changed. I'm all about competition. And that's what I love about this merger. It's gonna make everybody more competitive and it's going to drive better results for our customers. But on that issue, I am not afraid to compete. And I think customers should have optionality. In in general, the devil's in the details. Okay, with what they put out and we have to work through but I am very supportive of if you can't deliver for your customers, then customers should have optionality. And I have no issue with that. Now, it needs to be across the whole industry, not just okay, Union Pacific. It has to be for everybody. I would love to compete with some customers that are not getting the service level we're providing in the Western US and when we have the merger in the Eastern U. S. Or with the Canadian railroads that are running north south. Okay? Through and into Iowa. We'd love to compete against them, and we have no issue. Opening some of customers up or all of them up as long as everybody does. So that's where I'm at with it. The devil's in the details. And let's make sure that whatever happens actually improves the customer experience. The worst thing you can do is have a system in place that is complicated, No one understands how the customer can win. If you increase touch points, and you make it complicated, then the customer actually sees a deterioration. They're going to have to carry more inventory and more assets to try to move through it. So as long as we protect the investments that we've made, okay, to to provide service to our customers. Just in Inglewood, hundreds of millions of dollars to have the buffer in there to be able to recover as fast as we have. So I'm all for it. I like it. Let's get through the details. And I've told I've told everybody that the regulators that wanted to listen to me long before anybody put anything out this last one that I would be supportive. Now I don't think everybody's on the same page. But if they are, it should be an easy fix to go ahead and get it done. I'm ready. Union Pacific is ready to challenge ourselves And the cream rises to the top when you have more competition. So David, hopefully I helped you with that answer and you're clear about where we are on it. David Vernon: You absolutely did. And maybe just as a quick follow-up, you have a date for when the application is gonna be resubmitted? I'm not sure if that's that filing is in yet, but I think the FDA asked you guys for to let them know when the when the resubmit was going on. Jim Vena: Okay. You know, I've been having a exciting morning, the railroad recover. Then you ask me a question like that. I'm telling you, we got experts working on stuff and trying to get, all these experts to give me all the detail. We're working on a sliding scale right now. I don't like it. I wish it was in tomorrow, but they're working hard. And, this is weeks this was why we started with trying to get the application in way before the full six months because I was absolutely sure even though we thought we had done the the a good job that the was gonna find something that they wanted us to look at it again, And I and I understand why. This is a big combination. This needs to be done right. And I give the STB credit that they're gonna look at it. I think the three members plus all the people at the STB have a responsibility to make sure that what we're doing is positive. They're gonna come to the same conclusion as I have and the entire team here in Norfolk Southern has that it is positive. It is positive for for customers, for our employees, for America. Taking trucks off the road. But at the end of the day, it's a process. Frustrating as it is, Okay? In a while, I go home and I have a nice Irish whiskey to to calm myself down before I go to bed just to say, okay, I'm good. With this. But, stay tuned. As soon as we know exactly the date, I'll be the first one to announce it. I think we'll put a press release out that says that in March on whatever date it's going to come out, So sorry, I couldn't get can't give you a definitive one this morning, but you know I'm pushing them hard to get this thing done. David Vernon: Alright. Thank you. Jim Vena: You're welcome. Operator: The next question is from the line of Chris Wetherbee with Wells Fargo. Please proceed with your question. Chris Wetherbee: Hey, thanks. Good morning, guys. I guess maybe as it relates to the merger in the competitive landscape, obviously, there's a lot of customer relationships that need to be addressed as you go through this process. I know it's relatively early, but with the application in, people had chance to look at it, get a sense of how you're thinking about it. You'll have obviously more comments to come, as you just noted, Jim. I guess maybe specifically on the intermodal side, can you talk to us about how that sort of discussion is developing? There's obviously some big partners that are not on your railroad in the West, but maybe would be on the combined railroad in the East. Just trying to get a sense of maybe how that discussion sort of looks right now and maybe how we should think about those relationships evolving in 2026? What's embedded in your outlook on volume? Jim Vena: Let me pass it over to Kenny here in one minute, but let me just say this. We've had discussions with customers from bulk customers, from customers that are single car movers, customers that chemical customers that are moving, industrial products that need to move And every one of the customers that I've spoken with have they understand it. They see the benefit. Are they concerned? What they're always concerned about is will Union Pacific and they should be, okay? That should be a question they ask and they've asked me that question, is this, are you going to be able to keep the service level up with the combined railroad? And are you going to impact me? Because they remember Canadian Pacific, Shimazo with their, IT system. And I tell them to listen. With NetControl, what we did was we funded it's the fundamental base of everything that feeds into the railroad we did it and it was a nonevent. Also been railroading for forty seven years. And the end of the day, it's really important and for me it's real important Whether it was when I was in Vancouver and we were getting rid of those four hour quits that people were having, we did it in a way so that customers don't see the impact. That's real important to me. And with that, I think the feedback is if you can provide me good service, they see the benefit and they see the pressure this is going to put on the other railroads to compete. And if Chris, it's pretty simple. If you can't compete on service, if you can't win and be faster across the country, and across when we extend by 200 to 300 miles customers on East the East Side Of The Mississippi and customers on the West Side Of The Mississippi that can get further into the Ohio Valley. Where people from the East can get into Texas easier or into California easier, they're going to have to compete on price. I think the pressure is not going to be on customers. They're going to see much more competition. As we move ahead. But Kenny, you've had lots of discussions with people and why don't you give Chris a little bit of more background and color? Kenny Rocker: Yes, Chris. I think Jim hit it across the board. All of our customers not just, intermodal, but let's talk about intermodal and we're pretty excited about it. As you know, hub has come out, SWIFT has come out, ONE has come out. And what those intermodal customers see are the investments that Eric and his management team have made. We've talked about them with Inland Empire Phoenix Twin Cities, The service is strong. I talked about it in my results today, wow, we're coming from a place of strength being able to have our best ever domestic intermodal business and we've talked about it in all twenty twenty five. Over the road wins with Uber. Over the road wins in Phoenix, over the road wins in the Kansas City. So we're coming from a position of strength, and and we're we're excited about it. Chris Wetherbee: Got it. Appreciate the model is a pretty good one, Jim. Thank you. Jim Vena: I don't know how the hell you spell that. I'll leave it to you, Chris. Operator: Thank you. Our next question is from the line of Walter Spracklin with RBC Capital Markets. Please proceed with your question. Walter Spracklin: Yes. Thanks very much. Good morning. How are you doing? So so if I start, on operating ratio, if I look at your operating metrics, Jim, they look really good. I mean, length's like you know, Eric highlighted are are are at record levels, velocity record levels. You know, when I when I see that kind of operating performance, my inclination is to kinda improve your operating ratio fairly know, not by a little bit, you know, maybe a 100 basis points or more. But I'm curious as to, Jennifer made some comments about pricing and, or sorry, inflation and and how pricing won't be a contributor. Do you need pricing? Do you need volume to get north of a 100 basis basis points? Or can you do that through those metrics that you're hitting right now without help from macro or or price? Jim Vena: Walter, you're a smart guy. You've been around for a long time, and you understand this. You need You use a whole bunch of levers when we look at ratio, and that's a result of everything that we do. So we will continue to look at how we can operate better and how we can operate more efficiently. And you could see the work that was done by Eric and the entire operating team on productivity. Some things are given to us. Whether I liked it or not, when I showed up, this time, came back to work, we signed a collective agreement that increased wages substantially for our employees. And then this time, okay, parties went out fast and signed a pattern agreement that we've had to live with. Now we have agreements with everybody, but that includes a 4% wage increase. Okay, first year. At the end of the day, that's the pressure we have. Now Kenny needs to deliver on price. Okay? We're talking about price and saying where it is right now, but it's unacceptable if Kenny and the and the marketing team think that their job is to for the value we give customers to understand the marketplace and price it properly. So Walter, I'm very comfortable that we're going to be able to improve our OR this year. Jennifer is always much more conservative than me, that's okay. That's where she should be. Okay? She's the person that puts it all on paper and gives us the numbers. If I gave you my number, it would be scary. I'm not going to give it to you. I think, I'm very comfortable where we are, Walter. And, Walter, I gotta say it. Like, thank God I'm not in Winnipeg. When I saw minus 38, I was thinking, son of a I felt bad for those people at Canadian National. Like, let me tell you, they are tough. But, hopefully, I answered your question. Walter Spracklin: Yep. Appreciate the time, Jim. Kenny Rocker: Thank you. Operator: The next question is from the line of Jason Seidl with TD Cowen. Please proceed with your question. Elliot Alphron: Hey, thank you. This is Elliot Alphron for Jason Seidl. Wanted to ask about the 2026 outlook. Can you speak to the volume and pricing assumptions within your guidance? I know you're pricing in excess of that 4% inflation number, but can you speak to maybe how customers are absorbing new contracts given the muted customer demand you're seeing and kind of the expectations for the year? Jennifer Hamann: Don't want Kenny to give you the color, but let me just remind you what I said exactly. And we're not giving specific numbers as to volumes other than that we we do plan to outperform the markets. On the price side, we said that our price dollars on an absolute basis will exceed our inflation dollars. So that's an important nuance. We aren't talking about it in percentages, it's absolute dollars. So Kenny, take it away. Kenny Rocker: Yes. So last year around this time, we laid out macro macroeconomic indicators and we said at that time they were mix, and then in 2025, we put up a record year in freight revenue. So I just want to say that. So we know we can win in a difficult environment And we know we have some commodities that are going to we'll have to really go after like forest and lumber We'll see how that plays out automotive. We'll see how that plays out. But you look across the board, and construction, as the weather was good, we had a banner remarkable year. Plastics, banner remarkable year. Industrial chemicals banner remarkable year. Grain products ban a remarkable year. So, all three phases, we've been able to grow in a difficult environment. We're committed to that. We've got a strong service product And so with that, we're going to gather the demand that's out there. Maximize the price based on the service that we have and we'll see where that lands us. Elliot Alphron: Thank you very much. Operator: Next question is from the line of Scott Group with Wolfe Research. Please proceed with your question. Jim Vena: Good morning, Scott. Scott Group: Hey, thanks guys and Jim. So Jim, we've got the STB decision on the application. They sort of had a comment, hey. If you wanna improve the overall application, go for it. We've got lots of other comments from other rails, some other stakeholders. I guess, your degree of confidence and approval here changed in in any way? And and ultimately, know, what is giving you so much confidence in in approval here. Jim Vena: So so, Scott, if this was a bad deal, if this truly was not better for our customers, better for our employees, And you know what, 'd be speaking but no one would listen and no one would see the facts. This combination is compelling. It changes the dynamic and the competition. Remember, fundamentally, railroads the other railroads can say what they have to say and they're very vocal about it, but they're complaining because they're worried about competing against us because no business would would ever ever complain if somebody in their marketplace was doing something stupid. You know, if you were offering really bad coffee across the street, you'd go over there and try it out, you check out all their business processes, you check and see how their app is. You check and see how their payment is, and you check and see how there is. And if they were really bad, I don't know. Maybe the rest of them wouldn't do that in our industry. But I would tell the owner of that coffee shop across the street from my coffee shop, I'm telling you, your coffee is the best. Okay? I wouldn't complain. I'd only complain and I'd go back worried if the product they they had was better than mine, and I have to do what I have to do. So bottom line is that's why I'm very confident. And it's not just Jim Benner that's confident. It's speaking to the people in Norfolk Southern They see the benefit. They understand it. And that's good to have because we're going to be merging these two companies together. So I'm very confident that at the end of the day, going through this process, and is it painful? If this was the Jim Benner's STB, I would get that that decision done by my birthday. Okay, this summer. But this is not Jim Bena. Okay? It's SPB. We need to go through the process. We knew it was going to be a long and thorough and so be it. Okay? I would I wish it was thorough and shorter, but you know what? It is what it is. So we'll deal with that as we go. So, Scott, very comfortable with it. And we're going in to answer the questions that they asked us when they gave us the response You know, one of the things they asked us to do is give our red line of where we're going to, where we have, and any big deal has that that say to the buyer, the that's going to spend $85 billion in stock and cash at what point you could actually walk away. And we never thought that was material in looking at the at the merits of the business and whether it made sense to put the railroads together, and we didn't provide it. The STB wants it, we'll give it. I have no idea what the other railroads are gonna do with it. Maybe they'll they'll scurry home and take a look at and see what they can do to figure out how they can get close to that number where our walk away is. But I don't I don't understand it against the merits. We'll answer the key questions We'll make sure we do it right And if we have more information and we can add something in the in the merger as we put in the, refreshed merger application, we'll do that. But that's where we are with it, Scott. Scott Group: Thank you, Jim. Jim Vena: You're welcome. Operator: Next question is from the line of Tom Wadewitz with UBS. Please proceed with your question. Jim Vena: Good morning, Tom. Tom Wadewitz: Yes. Good morning, Jim. So I wanted to ask you about your thought process while we're in this approval phase. You talked about maybe '27. It might be like maybe implied more even for what happens with Norfolk, but I would would guess you have maybe some thoughts on kind of combined strategy. So how do you approach volume? I think Norfolk had seen some volume shift over to CSX on J. B. Hunt. Don't know if there's any risk to your volume, but you think volume as you're in this kind of broader approval phase before you can run the railroad combined do you say, hey, we got to be aggressive on volume and kind of win volume back? Or get as much volume as we can, or is this like, hey. You know, we don't need to be too aggressive because when we got the combined railroad railroad, then we're gonna really go out there and win. Jim Vena: Listen. I can't tell Norfolk Southern what to do. Okay? And I'm not going to say publicly because I just can't. It would be illegal for me to tell them what to do. But I'll tell you what we're doing at Union Pacific. We are looking to grow our business that's what we're going to do in 2026. We're looking for every opportunity When you serve a customer that gives you 30 railcars, and they're served also by another railroad, in Texas. We want our service level is high, and our pricing is is good, then we would expect them to give us 32 cars. And 33 cars. So we're going out to grow our business. And if you take a look at the way we handled the Canadian Pacific merger with Kansas City, I think we've done an excellent job of growing our business in and out of Mexico even though they have a seamless railroad going in. True numbers are we've done a spectacular job with FXE and with Canadian Pacific. We still ship with Canadian Pacific into Mexico and we ship with the FXE into Mexico, both northbound and southbound. So that's the way I look at it, Tom, is this year, the merger is one thing, but the fundamental of what we need to do to operate the railroad and grow our business and increase price for the value we're given and looking at the markets, and what we have to do and what's possible. Sometimes, we've got to drop price we've done that this year with some of our commodities that are single served. Because of the marketplace and what they were competing on. I've mentioned it publicly, You know, we've had to do that with the soda ash. Is this because of what's happening with their competitors that are from China with synthetic soda ash? So at the end of the day, that's where we are I expect Kenny to grow the fricking business. Otherwise, why do I need a marketing department? I expect Eric to deliver improvements in productivity Otherwise, why do I need a freaking operating department headed up by Eric? He's doing a good job. Gentlemen, you guys are doing good. Don't get me wrong. This is not me putting you on the hot seat. And Jennifer, you better freaking deliver too. Okay? So at the end of that that's where we are. Okay? So hopefully I gave you a clear view of the way I look at it. Tom Wadewitz: Very clear. Thank you, Jim. Jim Vena: Thank you. Operator: Our next question is from the line of Brandon Miclinski with Barclays. Please proceed with your question. Jim Vena: Good morning, Brandon. Brandon Miclinski: Hey, good morning, Jim and team. Thanks for taking the question. Jim, I guess, you put in context the proposed rulemaking change the FCB made on reciprocal switching and dropping the requirements to prove anti competitive behavior. Especially in the context of, like, your open access gateway proposal on the merger. As well? Jim Vena: Appreciate it. Okay. Well, listen. I I need to get these guys into it, also a little bit. And and Kenny, why don't you tell people what our position is on reciprocal switching or some open access. Kenny Rocker: Okay. Yeah. Think you hit it up early in the question. I think I think Jonathan Chappell asked it, but when you look at our service product being the way it is, we're not afraid to compete. I said that in our words, we've been able to grow again We want to expand the pie. We're not looking at just rail to rail competition. We're trying to go after over the road. We've been emphasizing that. I've shared earlier that they're from the Mexican motto. Growth on the international side, the over the road, from some of the ports going back east. We're looking at expanding the pie and we're doing that through the investments. We've invested in Twin Cities. We've invested in Kansas City. We've invested in the Gulf Coast also on the carload business. You've seen us show optionality Jim and also Brandon, and where we normally might have gone to the West Coast or PNW, on the grain business, we pivoted down to Mexico. So we're looking to go out there and compete regardless There was another part of the question in terms of the gateways and keeping those open. Our customers demand optionality. We want our customers to have optionality. There is no case where we go out and we would not want to provide optionality for our customers. So Eric, are you afraid of competing if we had reciprocal switching or some sort of access as long as it's fair as long as the details work to make the customer better. We if we don't deliver, somebody else should. So how's your feeling on it? Eric Gehringer: No fear at all, but I'm gonna focus on the back half of what you said. And Brandon, we talked about this to Kenny's point a little bit earlier, When you start thinking about reciprocal switching, what you have to be really cognizant of is what is the experience the customer is going to have. And you can horribleize it, I'm not going to horribleize it. But even in your average scenario, if it's not designed properly, that car or that collection of cars that the second carrier is now handling, they're gonna be in a terminal at least for a day or two. And so now you've added somewhere between, say, twenty and fifty hours of dwell to that car. That's not what customers want. At least that's not what our customers want. Our customers want us to seamlessly pick up the car, take it to our terminal, process through it quickly like our record dwell in fourth quarter of nineteen point eight hours, and get it an outbound train. So how we design this, in fact, specifically how the STB designs this, we need to make sure that we're really cognizant of is it achieving the ultimate goal of our customers, which is to be able to deliver the transit time that they promised their customers. And if I can add one thing, is, and we've done it. So we work with customers to build in And in fact, we have two places that we're going through the process to get three places. Jennifer, that's right. You're right. Three places that we are in the process of going through the through the Where customers are single served, regulatory environment to be able to build in. and we're willing to spend our money. That's the way it should be. Business should not be you get a freebie from somebody else. Like, I don't know. I'd have a heart time if I had a coffee shop, and I love coffee. And, you know, I'm short of coffee this morning. I need a double as espresso. But at the end of the day, if I had a coffee shop and somebody wants to set up in my coffee shop to sell their coffee. If you wanna have a freaking coffee shop, build one across the street, build the next door to me, do whatever. So At the end of the day, I'm not afraid to compete. In fact, I think it'd be an advantage for Union Pacific. And the merged Norfolk Southern Union Pacific to have open access We even put more pressure on our competitors to be able to win in the marketplace if we can have a real high level of service, which we have. But on top of that, if we need to spend money, son of a gun, some of the railroads, our competitors have huge amount of money put aside. They could build into just about anywhere if they wanted to. So that's the way I look at it. It's about competition. This is not your grandmother's railroad that's afraid and protective. Somebody wants to go through, New Orleans because that's the quickest way to get to the Southeast and into Florida. We wanna go there. If you don't, what you end up doing is you lose the business. Eventually, somebody comes from overseas to take that market away from you. And we've seen that in places where people get protectionist. We're not protectionist. I'm telling you, we didn't like the last time the STB came up with a way to do service and access. It was so freaking complicated. All we were gonna do was hire lawyers. Try to figure out how to do that. And I've I've got this love hate relationship lawyers. Okay? I love them sometimes, and sometimes they bother the heck out of me. But at the end of the day, we're here to compete, and I have no problem if we have something that provides service, higher service for our customers and we'll win. And they'll pay us for that service if we provide the service that makes them better and they can win in the marketplace. We need to partner with more and more of them as we go. So listen gentlemen, thank you very much. Sorry again for the long answer, but you got me going on this issue. Thank you. Brandon Miclinski: Thanks, Jim. Sorry if it was a duplicate question. Jim Vena: Oh, don't worry about it. I love it because, you know, you need to reinforce things 10 times. So that was not a shot against you about the question. I love that we probably weren't clear the first time, so don't worry about that at all. Operator: Okay? Brandon Miclinski: Thank you. Operator: Our next question is from the line of Stephanie Moore with Jefferies. Please proceed with your question. Jim Vena: Good morning, Stephanie. Stephanie Moore: Hi, good morning. Thank you. Well, being based in Nashville here, we're pretty iced in. So if UNT is back up and running by Thursday, then I hope we're I hope we consider the same for my household. So that's pretty impressive. But I did wanna return yeah. No. It's it's pretty impressive. I did wanna maybe return to the pricing conversation You know, look, considering how strong the the network is performing and and the value our can you talk a little bit about the pricing opportunity going forward for you guys? I mean, is there something that needs to happen from a industry standpoint to bolster pricing? You know, is this just a function of an improving freight backdrop? And then, you know, how is UNP specifically positioned post merger as well? Thanks. Kenny Rocker: You asked the question. So we've got two structural things that are going on. And Jennifer, talked to both of them. On the coal side, we've got some mechanisms in the contract that helped us out a little bit in 2025. And we see that as we'll see what happens with that. Going forward. And then the same thing we've talked about this now, we're talking three years. In terms of domestic intermodal and where the rates are from that level and we haven't seen pricing uplift there. Now I get to make this pretty crystal clear. We have the mindset with this service product that we are pricing to those levels. We have the mindset that has not we haven't backed away or changed anything on how we're looking at the pricing. Have those two structural things that we talked about. Outside of those, the teams are doing a very good job sitting down with customers, sharing the service product that they have, and talking about opening up new markets for growth and or on the renewal. So, there is no change whatsoever I need to make sure we're all on the same page on that. Jim Vena: And service drives price. Kenny Rocker: Service drives price and I've Service drives price. We're consistent with that. So hurry up. Jennifer Hamann: Yes. And rail is still more price competitive than truck. Jim Vena: And rail is more price competitive than truck. Stephanie Moore: Yes. Jim Vena: Thank you very much. Thanks for the question. Operator: The next question is from the line of Harry with Citigroup. Please proceed with your question. Jim Vena: Ari, good morning. Ariel Rosa: Hey, Jim, good morning. Thanks for taking the question. So I know a number of people have asked about reciprocal switching, but I actually wanted to broaden the question out a little bit more. Just if we could talk about the relationship between the class ones and the STB, know if you would agree with this. I know you've been railroading a long time. It it seems to me that over the last twenty, twenty five years or so, the STB has been relatively hands off with the rails as long as service has been pretty good. But now as we think about kind of transcontinental mergers, just scale of of the rails post UPNS, assuming it goes through. Is there anything that concerns you where the STB might say, just given the size of the railroads in that in that scenario, that the SUV says we need to be more We need to be more aggressive in our regulatory approach and how we think about protecting customer interests. And I guess, is there anything I know you said, obviously, competition doesn't concern you, but is there anything that would concern you you would say, okay, that's a step too far or that's something that the STB could do that would kind of impede our ability to to hit our synergy targets so that would erode margins kind of structurally over the long term. Jim Vena: The answer is no. But let me give you a little bit more feedback. So Ari, and I know you set me up to help me with this question. And I think it's a wonderful question. People People think about the railroad and the regulatory environment And they're thinking back to the September Okay? 1900 when the there was no highway system. There was vehicles were just starting to be manufactured. There wasn't trucks. So the competition was railroad against railroad was the key way and boats using water to be able to move products. If you actually move to today, we have if you look only in the railroad, you could say that we have X amount of business. But if you actually look at all the business, everything that's moved railroads have a pretty small percentage. Of the total business that's out there that's being moved. So our competitor is trucks. And vessels and international vessels coming in with competition. It is Brazil moving products into the largest soybean crushing facility, which is in Regatza. Okay, which is in Mexico. And that's our competition. So at the end of the day, we have to stop thinking about the railroads And if we end up with 38% or 40% of the total market, we hope to grow it, But if that's where we end up, it's a small piece. The other thing is is then this is real philosophically real important. Listen, the other railroads we go we're going back and forth lots. They're smart people that operate those other railroads. Okay? I know a lot of people in the other railroads, and they're smart people. And we should be proud as a nation that with all the regulations and everything that we do, from safety and everything else, I would put the railroads in The United States Of America up against and in North America up against anybody. No one has a railroad that can move a product at the price we move it and how safe we move it as an industry. So we can go back and forth. That's just normal business. I don't know why it's part of the railroad business. Know why they're doing it now because they're afraid to compete against us. They're up gonna have a stronger competitor. But at the end of the day, I think the regulators know they can't wreck this industry. If they wreck this industry by over by making it over complicated, trucks are getting more efficient. They have no if ands or buts, and I use Waymo as an example, but there's truck out there running right now to see how they can automate and have less people with more products in a truck, okay, or multiple trucks. That's our true competition, and that's where we have the win. STB are bright people. Okay? I've got to know Patrick a little bit, I can't talk to him very much anymore. Just because of, they're going through this merger plus the other two. Okay. Michelle and Karen, but at the end of the day, they're smart. They know they don't want to wreck the industry, but we also have to look forward and quit looking backwards to 1890 for a merger that happened in 1995. Okay? I had black curly hair. Big mustache. I looked cool back then. Okay? Not so cool anymore. But at the end of the day, technologies moved ahead, how we operate, information flow, how fast we can get information. Okay? Using AI, it tells us exactly, I knew what was happening on the railroad five minutes after I got up. I didn't have to phone anybody. Okay? So I sent, Eric a a little note thanking him in team on how well they're doing on recovering real fast. But at the end of the day, that's where we are. So answer to get back to the first simplified non AI generated answer, the answer is no. I'm not worried. Ariel Rosa: Okay. Very helpful, Jim. Thanks. Jim Vena: You're welcome. Operator: Our next question is from the line of Rikka Hamed with Deutsche Bank. Please proceed with your question. Jim Vena: Good morning. Megan: Good morning. This is Megan on for Richa. Thanks for taking my question. My question is for Jennifer. Oh, thanks. Laid out the full year expectation for compensation per employee to be up four to 5% year over year and mentioned opportunities to offset the increasing wage and benefit inflation through a few things like process improvements, and technology. Could you just clarify if that 4% to 5% increase includes your off offsetting efforts or if those represent potential upside improving costs? And any color that you're willing to share on opportunities that you've already identified would be really helpful. Thanks. Jennifer Hamann: Sure. So, yeah, the four to 5% that we say is what I'll call that the net compensation for employees. That already takes consideration what we're planning to do. And when you think about the drivers of that inflation this year, it's really three things. It's the new agreements that we've signed and the wage inflation. It's increases to health and welfare, so higher benefit cost. As well as higher payroll taxes as they raise the limits every year in terms of what's tax on a Tier one and Tier two basis. So those are the three main drivers. In terms of what we're doing to offset that, it's really across the board. And Eric's team is certainly a big part of that, doing more with RCL, taking more car touches out so that you need fewer people working in the yards. Doing more in terms of automating our switch operations, Eric, you wanna go into a little bit more of that? Eric Gehringer: Yeah. You hit three of the really important ones. The other one that really stresses how we operate the railroad. When I look at other railroads, I see them take on initiatives where they they've got some spend, say, dollars 70,000,000 on some and they set a goal to reduce it by 2%. That's not how we do it here. Here at Union Pacific, we look at the fundamental. What is the thing that we have to do or the collection of things that ultimately result in the railroad running even better And then we like to say the cost falls out. So when you see our record number on car velocity, 9% above a record quarter last fourth quarter when you see our locomotive productivity. That's what I would encourage you to focus on. Watch as we continue. It's tough work. When you put up as many gains as we put up, right, getting the next percent is tough. But as I tell my team all the time, we're in the business of doing hard, and and my team's our team, excuse me, is has delivered on that, and we'll continue to deliver that in twenty six. Jennifer Hamann: Yeah. And that's where you see the continued gains on the workforce productivity, right? Exactly. Jim Vena: So less people, even though the cost per employee might be up. Megan: Yeah. Jim Vena: Right, the total cost for the company is in a different place just because of the productivity gains. So we we will continue to see and you can see that from where our headcount direction has been over the last few years. Yes, up 2% volume in 2025, total with down 3.5% on the workforce. Exactly. And let's not miss that because that's how you take care of the inflationary cost per employee is you need less employees to do the same amount of work. Okay? Good question. Thank you very much. Operator: The next question is from the line of Brian Ossenbeck with JPMorgan. Please proceed with your question. Jim Vena: Good morning, Brian. Brian Ossenbeck: Hey, good morning. Thanks for taking the question. Want to keep you too much longer from that double espresso. Brian, it's a good morning, Brian. I got nothing else to do today, okay? This is the most important thing I need to do today is is, make sure that people understand what we're doing. So appreciate the you hanging on. Alright. Well, thank you for your time. So just to kind of follow-up ones really. Eric, you just mentioned you're in the business of doing hard. It's hard to miss all the records you've been setting, but you're still expected to reset the bar and and push higher. You gave a few comments about how you do that, but I just want to hear maybe a little bit more especially I think you have zero furloughs. So some maybe you can address sort of the the resource buffer from a labor side. If we do get positive upside or at least there'll be some uncertainty, we're not thinkingJim Vena: of right now. And then, Jim, just to wrap up maybe the M and A stuff, it doesn't sound like you're really from the STB and thinking about addressing some other comments from the rails just focused on the three main also doesn't seem like you're too concerned about the whole red line and having to provide that publicly. So maybe you can give some color on that to wrap up. Appreciate it. Eric Gehringer: Yes, I'll start. So you brought up a head count. I'll translate that into hiring. Now as we think about our hiring plan for 2026, remember a couple of things. First thing we look at is attrition. Right, to maintain our buffer of resources, one of which is our crews. We've gotta make sure that we cover attrition. And then to the person's question a few questions ago, we then do the puts and takes. So if we sign an agreement with a union, right, that may add heads, We don't expect that in 2026. But then we go through all of our technology initiatives. We go through the fundamentals that I was talking about. And we make adjustments to that. Now a lot of people start on the labor side and they should. But we also are just as focused on the non labor side. So when you think about the work that we've done over the last three years on fuel, whether it's modernizing locomotives, the expansion of our energy management system, our program for where do we partial fill fulfill, that saved us tens of millions of dollars and that trend will continue. Even when we think about modernizations alone, that's a 5% fuel savings per unit that we modernize. So I'm telling you, we can go through the whole because that's how we manage it here. We come into the year with specific initiatives There are dozens and dozens and dozens of them, and we work tirelessly to execute. And you saw the results in twenty five. And I expect it will be just as successful in '26. Jim Vena: Brian, if I can just add one thing on that is, what you don't see is we are carrying extra people, but we don't have them furloughed. We actually have guarantee payments just the way the collective agreements are that we and they're actually that buffer is built that way that we have some guaranteed payments. We've tried to structure number of employees in the right place and Eric and team do a fantastic job of driving that to be at the right place so that we don't get behind But we also are paying some guarantees nobody would see outside of us internally. So that's where the excess that buffer is situated. On the merger, listen, we always have different opinions. And it's interesting to hear the other railroads talk about about some of the things they've talked about, like we're going to shut down 300 lanes We don't have 300 lanes in intermodal to shut down. We have more than 300 customer to customer points, but trains going into terminals So we're going to keep them all open. And in fact, we want to expand that not be less. We've put on new trains that run now from LA to the West Side Of Chicago, G2, because we see a market there that we didn't operate. So that's a lane we've added and we want to continue to have the lanes that open up access for our customers east and west. Across the country. And one railroad put out that I was they sent it out to the customers that I was a leader on the EJ and E in two thousand and eight. Well, I wasn't in The US in 2008. I was battling the West Western part of the CN network. And but I still got credit for whatever happened on the EJ and E. So that's why I like to talk about fact, not fiction. So bottom bottom line is is is as we move ahead, going to have to give some things. And we know that. Like this red line I don't like it. I don't see what the benefit, but it's not about Jimvenna. It's about what the STB thinks. And they also need to be reasonable and understand understand that we're doing the right things because we're not holding anything back. We've told them black and white, day one when I called into the STB to tell them that we were gonna merge, I said, tell us what you want, and we will provide it. There's no big secret. I think we're pretty open about fundamentally who we are, what we do, what we're trying to do move forward. And there isn't any big secret because it's such a compelling case. So I don't like it because I don't think it adds to the merits but guess what? I wish Jim Benna had a a totalitarian system that I could get every decision that I want, but I don't even get it at home with my wife and kids, for god's sakes, let alone with the regulator, and I'm good with that. That's just part of the process, and we knew that's what it was gonna look In fact, sometimes I don't even get it here in the company. Eric tries to tell me what to do. Jennifer, for sure, okay, tells me what to do. And Kenny, he's a little he's my a really good salesman. Okay? I always keep my hands on my wallet when he's around and make sure he doesn't take $10 out of my pocket. But at the end of the day, that's just the way, life works and, we'll work through this. Because it's a compelling piece of business and compelling for our customers, the country, okay, and our employees. And I'm looking forward to when we have this railroad put together. Brian Ossenbeck: Alright. Very much. Very helpful. Jim Vena: You're welcome. Operator: Final question is from the line of Ravi Shankar with Morgan Stanley. Please proceed with your question. Jim Vena: Ravi, good morning. Madison: Hi, it's actually Madison on for Robbie. Thanks for for fitting us in. Jim Vena: Oh, no problem, Madison. How are you this morning? Madison: I'm good. Thanks so much for for all the color. I think I just have one kind of more of a cleanup question, not an m and a, so I'll give you a break on that. I know you had highlighted in the beginning of the call the fact that winter storm had been having on some operations. I was just wondering if you were able to quantify at all what you think the impact on the quarter could be from the recent weather or if you just have any more color right there? Jennifer Hamann: Yeah. I mean, it's going to add a little bit of cost to us, and that's really cleanup cost, little crew delay, limos, lodging, those types of things. Probably a little extra propane for switch heaters because we lost commercial power in several places. But the big thing that we'll see sometimes in winter storms is lost revenue. If you've got long customer shutdowns, prolonged periods where we're not able to serve our customers, We don't see that happening as we sit here today. Different than a couple of years ago when there was some bad weather in that Houston area, where you did have customers who were out for extended periods. That was much more impactful. Again, as we sit here, we don't see that. So we'll look to make up the lost carloadings. You'll certainly see that reflected in next week's loads when we report out to AAR. But with a lot of the quarter in front of us, basically two months left, I think we'll make that up and really just be left with a little bit of extra cost from the cleanup. Jim Vena: And, you know, it's a great question, and that's why it's real important for us to have the capability to recover fast. And the faster we can recover, and that's what I like about Thursday morning numbers, looking pretty good is that those impacts are not as significant and we get back to the customers to say ship us everything you got We're ready to move and let's move ahead. So listen, thank you very much. Great question. Madison: Got it. Thanks. Jim Vena: That was the last question, Yes, Mr. Venner. That was. Let me just tie it up here real quick, okay, because I've really enjoyed the call this morning. I think it's it's great to talk about what we are doing and how we move ahead. And I appreciate the questions. I think the questions were great. Looking forward to talking to you after the first quarter results. But going to operate this railroad in the best way we can. With all the talent we have. And people out in the field, that do a spectacular job At the same time, we work through the process for the merger. I'm excited. The whole team is excited. We get up every morning We could have just left it alone and not worried about a merger and just, ruled it out for a couple of years, you know, ride the horse out in the range, have a little bit of fun. Go out to the Super Bowl, go do whatever the heck we do when we're supposed to be working. But guess what? I'm not into that and neither is this team. We are here to deliver for our customers and win in the marketplace and be the best railroad in North America. So we're challenged by our competitors. They're smart. They want to beat us. And at the end of the day, I love it. Let's go challenge and we'll talk to you all later on. Thank you very much for taking the time to spend it. A little bit of time with us this morning. Thank you. Operator: Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.
Operator: Hello, everybody, and welcome to the Popular, Inc. Fourth Quarter 2025 Earnings Call. My name is Elliot, and I will be coordinating your call today. If you would like to register a question during today's event, please press 1 on your telephone keypad. I would now like to hand over to Paul Cardillo. Please go ahead. Paul Cardillo: Good morning, and thank you for joining us. With me on the call today is our President and CEO, Javier Ferrer-Fernández, our CFO, Jorge Garcia, and our CRO, Lidio Soriano. They will review our results for the full year and fourth quarter and then answer your questions. Members of our management team will also be available during the Q&A session. Before we begin, I would like to remind you that during today's call, we may make forward-looking statements regarding Popular, Inc., such as projections of revenue, earnings, credit quality, expenses, taxes, and capital, as well as statements regarding Popular's plans and objectives. These statements are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings release and our SEC filings. You may find today's press release and our SEC filings on our webpage at popular.com. I will now turn the call over to our President and CEO, Javier Ferrer-Fernández. Javier Ferrer-Fernández: Thank you, Paul, and good morning, everyone. Please turn to slide four. 2025 delivered results that reflect the strength of our franchise and the continued stability of the Puerto Rico economy. Our annual net income of $833 million increased by $219 million or 36% compared to 2024. Our strong fourth-quarter loan growth helped bring our total growth for the year to $2.2 billion, an increase of 6%. Banco Popular generated loan growth across most business segments, led by commercial loans. Popular Bank achieved growth in commercial and construction loans. Credit quality generally remained stable throughout 2025, aside from a couple of isolated commercial credit relationships in the third quarter. For the year, net charge-offs decreased by 16 basis points to 52 basis points. Our capital levels are strong, ending the year with a common equity tier one ratio of 15.7%. Our tangible book value per share of $82.65 increased by 21% year over year, primarily due to lower unrealized losses on investment securities and net income for the year, offset in part by dividends and our share repurchase activity. We repurchased approximately $500 million in common stock during 2025. Since resuming buybacks in 2024, we have repurchased approximately $720 million worth of common stock. We continue to believe that our shares are attractive at current prices. Additionally, in the fourth quarter, we increased our quarterly common stock dividend by $0.05 to $0.75 per share. Please turn to slide five, where we share highlights that reflect our strong operating performance in the fourth quarter. We reported net income of $234 million and EPS of $3.53, an increase of $23 million and $0.38 per share, respectively. Our results were driven by higher net interest income, an expanding net interest margin, strong loan growth, and importantly, lower operating expenses. Our credit metrics were stable in the quarter with lower NPLs and net charge-offs. We are very pleased to have exceeded a 14% ROTCE for the quarter and a 13% ROTCE for the full year, demonstrating significant progress in our efforts to improve our sustainable returns towards our 14% objective. Please turn to slide six. As of the end of the fourth quarter, business activity in Puerto Rico continued to be solid, as reflected by favorable trends in total employment, consumer spending, construction, tourism, and other key economic data. The unemployment rate of 5.7% remains stable near all-time lows. Consumer spending remains healthy. Combined credit and debit card sales for Banco Popular customers increased by approximately 5% compared to 2024. We also continue to see healthy demand for homes in Puerto Rico. Mortgage balances at Banco Popular increased by $115 million during the quarter. The construction sector continues to show positive momentum, with public and private investment fueling higher employment levels and driving cement sales to the highest level since 2021. We are optimistic that these trends will persist given the backlog of obligated federal disaster recovery funds, publicly announced real estate and tourism development projects, and the renewed focus on reshoring by global manufacturing companies. The tourism and hospitality sector continues to be a source of strength for the local economy. In 2025, airport passenger traffic reached a record of 13.6 million, increasing by 3% compared to 2024. During the fourth quarter, passenger traffic remained stable at around 3 million passengers. And according to Discover Puerto Rico, in the fourth quarter, hotel demand reached nearly 250,000 room nights, marking 11% year-over-year growth and driving a 4% increase in total revenue. We are executing on our strategic framework to be the number one bank for our customers by strengthening relationships and providing exceptional service and products to our customers. We are also focused on delivering solutions faster and improving productivity while reducing costs. Ultimately, our goal is to be a top-performing bank. In addition to the rollout of a commercial cash management platform, we also deployed a new consumer credit origination platform in Puerto Rico and The Virgin Islands. This platform provides a fully digital origination process for personal loans and credit cards. We saw an upward trend in online originations during the fourth quarter and have originated approximately $36 million since launch in the third quarter. We have continued to invest in our physical retail network to blend the speed and convenience of self-service with in-person support. Our branches continue to be an advantage in Puerto Rico and The Virgin Islands. As we continue to modernize our channels and platforms, we are creating a more seamless experience to provide our customers with the flexibility to connect with Popular through the channel that best fits their needs without compromising the quality of our service. We are also seeing the results of our focus on being simple and efficient. We have sustained and continued to simplify our commercial credit origination portfolio risk management. We are seeing faster cycle times, higher banker productivity, a more seamless customer journey, and loan growth in our small and middle market segments. During the year, we also executed a series of sustainable efficiency initiatives, including exiting our mortgage business in The United States, optimizing our mortgage servicing business in Puerto Rico, and transforming our ERP solution to a modern, cloud platform that significantly improves agility and performance. Currently, more than 800 of our colleagues are working on these projects. We are very proud of the progress that we have made. I will now turn the call over to Jorge for more details on our financial results. Jorge Garcia: Thank you, Javier. Morning, and thank you all for joining the call today. As Javier mentioned, our quarterly net income increased by $23 million to $234 million and our EPS improved by $0.38 to $3.53. Excluding the partial reversal of the FDIC special assessment, adjusted net income for the quarter was $224 million, an improvement of $13 million from Q3. These results were driven by better NII and lower expenses. As we have mentioned before, our objective is to deliver sustainable financial results. While we benefited from the FDIC reversal, we are pleased to have exceeded 14% ROC fee for the period and 13% ROC fee for the full year. In 2025, we executed targeted initiatives to improve profitability by growing the top line and capturing sustainable cost efficiencies, both of which are key drivers of the ROX enumerator. Looking ahead for 2026 and beyond, we will build on this progress and continue to drive improvement in operating leverage and profitability. At the same time, we see capital levels as a meaningful driver to improve Roxy. Our current objective remains a sustainable 14% Roxy. We will continue to use all available levers to position the company as a top-performing bank when compared to mainland peers. Please turn to slide eight. Our net interest income of $658 million increased by $11 million and was driven by higher loan balances, fixed-rate asset repricing in our investment portfolio, and lower deposit costs in both of our banks. For the year, NII increased by $259 million or 11%. During the quarter, our net interest margin expanded by 10 basis points to 3.61% on a GAAP basis. Our fully tax-equivalent margin improved by 13 basis points to 4.03%, driven by higher loan balances and lower interest expense, primarily due to lower balances and cost of Puerto Rico public deposits. Loan growth of $641 million in the quarter was strong, with both banks contributing to that increase. At BPPR, we saw loan growth of $497 million driven primarily by commercial and mortgage lending. At Popular Bank, we saw loan growth of $144 million, mainly driven by commercial lending. For 2026, we expect consolidated loan growth of 3% to 4%. In our investment portfolio, we continue to reinvest proceeds from bond maturities into US treasury notes and bills. During the quarter, we purchased approximately $900 million of treasury notes with a duration of 2.1 years and an average yield of around 3.56%. We expect to maintain a two to three-year duration in the investment portfolio. Ending deposit balances decreased by $323 million and average deposit balances decreased by $880 million. This decline was mostly driven by anticipated outflows from Puerto Rico public deposits, which ended the quarter at $19.4 billion, a decrease of $662 million compared to Q3. We continue to expect public deposits to be in the range of $18 billion to $20 billion. At BPPR, excluding Puerto Rico public deposits, ending balances increased by $525 million, driven by growth of $430 million in commercial demand deposits. Average deposits increased by $192 million. Total deposit cost decreased by 11 basis points at each bank. At BPPR, the decrease is mostly a result of Puerto Rico public deposits repricing lower by 22 basis points due to recent interest rate cuts by the Fed, while non-public customer deposit costs decreased by one basis point. At PB, the reduction was mainly related to lower online savings deposit costs and repricing of time deposits. We anticipate 2026 NII will increase 5% to 7%, driven by continued reinvestment of lower-yielding securities and loan originations in the current rate environment, as well as lower cost of Puerto Rico public deposits and online deposits at Popular Bank. Please turn to slide nine. Interest income was $166 million, a decrease of $5 million compared to Q3 and in line with the high end of our guidance. We continue to see solid performance across most of our fee-generating segments, including robust customer transaction activity during the holiday season. In 2026, we expect quarterly noninterest income to continue to be in a range of $160 million to $165 million. Please turn to slide 10. Total operating expenses were $473 million, a decrease of $22 million when compared to Q3. Excluding the FDIC reversal, operating expenses were $489 million. Aside from the reversal, the largest quarter-over-quarter variance was related to a $13 million noncash goodwill impairment taken in the third quarter. For the year, GAAP operating expenses increased by roughly 2.5% and was below our original 4% guidance as we executed on a series of sustainable efficiency initiatives and also benefited from the delay of some expenditures that will occur in 2026. In 2026, we expect total full-year GAAP expenses to increase by approximately 3% compared to 2025 as we continue to invest in our people and technology. Our effective tax rate in the fourth quarter was 16% compared to approximately 15% in Q3. In 2025, our effective tax rate was 17%, compared to 23% last year, driven by a higher proportion of exempt income. In 2026, we expect the effective tax rate for the year to be in a range of 15% to 17%. Please turn to slide 11. Tangible book value per share at the end of the quarter was $82.65, an increase of $3.53 per share driven by our net income and lower unrealized losses in our investment portfolio, offset in part by our capital return activity in the quarter. During the fourth quarter, we paid a quarterly common stock dividend of $0.75 per share, an increase of $0.05 from Q3. As Javier noted earlier, we are pushing our teams to enhance profitability through ongoing incremental revenue initiatives and expense discipline. While we have made progress over the past two years in reducing our CET one ratio, there is more we can do. In Q4, we repurchased approximately $148 million in common stock. We believe this is a good run rate for the pace of buybacks going forward, subject to market conditions. As of December 31, we have $281 million remaining on our active share repurchase authorization. In addition to the common stock repurchases, we will continue to use capital for loan growth, and we also expect to pursue a dividend increase later this year. Finally, we carry less additional tier one capital than peers and see that as another opportunity to optimize our capital structure in the future. We believe that these actions, which are subject to market conditions and board approval, will help us achieve our long-term stated CT one goal of having levels consistent with mainland bank peers plus a buffer for geographic concentration. With that, I turn the call over to Lidio. Thank you, Jorge. Lidio Soriano: And thank you all for being with us. Turning to Slide number 12. Credit quality metrics remained stable during the fourth quarter, with lower NPLs and lower net charge-offs. Non-performing assets and loans decreased by $4 million this quarter, mainly due to Popular Bank. U.S. NPLs decreased by $14 million as a $17 million mortgage relationship returned to accrual status, offset in part by higher commercial NPLs. BPPR NPLs increased $5 million, with commercial up $8 million, consumer up $3 million, offset in part by an $8 million decrease in mortgage NPLs. Inflows of NPLs declined by $194 million, primarily in BPPR, as the previous quarter included inflows from two unrelated commercial relationships totaling $188 million. The ratio of NPLs to total loans held in the portfolio decreased three basis points to 1.27%. Turning to slide number 13, net charge-offs amounted to $50 million or annualized 51 basis points compared to $58 million or 60 basis points in the prior quarter. This quarter's results include $5 million in recoveries from the sales of previously charged-off auto loans and credit cards. Excluding this, the net charge-off ratio was 57 basis points. Net charge-offs in BPPR decreased by $7 million, driven by a decrease in commercial net charge-offs as the prior quarter included a $40 million charge-off related to a single borrower. In 2025, net charge-offs were 52 basis points, an improvement of 16 basis points from last year, driven by lower consumer net charge-offs. For 2026, based on current trends and macroeconomic outlook, we expect annual net charge-offs of 55 to 70 basis points. The allowance for credit losses increased by $22 million to $808 million, mostly in BPPR, due to higher reserves for the commercial portfolio driven by higher balances, specific reserves, and loan modifications, coupled with higher reserves for consumer loans due to changes in FICO mix. The compression ratio of the ACL to loans held in the portfolio remains stable at 2.05%, while the ratio of the ACL to NPLs was 162% compared to 157% in the previous quarter. The provision for loan losses was $71 million, down $3 million from $75 million in the prior quarter. For the BPPR segment, the provision was $72 million compared to $74 million in the previous quarter. With that, I would like to turn the call over to Javier Ferrer-Fernández for his concluding remarks. Javier Ferrer-Fernández: Thank you, Lidio and Jorge, for your updates. Our fourth-quarter results closed out the year on a high note. We are very pleased with our financial performance in 2025. We increased revenues, maintained expense discipline, generated strong loan growth, and improved customer deposit trends. I am urging our teams to remain focused on deposit growth, loan generation, and particularly on our expense discipline. Our strategy is grounded in customer primacy. We are focused on deepening relationships, delivering value across channels, and simplifying how we operate. Most importantly, it is focused on translating these efforts into tangible financial results and generating value for our shareholders. In closing, I want to recognize our colleagues and their contribution to our results. I see what they do every day in our branches, call centers, and centralized offices. We are pushing ourselves to deliver more for our clients every day, and I am deeply grateful for their commitment and dedication. We are now ready to answer your questions. Operator: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Brett Rabatin with Hope Group. Your line is open. Please go ahead. Brett Rabatin: Hey. Good morning, everyone. How are you doing? Javier Ferrer-Fernández: Good morning, Brett. Doing well. Brett Rabatin: Wanted to start on the guidance and just thinking about the NII guide. And if I am reading it correctly, it kind of would suggest maybe slightly slower average balance sheet growth during 2026 and five to 10 basis points of margin expansion? And I know you guys do not like to give explicit margin guidance, but would that be within the realm of what you are looking at? And then just wanted to ask around the Roxy goal. You know, why would operating leverage that that might not increase a bit from here? Jorge Garcia: Okay. Thank you, Brett. Good morning. First, on the NII, first, we were very pleased with the 11% growth this year. The 11% growth in NII was driven by expanding the margin, being able to reinvest fixed-rate investments in our portfolio into higher-yielding assets, loan growth, and lower cost of deposits. We believe all those three factors will continue into 2026, albeit at a smaller magnitude. We will see a slowdown, for example, of the yield uptake that we will get on the reinvestment of the portfolio. But we are very comfortable with that 5% to 7% guide. We are expecting margin to continue to expand throughout 2026. I think when you look at that range, if you are looking at what drives one for the other, it really always revolves around low-cost deposit levels and our ability to reduce deposits in the US market. In terms of the ROC fee, you know, we have talked in the past, you know, that we want to be driven by the improvement in performance and net income. Right? And again, we are very pleased with the results this year. We have a lot of momentum going into 2026. We expect that momentum to continue. We want that, you know, above 14% to be sustainable. There is enough uncertainty in the world, and we want to make sure that we are absorbing any ups and downs to the cycle. We are not quite there yet. We do feel that we have a lot of momentum and like, you know, the starting point where we are at. But that is something that we want to continue to focus on. And I think this year, we try to be more intent or deliberate in how we are managing capital levels as well. And, you know, as I discussed in my prepared remarks. Brett Rabatin: Okay. And then the other question I have was just around, you know, loan growth, which was better than I expected and pretty strong in commercial. You know, when I think about that guidance for the coming year, I mean, you have had 6% ish growth the past two years. 4Q was 7%. You know, is the slowness or slower level anticipated in '26? You know, is that just conservatism around consumer, or any thoughts around that? And then as it relates to onshoring, you guys seen any opportunities related to that? Javier Ferrer-Fernández: Okay. So let's start first on the loan growth. You know, as you said, we have seen loan growth around 6% for the last couple of years led by growth in Puerto Rico. Growth in Puerto Rico was across all of our portfolio. Right? You know, commercial, mortgage, and consumer. As we look into 2026, we expect to continue to see commercial to lead the way and mortgage in Puerto Rico, but we do see a softening on the consumer, particularly around auto. So that is one part of the guide. The other growth engine for us has been in the US. You know, we are in good markets in the US. We like those markets. But we want to make sure that we are pricing for relationships and for profitable loan growth. There is some of that embedded. As well as, Brett, if you can imagine, there is always timing as loan transactions are focused on larger clients. When those things close in terms of funding that you advance or when things slow down on expected payoff, that has an impact on those kind of year-over-year kind of changes. But we are confident on the 3% to 4% guide and the momentum that we had over the last couple of years. Both Puerto Rico and our US markets. Brett Rabatin: Okay. That is helpful. Congrats on a strong year, guys. Javier Ferrer-Fernández: Thank you. Thank you. Operator: We now turn to Jared Shaw with Barclays. Your line is open. Please go ahead. Jared Shaw: Good morning. Javier Ferrer-Fernández: Good morning. Jared Shaw: Maybe, I guess, just sticking to the theme of growth outlook. When you look at fees, where do you see potential softness, I guess, in fees in that growth rate? You have had some pretty good trends during the course of the year. Jorge Garcia: Yeah. Remember, Jared, one of the things that the '25 results included, you know, roughly $10 million of kind of unusual items, you know, the recovery for prior periods of a tenant, and then we also had some refunds of federal taxes that were recognized in fee income. So that is $10 million really if you look at the guide, you are making up for that $10 million year. So there is a little bit more growth embedded in that guide than probably, you know, jumps out at you. Jared Shaw: Okay. And then on capital, nice to see the buyback and the commentary around sort of the willingness to bring capital ratios down. How should we think about M&A with that backdrop? And you certainly have the capital and the growth to do something, I guess, you know, in terms of potential sizes or anything like that? Any thoughts you could share with us? Javier Ferrer-Fernández: Sure. This is Javier. Well, our primary focus continues to be our transformation program. That said, in the US, we are always open to opportunities to add on profitable niche businesses, teams, and assets. So whole bank M&A is not a priority. However, it would be irresponsible for us to say that we would not evaluate opportunities to enhance shareholder value over the long term. I think we said this before. There is a high threshold for any transaction we may consider. And we will evaluate opportunities to grow inorganically as long as they meet the following criteria to complement our US business. First, it needs to be compelling enough for us to consider reallocating resources away from our transformation initiatives. We have a little bit over 800 employees who are currently focused on these efforts that we would need to reallocate to whatever effort related to an M&A, you know, due diligence, integration, conversion. Number two, core deposits. The transaction needs to strengthen our deposit franchise and lower cost deposits with lower cost deposits. Number three, it needs to be commercial-led, which is our key strategy in the United States. It needs to enhance our commercial-led and niche business strategy and also provide some CRE diversification. Four, it needs to be geographically consistent. So create greater market penetration in our existing footprint, increasing opportunities for value creation through cost synergies, or need to extend presence to adjacent markets or geographies. And I think, also, it needs to have the scale in terms of scale, it needs to be right-sized for our US business. I have a preference for not for MOEs. MOEs. I, you know, I do not think either of those. Not that they cannot work, but that is just my bias. And I think the last item would be cultural fit, and it is the last, but it is really top of mind. Whatever target needs to align to our culture of performance and employee well-being. So we are very mindful that not all customer demographics will make sense as a part of Popular. So I think, you know, very specifically, that is how we think today about M&A. Jared Shaw: Okay. Thanks. That is great insight. Just maybe finally for me, do you just have the spot deposit costs and asset yields at the end of the year? Jorge Garcia: We do not usually provide, you know, the spot rates, Jared. Jared Shaw: Okay. Alright. Thanks. Operator: We now turn to Benjamin Gerlinger with Citi. Your line is open. Please go ahead. Benjamin Gerlinger: Hi. Good morning. I was wondering if we could touch base on expense. Good morning. So on the expense guide, I know you guys always give a GAAP basis. So it is inclusive of investment and things like that. I know that last year, you are also investing. And this year, I am assuming 27 yards, will are they going to because it is your size investment almost like a core. So I was kind of curious. Is this year on an investment basis kind of smaller or larger or anything you could frame up sort of timing and any expectations on that relative to kind of what we have seen previously or potentially starting new projects that are multiyear in nature? Jorge Garcia: I mean, I think the run rate that we are going is not changing much. It gets to a point then where we only have so much capacity and resources to be able to do so much at once. I think in certainly in '25, we were running at that capacity level. As things roll off and we go live, you know, for example, Javier talked about that we went live on a new ERP in January 1. That releases some resources, but then a lot of those resources get reallocated to the next big project and the next thing going on. You know? So I think we all feel fairly comfortable with the level and focus of the teams. You know, we can always certainly do more, but there is a reality that you can only have so much, you know, resource and management focus on these implementations. Benjamin Gerlinger: Gotcha. That is helpful. I know we have talked about the pace of loan growth, and then also the reinvestment of the securities higher. I am just kind of looking at, like, just the average earning asset mix where it is today, and, obviously, if you could get securities into a loan, probably the best case scenario. But I am just kind of curious, is today's mix within kind of the guardrails that you want? Could you potentially see more loans down the road or just kind of curious on just how you think about average earning asset mix down two, three, four, five years from now given that you also have the public deposits? Jorge Garcia: Yeah. I mean, certainly, we would prefer to make loans, not so much necessarily on a yield perspective, but we would rather have those relationships. Right? And we feel that, you know, we can have a deeper profit base with a lending relationship than we can just buying, you know, portfolio assets. But there is a reality that we have around 30% of our deposits in Puerto Rico that require it to be collateralized, and that will keep us in the portfolio business of buying investment securities. So as we go forward, we would like to see a lower loan to the or sorry, higher loan to deposit ratio, but it will depend on the composition of our balance sheet. But, you know, as I said before, we do expect NIM to continue to grow and expand this year. And even as we go forward and we start combining maturities between our recent purchases and more, you know, legacy pre-2023 investments, we still have a good upside pickup of yield in that investment portfolio. Like, current rates, the more recent purchases do not reset very far to where we bought them versus the uptake that we get in the more legacy portfolio. So we still see that as a strong tailwind going forward. Benjamin Gerlinger: Gotcha. Okay. Thank you. Operator: We now turn to Kelly Motta with KBW. Your line is open. Please go ahead. Kelly Motta: Hey, good morning. Thanks for the question. Maybe turning back to Capital, I want to make sure I heard you correctly. It seems like you alluded to maybe additional tier one being lower than peers. Wondering if from a high level you can discuss, you know, it seems like maybe then leverage would be your guiding ratio, how you are thinking about that as we move ahead. Given the importance of capital return to the profitability improvement story? Thank you. Jorge Garcia: Sure. Thank you, Kelly. So we often talk with you all about CET1 and a lot of focus on CET1. We talked about, you know, our goal of getting that lower plus a buffer. One of the things that we do not very often talk about is that, you know, we have somewhat inefficient capital stack and that we really have very little additional tier one. Right? We have, you know, around five basis points when we look at peers, they have anywhere between 50 and 100 basis points of additional tier one. So we look at this as another lever that is an opportunity that we are evaluating and looking at. Perhaps there is an opportunity for something that is accretive without necessarily impacting the total tier one or total regulatory capital and being able to balance lowering CET1 with managed and board's intent to be more, you know, deliberate in reducing that capital over a prolonged period of time. Kelly Motta: Okay. Alright. Fair enough. And maybe I think we have hit on this a bit, but turning to loans and yields, I was surprised. You know, your loan yields have held in really nicely even with the rate cuts. Can you remind us how much of your book floats and I do not believe you usually provide it, but I will try. Any, you know, new production rates would be really helpful here. Thank you. Jorge Garcia: Yes. So a couple of things on loan yields. We are still seeing loan growth in Puerto Rico on the consumer side to be, you know, flat or above and with the exception of credit card, but in the quarter, we still saw an improvement in auto yield and flat in personal loans. And, you know, we talked about in the past that, you know, we just have the low beta on the way up. You know, we did not pass through all the increases in the loan pricing, and we are seeing kind of the benefits. A little bit of the opposite behavior that we see in our deposit base in Puerto Rico. I do not, you know, I think last quarter, we talked about where I do not know how long that is going to continue. You know, as I said in talking about loan growth, we do see a softening in consumer demand, particularly around auto. So it would seem logical to me that we start seeing some lower pricing there as people compete for the production. In terms of variable, it is around 25% of our total loans are variable or floating. Most of that is commercial loans. I think both portfolios around 40% of commercial loans are floating. And then remember, we do have the credit card. We have, you know, the construction portfolio that floats. And in terms of new yields, we do not provide that. Kelly Motta: Okay. Fair enough. Last one, if I can slip it in. I apologize. This was addressed already. But with the charge-off, 55 to 75 basis points is certainly lower than, you know, historically, what we have seen in Puerto Rico, but a step up from 2025. I would imagine that is mostly on the consumer side, but can you kind of piece together the outlook here of what you are seeing, how you came to that 55 to 75 basis point range, any movement between now and, you know, what gets you to that higher range in '26? Thank you. Lidio Soriano: Yep. Small correction, Kelly. I mean, we provided for 55 to 70 basis points. So the high end was a little bit lower than 75 basis points. Yeah. I mean, generally, before going to the details, I mean, we see have a very stable outlook. We think the Puerto Rico economy continues to be stable with moderate growth, and that is the outlook that we have for next year. Under that context, we believe that, generally, our consumer portfolio will continue to behave as they have in 2025. We do account for potentially some charge-offs of some larger commercial relationships that we have reserved for. So that is embedded in the range that we have provided to you. So that explains a little bit of the rationale. Kelly Motta: Thank you so much. I will step back. Operator: We now turn to Arren Cyganovich with Truist. Your line is open. Please go ahead. Arren Cyganovich: Thank you. You could talk a little bit about whether or not you are seeing any kind of deposit competition in Puerto Rico and your expectations for deposit growth in the year? Javier Ferrer-Fernández: Well, I think clearly, there is competition in the market. You know, you can see from our numbers that we have grown deposit balances. And we expect to do the same this year. But there are a few banks in the market and also credit unions. So but we are not seeing any irrationality in the pricing. So on this cycle. So I would say that it is pretty steady, and we will not, however, we said it before, we will not lose good clients to pricing deposit pricing. So again, we are going to defend our position and particularly good relationships in all segments. But hopefully not do anything that is crazy. Arren Cyganovich: Okay. Helpful. And then maybe just kind of thinking broader picture. The US has really stepped up military in The Caribbean. And wondering if you are seeing any, you know, increasing presence and whether or not that is a positive from an economic standpoint to Puerto Rico? Javier Ferrer-Fernández: Well, I will say that it is a net positive. We have seen some increased activity, but it is mostly, I would not say in our branches. I am going to say it is in geographies adjacent to military bases or installations. You know, we have seen customers that are benefiting from relationships with the military throughout Puerto Rico, and we are seeing there are reports of the military entering into lease agreements for, you may imagine, you know, ports, and airports. And, again, we know of customers, clients of ours that, you know, smaller or middle market clients that have entered into contracts with the military. So that is why we believe it is net positive. Obviously, we are monitoring it. If military presence were to grow, that can only increase. So that is why I started by saying that it is net positive. We will see. It is dependent on, as you know, you know, geopolitical and forces and decisions out of the White House. Arren Cyganovich: Thank you. Sure. Operator: We now turn to Gerard Cassidy with RBC. Your line is open. Please go ahead. Gerard Cassidy: Morning, Jorge. Good morning, Javier. Javier Ferrer-Fernández: Good morning, Gerard. Gerard Cassidy: And at the risk of being called a curmudgeon again as I was on a call with one of your peers, I have to ask a question. I mean, the outlook for you folks and your peers is quite good for 2026. The economy is healthy. Credit, as you guys pointed out, is resilient. We have a steeper positive slope yield curve. Maybe it gets even more positive slope. We have got loan growth as you pointed out as well. When you look around corners, aside from the geopolitical risk that we are all aware of, when you guys have to look around corners, what are you watching out for so that we do not get a surprise this year that nobody is obviously expecting? Javier Ferrer-Fernández: Well, that is a very good question. Of course, we think about it all the time. I think that one of the themes that is in The States as in Puerto Rico is affordability. Right? I mean, we think about that and how it may impact certain segments of our clients. Right? And it is something that obviously impacts home creation, let us say, and it may impact our customers if inflation would escalate. So that is something that we think about. And the other item that we cannot control, but it obviously has an impact on our economy is the PREPA situation. The fact that the electric power authority bankruptcy is still pending. So anything having to do with the generation of electricity is a concern because it is essentially a tax on economic growth. Now we are also benefiting from the fact that gasoline is at very good levels. So we are benefiting from that. But I think those will be the two items that are kind of lurking, you know, and may bite us. But you know, we are hoping that this is a year where the PREPA bankruptcy gets dealt with. And, clearly, everybody recognizes that, you know, developing the grid and fixing this is critical for Puerto Rico's future. So we think that, you know, clear heads will prevail and we will get to a resolution that is rational for all the parties involved. Gerard Cassidy: Very good. And then as a follow-up, stepping back for a moment, you guys touched on some of the economic statistics for Puerto Rico. Can you remind us and give us some color on the onshoring of America and, you know, the building of manufacturing plants that is taking place on the mainland? I believe Puerto Rico is seeing some of those benefits as well. Can you give us some color on what you are seeing on the ground? Is there progress being made there and what that future might look like for the economy of Puerto Rico? Javier Ferrer-Fernández: Yep. Well, we can comment on what is public and maybe provide some thoughts on maybe stuff that we are listening to through the grapevine. But sure. You are absolutely right. Global manufacturers are increasingly prioritizing reshoring initiatives, and Puerto Rico is very well positioned to benefit from this trend. So during last year, multiple companies announced new investments or expansions in Puerto Rico of all sizes. And that represents about $2.2 billion in total capital investment and the creation of more than 3,500. Well, actually, I thought it was 4,600 jobs. So and I think we called it the whale. I mean, there is, again, all sizes. But the whale we call the Eli Lilly's announcement, which is a $1.2 billion commitment to modernize and expand its pharma manufacturing facilities in Carolina, and that is close to 1,100 to 1,200 new jobs. And Amgen's $650 million investment to expand its biofarm operations in Huncos, and that is another 750. Now that said, we expect, and this is the grapevine now. That is what happened last year. And it is close to 17 entities that announced new investments in Puerto Rico through the onshoring or reshoring. But the grapevine tells us that, you know, we ought to expect more announcements in 2026. And a few will be large. So but that is just grapevine. So we think that that trend will continue. And, of course, that will fuel our economy. It is not only the direct job, but as you know, this has a multiplier effect. And any such investment will generate, you know, three times what it typically generates in indirect investment. So looking forward to more announcements from the government in '26, and, of course, once that happens, you will know right away. Gerard Cassidy: Very good. And now will there be any benefits from the halftime show at the Super Bowl? Javier Ferrer-Fernández: We will see. We will see. We will see. Gerard Cassidy: More record sales. Right? We can talk about it. Thank you. It is interesting. Javier Ferrer-Fernández: I have already seen the ads. The ads are fantastic. Gerard Cassidy: Yeah. The ads are fantastic. Good. But we will see. Gerard Cassidy: Oh, that is good for Puerto Rico. Okay. Thank you. Javier Ferrer-Fernández: Yep. Absolutely. Thank you, Gerard. Operator: We now turn to Emmanuel Navas with Kwatosanda. Your line is open. Please go ahead. Emmanuel Navas: Hey. Most of my questions have been asked, but I just wanted to check in on what are the market conditions that would impact your buyback? Just is that valuation, pricing, are you targeting some sort of total return target? Just any kind of color more on the buyback pace, please. Jorge Garcia: First, Emmanuel, just want to welcome you to the call and thank you for picking up coverage for all the banks in Puerto Rico and supporting our island. So appreciate it. In terms of market conditions, I mean, you know, we tend to do these on 10b5-1 plans. So, certainly, changes in market prices that, you know, could impact the grids that we use. So that is certainly something that is something unexpected, could be an accelerator or decelerator from the target number. But, also, you know, global political, macroeconomic environment, and these are all things that impact our perception, you know, of what is happening and how quickly we want to execute on the repurchases. But I will reiterate what Javier said. We believe that we find that our current share price is very attractive. Emmanuel Navas: And the current share number in this quarter was nice. You like that pace. Correct? Jorge Garcia: We like the total volume, the total dollar that we spent to be a good baseline. Emmanuel Navas: Perfect. I appreciate that. Thank you, guys. Operator: We now turn to Timur Braziler with Wells Fargo. Your line is open. Please go ahead. Timur Braziler: Hi. Good morning. Javier Ferrer-Fernández: Hey, Timur. Timur Braziler: Trying to put a finer point on auto expectations. Can you just give us a little bit of color here, as to what current demand looks like? And as you start looking out throughout the course of 2026, do you see this being a tough comp year kind of throughout the year, or do trends start getting better maybe post-April once you kind of lapse through some of the pull forward when tariffs first got announced last year? Lidio Soriano: I will give you a little bit of perspective in terms of the auto industry and maybe a little bit of perspective in terms of the outlook for 2026. I mean, if you look historically, prior to COVID, I mean, new auto sales in Puerto Rico, you had a year above 100,000, that was a great year for the industry. Over the recent years, after COVID, numbers have been higher than that. We had years of 120,000 was the record year for the industry. This year, we are ending up the year around 111,000, which is a 9% down from the previous year. And the expectation for the industry is to be slightly down 5% from the numbers that we have. What I will say still, I mean, a year that is above 110,000 or close to 110,000, that is a great year for the industry in Puerto Rico. Timur Braziler: Okay. Got it. Thank you. And then maybe asking the expense question a different way. I think, historically, you have broken it down kind of into three different phases. With the first phase being to kind of change the mindset of the employee base and focusing on the customer, phase two being, simplify the franchise, improve the efficiency and then finally becoming a top-performing bank. I am guessing between or I am questioning, I guess, between phase one and phase two, the costs kind of associated with those, are they similar? And your comment that you had to delay some technology expenditures in '25 that are running in '26, like, are those costs similar as well, or is one of those phases implicitly more expensive maybe than some of these others? Jorge Garcia: I think the one thing that I would encourage us to think differently is there is no really phase-driven. I mean, this is an arms race every day. You know, that, you know, whether it is other banks, fintechs, other competitors, are competing. Everybody is competing for a user experience that is very unique and omnichannel. We can come up with all the different, you know, buzzwords. You know, we are happy with the level of investment that we are at. Know that there is more to do. And we are going to wake up tomorrow and have another new challenge that we will have to evaluate and put on the queue something else. Know, I think that what is important is that we are very much focused on it. We have a strong investment discipline in terms of the projects that we are green-lighting with our customer in mind, but also our employees. I think it is that combination that creates the operating leverage that we are looking for. But I think we need to really kind of think of this as a steady state and how do we focus and shift to adding value from our decisions. But, Timur, there are a lot of things here that just become table stakes. That we have got to do or risk falling behind. Javier Ferrer-Fernández: Yeah. And I do not see it as phases. I see it as a strategic framework which would have us, towards point, do our jobs every day better, faster, and quicker. To tackle competition, which, you know, is not going to let down. As you know, everything is going quicker faster. So, you know, we have a great position in Puerto Rico. We need to defend it. But also grow it. And that is exactly what we are trying to do every day. Timur Braziler: Got it. Thank you. Operator: We now turn to Brandon Bowman with Bank of America. Your line is open. Please go ahead. Brandon Bowman: Thank you. Good morning, everyone. Very nice quarter. I just wanted to build off of the last question on expenses. If we pull out the profit sharing incurred last year, it implies a little bit faster of a growth rate. I was just hoping you would be able to dissect the drivers of that. Is it the planned investments that were delayed that is causing the 100 basis point difference in the growth rate? Or is it something else? Any breakdown would be helpful. Thank you. Jorge Garcia: Yeah. Thanks, Brandon. Thanks for the question. You know, first, I think if you look at where we ended up 2025 versus our original guide and even our guidance in the third-quarter call, we did, I think, outpace or overperform in 2025. The teams have done a really good job to be focused on efficiency. We have implemented a lot of opportunities that are sustainable and will continue to generate savings, but we also had some wins that resulted in maybe a benefit that we see in '25 that we did not we will not see repeat '26, or we will see a lower level in '26 versus '25. Then when you add that to the continued investments in technology, you know, I think we have talked in the past how as projects go near live, you start doubling up on expenses as you are supporting two platforms. And kind of incurring, you know, the cost of licensing on the old platform and the cost of development and the new platform, etcetera. That tends to have some peaks and valleys, and that is part of the noise that you are seeing and comparing the run rate. But we will continue to invest in technology and continue to invest in our people and ensure that we are attracting talent. And those are the two biggest drivers when we look at year-over-year and our expectation of expense growth. Brandon Bowman: Thank you very much. Have a good day. Jorge Garcia: Thanks. Operator: We have a follow-up from Kelly Motta with KBW. Your line is open. Please go ahead. Kelly Motta: Hey. Thanks for letting me circle back. I apologize. I forgot there are so many people on this call. Just to dig down a bit the NII guide and parsing that with your commentary for margin expansion. Thinking through the funding side, mainly deposits, you know, you had some declines in brokered. You gave the range for government. Are embedded in your NII guide, do you have any, you know, thoughts around or I guess, opportunity to run off some higher-cost funding given the strong cash flows you are generating off the securities portfolio? And overall outlook for, you know, core deposits in Puerto Rico here? Thank you. Jorge Garcia: You know, of course, our objective is not only to retain, you know, client deposits, but, you know, also increase them. Right? So we have been seeing good momentum in our retail network across all segments, you know, affluent, mass affluent, and mass. We have seen strong deposit growth in commercial, really led by corporate and small business. So we expect some of those trends to continue. I think the opportunity on that NII is, you know, can we reduce the cost of the US deposits? And those are driven both by the competitive nature of online, you know, direct deposit, which are important funding sources for our US business. But we are also seeing strong competition in New York and the Florida markets. You know, the reality is that kind of for that incremental money and clients that are more rate sensitive, it is still very competitive out there, and it is our team's goal is we are very much focused on relationship growth and if that begins with the loan relationship in the US, making sure that that translates into deposit relationships. That, you know, maybe impacts our loan growth guidance as we want our team to be more focused on those relationships and that profitability. But at the end, no secret. In banking that the deposits and low-cost transactional accounts and primacy with those clients are going to be the driver of that guide. And when we look at the outperformance this year, it was really driven by the growth in deposits. Both of our markets. Kelly Motta: Got it. Thank you so much. Operator: Okay. This concludes our Q&A. I will now hand back to Javier Ferrer-Fernández for any final remarks. Javier Ferrer-Fernández: Well, thanks again for joining us and for your questions. We look forward to updating you on our first-quarter results in April. Have a good day. Operator: Ladies and gentlemen, today's call has now concluded. I would like to thank you for your participation. You may now disconnect your lines.
Operator: Welcome to the Fiscal 2026 Second Quarter Earnings Call for Applied Industrial Technologies. My name is Mark, and I will be your operator for today's call. At this time, all participants are in listen-only mode. If you wish to ask a question at that time, please press star followed by the number one on your handset to ensure the best audio quality. If at any time during the conference call you need to reach an operator, please press star 0. And please note that this conference is being recorded. I will now turn the call over to Ryan Cieslak, Director of Investor Relations and Treasury. Ryan, you may begin. Ryan Cieslak: Okay. Thanks, Mark, and good morning to everyone. This morning, we issued our earnings release and supplemental investor deck detailing our second quarter results. Both of these documents are available in the Investor Relations section of applied.com. Before we begin, just a reminder, we'll discuss our business outlook and make forward-looking statements. All forward-looking statements are based on current expectations, subject to certain risks, and uncertainties, including those that are detailed in our SEC filings. Actual results may differ materially from those expressed in the forward-looking statements. The Company undertakes no obligation to update publicly or revise any forward-looking statement. In addition, the conference call will use non-GAAP financial measures, which are subject to the qualifications referenced in those documents. Our speakers today include Neil Schrimsher, Applied's President and Chief Executive Officer, and David Wells, our Chief Financial Officer. With that, I'll turn it over to Neil. Neil Schrimsher: Thanks, Ryan, and good morning, everyone. We appreciate you joining us. I'll begin today with perspective and highlights on our results, including an update on industry conditions and the expectations going forward. David will follow with more financial detail on the quarter's performance and provide additional color on our updated outlook. I'll then close with some final thoughts. Overall, we continue to effectively manage through a mixed yet evolving end-market backdrop during the second quarter. Sales and EBITDA margins were in line with guidance despite higher than expected LIFO expense and seasonally weak sales activity in December. Our team responded well with strong underlying margin performance and cost control while continuing to expand backlogs and business funnels supporting a stronger sales trajectory into calendar 2026. We also remain active with capital deployment across many fronts, supported by our free cash generation and balance sheet capacity. As it relates to sales trends in the quarter, reported year-over-year organic growth of 2.2% was modestly below last quarter of 3%. Underlying sales growth showed signs of strengthening as the quarter progressed, with November sales up by nearly mid-single-digit percent organically over the prior year following a low single-digit percent increase in October. However, growth moderated in December with average daily sales rates notably below normal seasonal patterns. While monthly sales trends have been choppy for most of the year, we do not view December's weakness as indicative of the underlying sales trend developing across the business. Of note, December is always a noisy month, given seasonal factors that can drive variability in how customers operate plants and phase shipments. This dynamic was further influenced this year by the midweek timing of the holidays. In addition, we're encouraged by early fiscal third-quarter trends with organic sales month-to-date in January trending up by mid-single-digit percent year-over-year. Booking rates are also continued to show positive momentum across both segments. In particular, orders in our engineered solutions segment increased over 10% year-over-year in the second quarter. This is the strongest quarterly order growth rate in the engineered solutions segment in over four years, with a two-year stack trend continuing to improve sequentially. These positive trends are more in line with various underlying demand signals that have developed over the last several quarters, including improved customer sentiment and ongoing growth across our business funnels. We're also seeing slightly more positive trends across several of our primary end markets. Year-over-year trends across our top 30 end markets were relatively unchanged sequentially with 15 generating positive sales growth compared to 16 last quarter. So this is up from 11 in the prior year second quarter. In addition, when looking at our top 10 verticals, we saw six positive year-over-year, compared to five last quarter and three in the 2025. Growth was strongest in metals, aggregates, utilities and energy, mining, machinery, transportation, and construction during the quarter. This was offset by declines primarily in lumber and wood, chemicals, oil and gas, rubber and plastics, and refining. From an operational and profitability standpoint, we delivered solid performance that helped balance softer sales activity in December, and greater than expected LIFO expense, as well as a difficult prior year margin comparison as we had previously highlighted. Of note, LIFO expense came in at roughly $7 million. This was above the $4 million to $5 million range we had assumed in guidance and compares to the less than $1 million in the prior year second quarter. As in prior periods of increasing LIFO expense, our teams responded with a focus on internal initiatives, effective management of product inflation, and strong channel execution. David will provide more details shortly, but when excluding the impact of LIFO, gross margins were up both year-over-year and sequentially and EBITDA margins held firm over the prior year against a difficult prior year comparison. This performance reinforces the durability of our operating model and various self-help opportunities across the business. We also continue to execute thoughtfully against our capital deployment priorities. Of note, this morning, announced an 11% increase in our quarterly dividend following a 24% increase last year. The increase is consistent with our expectation of ongoing dividend growth as we align annual increases with normalized earnings growth and our favorable cash generation profile. We also remain active with share buybacks deploying over $140 million on repurchases during the 2026. These actions reflect confidence in our cash flow generation, as well as the value we see across Applied from our strategy, and long-term earnings potential. Further, we continue to evaluate various M&A opportunities across both our segments that could drive a more active pace of acquisitions over the next twelve to eighteen months. Our acquisition priorities remain unchanged with an ongoing focus on expanding our technical engineered solutions position across automation, fluid power, and flow control. We also remain opportunistic with M&A opportunities across our service center network aimed at optimizing our local market coverage and service capabilities. Today's announced acquisition of Thompson Industrial Supply is a great example of this. With expected annual sales of $20 million, Thompson is a nice service center bolt-on acquisition that will enhance our footprint in Southern California. They bring strong technical knowledge, and align supplier relationships as well as in-house belting and fabrication capabilities that strengthen our value-added services and competitive position in the region. We're excited to welcome Thompson to the Applied team and look forward to their capabilities. As it relates to what we see ahead, I remain constructive on our growth potential entering the 2026 and beyond. While end markets remain mixed and choppy, several growth catalysts are becoming more evident. First, our service center segment is well-positioned to support our customers' heightened technical MRO needs as they catch up on required maintenance across an aged installed equipment base. We believe there's a clear underlying trend developing around this theme. Of note, our US service center sales were up over 4% year-over-year the second quarter inclusive of seasonally weak December activity. We saw growth across both strategic national accounts as well as our local accounts. Local account sales growth strengthened as the quarter progressed which is an encouraging signal for broader industrial activity. We also continue to see stronger activity across several of our heavy U.S. industrial verticals that are break-fix intensive. This includes primary metals and aggregate markets where related service center sales were up by a double-digit percent year-over-year in the quarter. Segment booking rates were positive in the quarter while month-to-date in January segment organic sales are trending up by a mid-single-digit percent year-over-year. Our scale local and consistent service capabilities and technical knowledge of motion control products and solutions are driving greater growth opportunities in both legacy and emerging end markets. We also continue to benefit from sales process initiatives ongoing pricing actions as well as increased traction from our cross-selling efforts. During November, our service center leadership teams gathered in Cleveland to collaborate on our strategic growth initiatives cross-selling opportunities, and operational requirements moving forward. There remains significant excitement and energy surrounding our core business today, and our teams are making notable progress deploying a number of strategic actions designed to further catalyze our growth long-term. Within our 2026, we're starting to see this play out. With segment organic sales trending up by a high single-digit percent year-over-year month-to-date in January. In addition, we expect increased customer activity across our technology vertical which represents about 15% of our engineered solutions segment. Of note, we continue to receive positive demand signals from our semiconductor customer base. This aligns with broader market indications suggesting a multiyear upcycle is emerging for semi wafer fab equipment. As a reminder, semiconductor space drives the bulk of our technology vertical participation where we provide various fluid conveyance, pneumatic, and automation solutions to wafer fab equipment manufacturers and other providers along the value chain. Many of our solutions are directly specified into wafer fab equipment across both new and established equipment platforms. I would also highlight recent investments we've made in engineering systems and production capacity that should provide support to fully leverage these demand tailwinds moving forward. Combined with new business tied to broader data center build-out, we believe our technology vertical could provide a nice tailwind to our organic growth in coming quarters. Our automation operations are also in solid position to drive stronger growth moving forward. Automation orders were up 20% year-over-year in the second quarter. We expect various secular tailwinds to continue to positively influence demand for our advanced automation solutions, including structural labor constraints, heightened focus on safety and quality, and North American reshoring activity. These dynamics are accelerating the adoption of collaborative and mobile robots, machine vision, and IoT solutions as well as require strong application and engineering support that aligns well with our market approach and value proposition. In addition, our flow control team is focused on capturing growth developing within life science, pharmaceutical, and power generation markets across the U.S. With established product portfolios and leading technical capabilities around calibration services, instrumentation, steam and process heating, and filtration we are favorably positioned to win in these markets. Year-to-date, flow control sales have been modestly lower year-over-year, partially reflecting muted activity across the chemicals end market as well as a slow pace to project shipment phasing in prior year comparisons. However, flow control orders were up by a high single-digit percent year-over-year in the second quarter. We expect more productive backlog conversion into the 2026 based on customer indications and firming end market trends as well as broadening maintenance and capital spending on process flow infrastructure across the U.S., in support of energy security, and power generation capacity. Lastly, we're encouraged by improving trends across our industrial and mobile OEM fluid power operations where organic sales were positive year-over-year for the first time in two years during the second quarter while orders were up by double-digit percent over the prior year. This positive development is notable considering the drag this area of our business has had on our growth the past several years. As a reminder, our Fluid Power customer base includes thousands of small and midsized specialty OEMs across a diversified industry base. Our leading innovative engineering capabilities access to premier supplier technologies, and customer reach are driving new business opportunities with these OEMs as they begin to integrate advanced power and control features into their next-generation equipment. Structurally higher, we believe demand for these features will be as OEMs begin to reaccelerate production giving an increased focus on power consumption machine performance, and automation. Combined with our enhanced footprint and capabilities following our Hydrodyne acquisition last year, our Fluid Power operations are in a strong position moving forward. As it relates to Hydrodyne, we marked the acquisition's one-year anniversary at the December. I want to take a moment to thank our team's combined efforts over the past year in making this acquisition a great early success. We've achieved notable growth operational momentum from this transaction, that stands to further augment our earnings potential as underlying end market demand begins to build. Of note, Hydrodyne generated over $30 million of EBITDA in the first twelve months of ownership, with contribution building year-to-date in fiscal 2026 as we continue to align teams, and realize synergies. During the second quarter, Hydrodyne's EBITDA margins exceeded 13% and were modestly accretive to our consolidated EBITDA margin performance. We've made tremendous progress in leveraging complementary solutions. Harmonizing technical capabilities and systems, and driving operational efficiencies across the combined operating platforms. We're connecting Hydrodyne with new growth opportunities by cross-selling their value-added fluid power repair solutions across our legacy US Southeastern customer base. We're also enhancing their capabilities. Serving the rapid pace of innovation, development, across Fluid Power mobile systems, as well as providing fluid conveyance solutions tied to data center thermal management needs. Moving forward, we expect Hydrodyne's contribution to be increasingly accretive to our underlying growth and margin performance as this positive momentum feathers into our organic results. At this time, I'll turn it over to David Wells for additional detail on our results and outlook. David Wells: Thanks, Neil. Just as a reminder before I begin, as in prior quarters, we have posted a quarterly supplemental investor presentation to our investor site for additional reference as we recap our most recent quarter performance. Turning now to our financial performance in the quarter. Consolidated sales increased 8.4% over the prior year quarter. Acquisitions contributed six points of growth while the impact from foreign currency translation was a positive 20 basis point impact. The number of selling days in the quarter was consistent year-over-year. Many of these factors, sales increased 2.2% on an organic basis. It relates to pricing, estimate the contribution of product pricing on year-over-year sales growth approximately 250 basis points for the quarter. This is up from approximately 200 basis points in the first quarter and primarily reflects the effective pass-through of incrementals now supplier price increases in recent periods. Through the consolidated gross margin performance, as highlighted on page seven of the deck. Gross margin of 30.4% was down 19 basis points compared to the prior year level of 30.6%. During the quarter, we recognized LIFO expense of $6.9 million which was $2 million to $3 million above our expectations and up meaningfully from prior year second quarter LIFO expense of $700,000. On a net basis, this resulted in an unfavorable 54 basis point year-over-year impact on gross margins during the quarter. While the LIFO expense increased partially reflects broader cost inflation, and supplier price increases, we also prudently increased our level of inventory investment in the quarter based on our outlook and firming demand developing across the business. As a reminder, our use of LIFO accounting accelerates the recognition of price inflation on our results, which during periods of increasing inflation and inventory expansion reduces our tax burden and drives cash savings. Importantly, from a reported gross margin standpoint, the impact is more about timing of when we recognize product inflation and is not a change in the underlying economics of the business. As inflation levels out, and eventually normalizes, we would expect this impact to unwind accordingly as we saw in prior periods of greater inflation, and LIFO expense. That said, as Neil mentioned earlier, our team responded well to these inflationary headwinds through various countermeasures, including effectively managing supplier price increases channel execution, and margin initiatives. We also benefited from positive mix tighter Hydraland acquisition, as well as stronger growth across local accounts. Excluding record expense, gross margins of 31% up 34 basis points year-over-year against the strong prior year comparison. As it relates to our operating cost, selling, distribution, and administrative expenses increased 11.1% compared to prior year levels. On an organic constant currency basis, SD and A expense was up 1.4% year-over-year compared to a 2.2% increase in organic sales. During the quarter, ongoing inflationary headwinds and growth investments were balanced by solid cost control, and internal productivity initiatives. Overall, modest organic sales growth coupled with M&A contribution, favorable underlying gross margin performance, and cost control, resulted in reported EBITDA increasing 3.9% year-over-year inclusive of a 460 basis point year-over-year LIFO expense headwind. This resulted in EBITDA margins of 12.1% which was down 52 basis points from the prior year level up 12.6% inclusive of a 54 basis point year-over-year headwind from higher LIFO expense. The 12.1% reported EBITDA margin was within our second quarter guidance range of 12 to 12.3% despite greater than expected LIFO expense which was approximately 15 to 25 basis points unfavorable to our expectations. Reported earnings per share of $2.51 was up 4.6% from prior year EPS of $2.39. On a year-over-year basis, EPS benefit from a lower tax rate and reduced share count. Partially offset by increased interest, and other expense. On a net basis. Turning now to sales performance by segment, as highlighted on slides eight and nine of the presentation, sales in our service center segment increased 2.9% year-over-year on an organic basis when excluding a 30 basis point positive impact from foreign currency translation. The organic sales increase in the quarter was primarily driven by price contribution as volumes were relatively unchanged year-over-year reflecting seasonally slow sales activity December and lower international shipments. Across our US operations, sales increased more than 4% over the prior year, reflecting growth across both our national, and local account base. US service center sales benefited from firming demand across several core end markets as well as Salesforce investments and cross-selling actions that continue to read through within a mixed demand backdrop. Segment trends also continue to be supported by favorable growth across Fluid Power MRO sales. Segment EBITDA increased 2.2% over the prior year inclusive of a 340 basis point year-over-year LIFO headwind. While segment EBITDA margin of 13.3% declined 14 basis points inclusive of a 45 basis point year-over-year LIFO headwind. Excluding the impact of LIFO, the year-over-year improvement in segment EBITDA and EBITDA margin primarily reflects underlying operating leverage on stronger U.S. Sales, channel execution, and cost control. Within our engineered solutions segment, sales increased 19.1% over the prior year quarter with acquisitions contributing 18.6 points of growth. On organic basis, segment sales increased point 5% year-over-year. The increase was primarily driven by price contribution as well as modest volume growth across Fluid Power Mobile and industrial OEM customers partially offset by lower flow control sales. Sales across our automation business increased 3% on organic basis over the prior year. Representing the third great quarter of positive organic growth. Segment even increased 4.4% year-over-year over the prior year, inclusive of a 400 basis point year-over-year LIFO headwind primarily reflecting contribution from our Hydrodyne acquisition partially offset by lower organic EBITDA and muted sales trends in the quarter. Segment EBITDA margin of 14.3% was down roughly 200 basis points from prior year levels, inclusive of a 55 basis point year-over-year LIFO headwind. Excluding the LIFO impact, segment EBITDA margin declined was primarily driven by lower flow control sales, and unfavorable M&A mix as well as a difficult prior year comparison from record performance across our engineering solutions segment during the 2025 tied to favorable mix, as we had previously highlighted. Moving to our cash flow performance, cash generated from operating activities during the second quarter was $99.7 million while free cash flow totaled $93.4 million representing conversion of 98% relative to net income. Compared to the prior year, free cash was up slightly as greater working capital investment was balanced by ongoing progress within total initiatives. From a balance sheet perspective, we ended December with approximately $406 million of cash on hand and net leverage at point three times EBITDA. Our balance sheet is in a solid position support our capital deployment initiatives moving forward including accretive M&A, dividend growth, and opportunistic share buybacks. During the second quarter, we repurchased over 346,000 shares for $90 million bringing the year-to-date total to over 550,000 shares for $143 million. Turning now to our outlook. As indicated in today's press release, and detailed on Page 12 of our presentation, we are adjusting our full year fiscal 2026 EPS guidance following our first performance and updated outlook. We now project EPS within the range of $10.45 to $10.75 based on sales growth above 5.5 to up 7% and EBITDA margins of 12.2 to 12.4%. Previously, our guidance assumed EPS of $10.10 to $10.85 on sales growth of four to 7% and EBITDA margins of 12.2 to 12.5%. Our updated guidance now assumes LIFO expense of 24 to $26 million compared to prior guidance of $14 million to $18 million. In addition, we announced two hundred ten two hundred thirty basis points of year-over-year sales contribution from pricing up from prior guidance of 150 to 200 basis points. From an organic sales perspective, we are now assuming a 2.5% to 4% increase for the full year compared to our prior assumption of up one to 4%. This takes into account first half organic sales performance as well as early third quarter organic sales trends which as noted earlier, are trending up by mid-single-digit percent over the prior year in January. I would note prior year sales comparisons are slightly more difficult in February, March, compared to January. In addition, we continue to assume ongoing macro and policy uncertainty will influence customer spending behavior and shipment activity near term. We believe this could result in ongoing variability in monthly sales growth, any greater clarity on the macro backdrop, or incremental support lower interest rates, and fiscal policy. At the midpoint of our updated guidance, we assume organic sales increased by approximately 4% year-over-year in the 2026. With third quarter organic sales expected to increase by a low single-digit to mid-single-digit percent over the prior year. We also project inorganic M&A with sales and modest foreign currency tailwinds to contribute approximately 50 basis points of year-over-year growth in the second half of the year. The M&A contribution includes today's announced acquisition of Thompson Industrial Supply, as well as our May 2025 acquisition of Iris Factory Automation. Our guidance does not include contribution from future M&A or additional share repurchases in the second half of the year. From a margin perspective, we expect third quarter gross margins to decline sequentially to a low 30% range. This assumes a more normalized level of gross margin execution, relative to our strong underlying second quarter performance as well as slightly higher LIFO expense sequentially. Combined with modestly stronger operating leverage, and greater sales growth, as well as ongoing inflationary headwinds, anticipate growth investments and our annual merit increase effective January 1 we expect third quarter EBITDA margins to be within the range of 12.2 to 12.4%. Lastly, some housekeeping items. Our updated guidance does assume a slightly lower share count following second quarter share repurchases as well as a tax rate assumption of approximately 23% for the full year compared to our prior range of 23 to 24%. These slight EPS tailwinds are partially offset by an increase in net interest expense into the second half of our fiscal year following the net impact of our interest rate swap maturing at the January. With that, will now turn the call back over to Neil for some final comments. Neil Schrimsher: So to wrap up, our team executed well through the 2026. We're delivering on our financial commitments and making strong progress on our strategic initiatives. As we enter the second half of the year, we do so from a position of strength, with signs of emerging growth catalyst developing across several areas of our business. Early fiscal third-quarter sales trends are encouraging and provide a nice jump-off point. Though we remain prudent with our guidance, as we look for greater consistency in sales trajectories as we move into more meaningful seasonal months while balancing the near-term timing impact of LIFO accounting. Importantly, sentiment from both our customers and our sales teams continue to be directionally positive. And our business funnels are expanding. Technical MRO requirements are heightened entering what should be a more productive operating environment. As we move through calendar 2026 when considering potential support from lower interest rates, a more favorable tax policy, and deregulation. In addition, our industry position places us in a unique and comprehensive position. To capture growth as capital spending broadens across many of our customer verticals. This includes pro-business policies supporting greater production and investments in core legacy verticals such as metals, mining, and machinery, as well as clear secular structural tailwinds supporting multiyear cycles across semiconductor, power generation, and energy end markets. We also expect to play a greater role across the data center space. Given our expertise and product offering in areas of thermal management, robotics, and fluid conveyance. With our deep technical industrial facility domain expertise, access to critical higher engineered industrial products, and balance sheet capacity we're well-positioned to capitalize on these growth opportunities. We also remain positive on our margin expansion potential as these tailwinds drive stronger top-line growth. We continue to see a clear path to achieve our mid to high teen incremental EBITDA margin target at mid-single-digit organic sales growth. This is supported by inherent operating leverage across our business model combined with mixed tailwinds tied to the ongoing expansion of engineered solutions segment and local account growth within our service center segment. Additional support should emerge as we continue to scale our automation platform following various growth investments in recent years. Overall, we look forward to fully capturing this growth potential through the remainder of fiscal 2026. And years to come, And as always, we thank you for your continued support. With that, we'll open up the lines for your questions. Operator: Thank you. We will now begin the question and answer session. If you would like to ask a question, please pick up your handset. Press star followed by the number one on your telephone keypad. If you would like to withdraw your question from the queue, press star 1 again. As a reminder, if at any time you need to reach an operator, please press star 0. And our first question comes from the line of Christopher Glynn with Oppenheimer. Christopher, please go ahead. Christopher Glynn: Thanks. Good morning, guys. Just wanted to dive into the engineered solutions orders in the quarter. Up over 10%. I assume that was an organic basis. Just want to clarify as well as you know, what degree of positive book to bill that might denote. Neil Schrimsher: Yes. So that would be on an organic basis. And, you know, as we think about it, it broke out across the segments with automation as we talked about plus 20 fluid power, low teens, 13, and flow control, high single digit. 8%. Into this side. Book to bill was above one during the quarter, and, you know, now has been three of the last four quarters in that side. Christopher Glynn: Great. Thanks. And, on the fluid power comparisons, you know, you've you've got the destock comparison. So curious if you could sort of dissect the kind of end demand trend versus you know, better kinda kinda sell through there in alignment? Neil Schrimsher: Yeah. I think, really, the stock, destock given how that's elongated out, has really been worked through. So the performance that we saw in the mobile off highway part Fluid Power is encouraging. As well as the work that's going on with those mid-tier and smaller OEMs. We're also encouraged on the fluid power side of the amount of industrial activity I think that's similar to service centers on technical MRO requirements. That industrial customers are having to look at the aging of that installed base of it producing equipment and is giving us opportunities. And then, right, as we talked about in in the comments, we think the technology side of our fluid power is really set up well as we think about semi wafer fab equipment and also that growing participation in data center. Christopher Glynn: Okay. And last one for me. Think in the January sales up mid-single digits, you mentioned Engineered Solutions was up high single digits. And you mentioned February and March, bit more difficult comps. So do just wanna make sure I have all that right. And, also, just on the thought that maybe January had a benefit from neutralizing the December pause? Neil Schrimsher: Yeah. You you know, you think about it. There could be, right, from the December right, which we talked about or looked at from that side. From normal seasonal patterns there, right, running lower. So there could be But I think the height of some of that growth and increase we take as, we take as favorable that it it's more than just a little bit of, timing. David Wells: Yeah. And, Chris, the the other know, thoughts on you know, the trends in engineered solutions being up high single digits in January is is is correct. And that maybe another part of your question that maybe we didn't answer, but let us know. Christopher Glynn: Appreciate that. I think we got it. Operator: And our next question comes from the line of David Manthey with Baird. David, please go ahead. David Manthey: Good morning, guys. My first question is on SD and A. Organic constant currency SD and A growth was less than organic revenue growth again this quarter, which looks really good. I'm wondering as we lap Hydrodyne here, should overall fDNA come in closer to overall revenue growth next quarter. And then as we look forward, is there anything unusual in the '25 on SD and A? It looked like the sequential from the third quarter was up a greater than normal dollar amount there. And I'm just wondering if there was something unusual we should know about. David Wells: Yeah. The you know, we'll start with the sequential increase in '25, you know, third to fourth quarter, David. The couple things came into play there. There was an increase in benefit cost. You know, there's there's variability obviously in our our self-insured medical expense. But also about a million 5, you know, that that swapped around with, you know, Rabbi Trust or deferred comp that, you know, gets offset in other income. So that did skew SDNA just a little bit. As you think about, you know, kind of now as we move into third quarter, we do have the focal mirror point coming in, you know, and and lapping hydrogen to your point. So we would still work to, you know, show an increase less than the rate of, you know, the sales increase. But I would expect it to, you know, given that they said the the late last quarter was about half the rate of the sales increase in terms of the SG and A increase. We'd expect that gap to close just a little bit just given those factors coming into play. Neil Schrimsher: Hey, Dave. Just also on the prior year fourth quarter for fiscal twenty five, it was impacted if you recall by some AR provisioning that we had in the quarter. I think that was over over 2,000,000 or so year over year So that's part of the the year over year or the the the uptick in the fourth quarter trend you see there. David Manthey: Yes. Thanks. And based on your guidance, it would appear that the fourth quarter of this year is more normal, kind of, I don't know, 10,000,000 quarter to quarter increase which which looks more normal. Okay. Thank you for that. And then on capital allocation, I'm not sure if it's in the deck here, but did you mention the shares left under your repurchase authorization? And I guess in the context of I think you have about a billion and a half dollars of borrowing capacity, including some accordion features, Does does share repurchase take priority over debt paydown in the near term given the your ample access to capital and and kind of the relative share price? David Wells: You know, we we'll still be opportunistic when you look at the share repurchase. You know, we are contemplating some debt pay down you know, not the entirety of it, but given the you know, in January, the swap will roll off. So we'll work to neutralize a little bit of that, you know, added interest expense that would come with that. So you know, here again, take it in rank order priority. It's gonna be the organic growth investment. Followed by M&A, you know, followed by the dividend increase, you know, kind of 11%. You know, this quarter coming off to 24% last year. Increase. So continuing to move that in line with our, you know, increase in in earnings in the business. As well as then, you know, the opportunistic, you know, share repurchase. So we'll balance all those to your point. Plenty of, you know, you know, dry powder given the the billion 5 capacity and leverage of point three times. To really work all those angles. Neil Schrimsher: Then, Dave, we have, I think, about about 700,000 shares left on the current authorization that we had, which we had you know, up updated, I think, last last August. Time frame. And so we'll we'll continue to look at that as we as we continue to buy back shares and and update it update that accordingly as as we progress through that the current program. And then lastly, Dave, I'd just say on the M and A side, as we touched in the remarks, we feel good about the pipeline, the work the activity, touch on the potential for greater activity as we look out over the twelve to eighteen months. Really around our stated priorities of continuing to build out engineered solutions with some more select opportunities for differentiation around the service center side. So we're low CapEx requirements. We'll continue to make those. They generate strong returns, but the M and A opportunity for us, we think, remains a a good priority for us as we operate through the rest of this fiscal year and look out beyond. David Manthey: Thanks, guys. Appreciate it. Operator: And your next question comes from the line of Brett Linzey with Mizuho. Brett? Please go ahead. Brett Linzey: Hey. Good morning, Hey. Want to want to come back to the automation orders up up 20%. I I guess, how much of that do you think is related to pent up needs that were put on hold that are that are just starting to release verse new projects, capital formation that's being driven by incremental on your customers might be focused on? Neil Schrimsher: Yeah. Brett, I I don't know if I got a perfect answer to that. Obviously, we've had growing funnel equity within our automation group. And also with our service center teams walking in here today A couple of releases are getting highlighted on projects that that were in flight. But there's also a a great amount of work if we consider what is coming to The US from a reshoring standpoint, we have more customers reaching out How can they drive their efficiencies and productivity on where collaborative or mobile robots will help If they're looking at quality control or quality and inspection where vision systems can help and even just connectivity products, right, to monitor KPI and performance where perhaps people did that manually in the past. At equipment to to way to have visual panels and boards on that. So I think both are gonna be continued drivers for us. As we look out over calendar 2026. Things that we worked on on ideas and solutions but also increase new opportunities as we think about the backdrop And then things like, tax policy and outlooks are probably gonna help further accelerate some of that look from customers. Brett Linzey: Yeah. That that's great. And then just my follow ups on price. So the contribution was 250 bps in in the quarter. Curious what you're seeing here in calendar '20 from a vendor price standpoint. And how should we think about pricing contributions for the balance of this fiscal year in Q3 and Q4 as you got some wraparound and and maybe some incremental coming through? Neil Schrimsher: Yeah. We think about activity from, our suppliers obviously, those that are more calendar year based and increases, we we see those in in place. We did see some that are later year perhaps midyear around their fiscal year events. Accelerate. So we think to a large part, there's more of that that is in now We would think the third quarter has the potential to be similar to the second quarter, so two fifty basis points in that And then with the fourth quarter, given perhaps that aging or overlapping of some prior increases, maybe that moderates to a couple 100 basis points impact in the fourth quarter. And so that that's what's encapsulated in our outlook. If we look beyond that, right, hey. We will see, there could be a path to higher upside in that as we think about the direction of of LIFO that we'll have into that side of it as well. Brett Linzey: Alright. Got it. Thanks. Best of luck. Operator: And our next question comes from the line of Sabrina Abrams with Bank of America. Sabrina, please go ahead. Sabrina Abrams: Hey. Good morning, everyone. Neil Schrimsher: Good morning. Sabrina Abrams: Question. So, I know you guys did raise the pricing guide this quarter. And pricing, I guess, accelerated nicely quarter over quarter. But, you know, you did raise LIFO expense, and I would just like to ask why not assume price is going to accelerate into the second half because I would think price continues to accelerate from here. But just any color around that assumption. Neil Schrimsher: Yeah. So so as we think about touched on just a little bit there. We're seeing the announced increases from our suppliers as we think about for much of '26 Kent, or perhaps likely in place now. And then if we think about the aging or the overlap of of prior increases, that's what we're saying perhaps the price moderates to that couple 100 basis points in the fourth quarter compared to this two fifty level that we have today. Obviously, they will be close to the inputs of looking at any other metals material increases that will be coming through with suppliers and work with them to orderly take them through to the markets. But hey, that that's our view now perhaps the tariff environment is gonna stay moderated at its current level right now as we look out over the rest of the fiscal year. David Wells: I'd say too I'd add the, you know, obviously, you're seeing in the as you start looking at the comps in the back half of '25, some higher levels of pricing that that does skew year over year just a bit. Versus the first half. And then, you know, thinking about the LIFO doesn't necessarily travel in exact tandem with the dynamics that we see on the pricing despite price increases because that's also influenced by the mix of what we're purchasing. So we did have a heavier concentration this quarter of parts that we had not purchased for two, three years, which attracted a fair amount of you know, LIFO increase as we looked at the you know, the buy versus, you know, kind of the the two or three year ago price that we're carrying at. So, you know, that that is also a factor as you try to, you know, correlate those two. Sabrina Abrams: And just on guidance, on my math, I think there's an extra versus a prior guide. I think there's an extra 18¢ from LIFO expense going up. Impacted embedded in the new EPS guide, and there's another couple cents of interest expense. And then on the other side, you have the benefit of maybe a lower share count and, like, very, very modest impact from the acquisition you did. And just, like, as I think about these moving pieces and the narrowed guidance, Maybe is the right way to think about it that the core guide has been raised? Because if I sort of back out all this other stuff, I'm getting to, like, core EBIT is higher versus the last versus last quarter, but I just wanna clarify with you guys whether that's the correct way to think about it and any, moving pieces I might be missing. David Wells: Yeah. I think there's a modest increase there resulting from really the strong margin performance. You you get to strip out that life of 31% you know, gross margin performance against a very difficult comp, you know, like I said. Think about the year over year, you know, still being up. Partially driven by that high rise mix benefit. But nonetheless, you know, very pleased with the team's response to the in place in your environment. So you're seeing some of that read through. Still be cost conscious and, you know, kinda continuing to look at that. So I I you know, I'd say it's a modest increase there in the core. And then know, we think about the guide really tightening the guide at the upper end of the the previous guide. Sabrina Abrams: And and just to clarify, oh, sorry. Neil Schrimsher: No. This is Are you guys finished? Sabrina Abrams: Yeah. No. That's that's fair. So I think, yeah, if you look at the midpoint of the guidance, you know, at, you know, the organic growth we're assuming in the back half of the year, is up slightly from what we were assuming in the prior guidance that we provided. Maybe even a more meaningful amount when we look at it, you know, at at the high end. And so not a huge change, but we are assuming a little bit greater growth, organic growth on sales, in the back half relative to what we were, you know, prior. Sabrina Abrams: And just one last quick follow-up to that. Is that on the raised pricing assumption? Or is implicit ly did you raise your volume assumption? Neil Schrimsher: Yeah. It's a it's primarily tied to the the break the raised pricing assumption, but still some volume volume assumptions as well in there as well. Sabrina Abrams: Thank you. I'll pass it on. Operator: Our next question comes from the line of Ken Newman with KeyBanc Capital Markets. Ken? Please go ahead. Ken Newman: Hey. Good morning, guys. Thanks for squeezing me in. Wanted to first just touch on the margin guidance, if we could. You know, I guess there's a headwind due to LIFO here in the back half. I think the math is around, like, 30, 40 basis points. On EBITDA. But know, I would think that the high single digit the low double digit sales growth in engineered and then the automation orders being up 20% would be a decent mix offset. So maybe can you just help us think about, you know, bucketing the various moving pieces in the margin guide and what that assumes for mix versus price cost and LIFO headwinds? Neil Schrimsher: Yeah. I can, I can start? So just as we think, right, and we talked about, hey. Perhaps we moderate below the 30.4 that we had in the second quarter that, tend to 30 basis points on gross margin on the guide. I think you're right. And potential for LIFO to be a 30 to 40 basis point headwind path to things that, could counteract Right? Right. One will be, hey. What is that true path of of LIFO in in the second half? To your point on on mixed dynamics, engineered solutions, local account growth, and service centers would both be the potential for benefit in that the the further path on on know, m and a performance, you know, Hydrodyne as it comes in. Would have the, perhaps continued improvement. And then, obviously, we'll be focused on our our our price actions and ongoing margin initiatives that we have across that benefited us in the second quarter. But, hey, as as we sit here today, right, we say there is that potential for that to show up, including that higher LIFO expense that we had in the second quarter somewhat to continue on at that $7 million to $8 million impact. David Wells: Yeah. I think you strip that out Sorry. Yeah. You strip that out, Ken. I'd say, you know, the LIFO expense it it's a good story in terms of the incrementals. We're up over 20%, you know, that was implies in terms of guidance in the back half in terms of incrementals ex LIFO. So you are seeing all those things, you know, Neil indicated and highlighted there in terms of the you know, the mixed benefit, you know, flow control sales coming back the acquisition mix benefit, know, stronger, you know, engineered solution shipments, which help from a mix standpoint as well. So those things play in in addition to the the workaround pricing and and, you know, kind of the channel optimization. Ken Newman: Okay. That's that's helpful. And then, you know, just for my follow-up, you know, it it was here it was nice to hear you guys reiterating the the mid teen incremental EBITDA margin target on mid single digit growth I think the midpoint of the of this quarter's guide is slightly below that But I I wanted to get your thoughts on, you know, one, do you think you could reach that target exiting this fiscal year? And if so, you know, do you need a specific number or a contribution of volume growth to kinda get there? Well, And maybe also, you know, if we get incremental pricing versus what you're already expecting in the guide today, would you expect that to be neutral to the operating leverage or accretive? Neil Schrimsher: I can start. As we think about that leverage and then, hey, right, some of our targets that we have for the business, we think about them really from an annualized basis. But to your point, you know, we've demonstrated strong incrementals with with low single digit in volumes. As we move up Right? Those have the opportunities to to improve So as I think as we look out over calendar '26, we see that opportunity for that to play out and develop for us. David Wells: Yeah. You know? And, again, I would say that, know, at the midpoint of the guidance, you know, we would assume that the fourth quarter gets to call it, a mid teen incremental margin on EBITDA, you know, at, you know, call it, you know, that, the 4% or so type of organic growth. That we have, you know, baked in into the guidance. You know, at this point. And that includes the LIFO increased LIFO year over year. As mentioned earlier, we will have a benefit year over year in the fourth quarter assuming normalized AR provisioning given that prior year, impact that we had. And so we're getting to that, you know, call it, mid teen to high teen range, you know, at slightly below mid single digit organic growth, but feel very good as we move into you know, more stabilized and firm mid single digit organic growth environment that those that that that incremental margin guide is is achievable. Then as it relates to pricing and anything incremental, a team that's doing a great job of of managing pricing, a number of other initiatives that we have on gross margin. Countermeasures to to manage through that. And, we'll see how it all plays out. But, obviously, inflationary environment, but the team's doing a good job executing through it. Ken Newman: Very helpful. Thanks, guys. Operator: And our next question comes from the line of Christopher Dankert with Loop Capital Markets. Chris? Christopher Dankert: Hey. Morning. Thanks for, for fitting me in here. I guess just on third quarter guide, if I'm looking at what you guys have staked out from organic sales growth perspective, that seems to imply kind of a below typical seasonal growth level. I mean, I think, 5% sequentially is kind of what the midpoint implies. Longer term, you're typically up in the high single digit range. I guess, consider the December holiday timing impact, the the ES orders, snake metal pricing, Can you kind of help us square the below seasonal midpoint of that sales guidance for fiscal 3Q? David Wells: Actually, Chris, if if you look at it, the you know, given the the low to mid single digit assumption for Q3, 4% here again organic for the the the total back half. That would assume for the first quarter in quite a while, been, you know, kind of, you know, last quarter was 200 basis points below the typical seasonality, but that that's really back in line with what we'd say is normal seasonality. As we transition from Q2 to Q3. Christopher Dankert: Got it. Got it. Well, I guess in the interest of time, I'll I'll leave it there, but but thanks so much. Operator: And our next question comes from the line again from Christopher Glynn. Oppenheimer. Christopher, please go ahead. Christopher Glynn: Yeah. Thanks. Just one on the mechanics of LIFO. I you know, definitely don't claim a a deep appreciation of how it all works. But I'm wondering about the lead time dynamics, what they've been like for supplier price negotiations? Are they, you know, faster cycling than normal, or have the signals been too varied? Just wondering if there's perhaps an opportunity to standardize the the preplanning communications with suppliers a little bit more just given your long term, distinguished excellence in data and analytics? Throughout the organization on many dimensions. Neil Schrimsher: Yeah. I can start. Chris, I think suppliers are being orderly in this and, you know, hey. That's that's our expectations. As they're working on them as they develop. Obviously, you need the data. You need the files to work through on that. To be able to effectively implement. So we're not changing our our expectations or views that that that has to be orderly. And so I think, suppliers are understand that, it's best for them as well. So they're they're working to do that. And so it kinda led, a little bit, I think, most of the annual increases are in, I think those that we're contemplating are more historically kinda mid or their more fiscal year side. Have accelerated. I think most of those are in. So from a price increase standpoint, I won't say that that they're they're finished at metals or something else moves. But then I think most of those are in place right now. David Wells: Yeah. Christy, I think the other piece of LIFO, the the consider, as it relates to how it moves, quarter to quarter, obviously, is is what we decide to bring in bring in as relates to inventory Right? And so, if that remains, a fluid, you know, sort of dynamic and we feel good that what we're seeing in the back half is demand is starting to firm. That, you know, we're starting to bring more inventory on as we talked about a prudent way. And so that drove some of the think, increase in life or maybe relative to what we expected you know, last October when we talked about LIFO expense guidance. So that's that's probably a piece of it just to keep in mind, that that will continue to fluctuate depending on the demand backdrop. Neil Schrimsher: Yeah. Put in context, operating invoice for us out of point and a half in terms of one half percent in terms of the yeah, sequential change in the quarter. As you see that, you know, demand firming. And we brought into the inventory to support that. Operator: Thanks, everybody. At this time, I'm showing we have no further questions. I will now turn the call over to Neil Schrimsher for closing remarks. Neil Schrimsher: Thank you. I just want to thank everyone for joining us today, and we look forward to talking with you throughout the quarter. Operator: You, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning. My name is Krista, and I would like to welcome everyone to the JetBlue Airways Corporation Fourth Quarter 2025 Earnings Conference Call. As a reminder, today's call is being recorded. I would now like to turn the call over to JetBlue's Director of Investor Relations, Koosh Patel. Please go ahead, sir. Koosh Patel: Good morning, everyone, and thanks for joining us for our fourth quarter 2025 earnings call. This morning, we issued our earnings release and a presentation that we will reference during this call. All of those documents are available on our website at investor.jetblue.com and on the SEC's website at www.sec.gov. In New York, to discuss our results are Joanna Geraghty, our Chief Executive Officer, Martin St. George, our President, and Ursula Hurley, our Chief Financial Officer. Today's call, we will make forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, statements regarding our first quarter full-year 2026 financial outlook, and future results of operations and financial position including long-term financial targets. Industry and market trends, expectations with respect to tailwinds and headwinds, our ability to achieve operational potential targets, our business strategy for future operations, and the associated impacts on our business. All such forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in these statements. Please refer to our most recent earnings release as well as the 2024 10-Ks and other filings for a more detailed discussion of the risks and uncertainties that could cause actual results to differ. The statements made during this call are made only as of the date of this call. Other than as may be required by law, we undertake no obligation to update this information. Investors should not place undue reliance on these statements. Also, during the course of this call, we may discuss certain non-GAAP financial measures. And now I'd like to turn the call over to Joanna Geraghty, our JetBlue CEO. Joanna Geraghty: Good morning, and thank you for joining JetBlue Airways Corporation's fourth quarter and full year 2025 earnings call. I want to thank our crew members for their continued dedication to running a safe operation, especially during Winter Storm Fern. We've canceled over 1,100 flights as a result of the storm, and the industry remains in recovery mode. While today's forward-looking guidance excludes the storm's impact, given January is typically a trough period for us, we do not currently expect the impact to be material to achieving our full-year earnings guidance. Before we get to 2026, let's take a look back at 2025. In the first full calendar year of our Jet Forward transformation, I am very proud of what we've accomplished. In the face of a government shutdown, macro uncertainty, and aircraft-related groundings disproportionately impacting JetBlue, we stayed focused and continued to work toward our goals. Operational performance has been a key proof point of our strategic transformation. In 2025, we beat all of our on-time performance targets, improved every one of these metrics versus the prior year, and narrowed the gap relative to others. What makes this even more significant is that it follows an equally strong 2024, when we also beat all of our on-time performance targets. Two consecutive years of reliability improvements are a direct result of Jet Forward investments, smarter planning, disciplined execution, and our team's daily focus on doing the basics well, all in the most challenging airspace in the world. Our customers are recognizing these meaningful reliability improvements. I want to emphasize this. In 2025, we achieved an eight-point gain in Net Promoter Score and a 17-point gain since the beginning of 2024 and the launch of Jet Forward, making us once again a leader in customer satisfaction. This improved experience is driving loyalty and, in turn, has increased the rate at which customers return to fly JetBlue. The progress we've made on delivering reliable and caring service not only increases customer satisfaction, it also sets a solid foundation to enable the success of our other priority moves. Our products and perks are increasingly capturing more premium revenue, following the enhancement of Even More and the continued outperformance of preferred seating, the release of our premium credit card, which far exceeded sign-up targets last year, and the opening of our first-ever lounge at JFK. And not to forget, we won the J.D. Power Award for the Best Business Class Product last year. Network changes continued to progress well, even as we capitalized on near-term strategic opportunities in Fort Lauderdale, where customer response to our close-in schedule additions has greatly exceeded our expectations. Underlying it all, we maintained a tight hold on costs in the face of meaningful capacity reductions. Taken together, these Jet Forward initiatives delivered $305 million of incremental EBIT, slightly better than our initial expectations. This outcome gives me great confidence that Jet Forward continues to be the right plan. Macro uncertainty pressured industry demand last year and impacted results versus our initial full-year operating margin guidance of 2% to 1%. As previously shared, we estimate this uncertainty represented more than four points of headwind to operating margin for the year, impeding our path to restoring operating profitability in 2025 and resulting in an adjusted operating margin of negative 3.7%. Looking ahead to 2026, we are focused on turning the progress from our Jet Forward initiative into improved profitability. At a high level, our full-year guidance is based upon 3.5 points of capacity growth, 3.5 points of unit revenue improvement, and 2% non-fuel unit cost growth, all contributing to our forecast of breakeven operating margin or better. Our guidance assumes the macro environment continues to provide a constructive baseline for demand. Any incremental recovery in GDP or reduction in fuel prices beyond consensus estimates represents potential upside as 2026 progresses. Critically, we expect to deliver $310 million of incremental EBIT from Jet Forward this year for a total of $615 million in 2026. This keeps us on track to deliver $850 to $950 million of total incremental EBIT for the full year 2027. The incremental EBIT growth in 2026 is driven by the continued ramp of our existing initiatives and the launch of several exciting new initiatives, including rolling out the remaining key components of our Blue Sky collaboration with United, the opening of our Boston lounge, and the launch of our domestic first-class product. Though it has already been a dynamic start to the year, with the temporary closure of a portion of Caribbean airspace and Winter Storm Fern, our focus remains on controlling what we can and translating these efforts into several points of operating margin improvement in 2026. With that, I will turn it over to Marty. Martin St. George: Thank you, Joanna. And once again, a sincere thank you to our crew members who stepped up to keep our operation running safely throughout 2025 and into 2026. Turning to slide seven of the presentation, fourth quarter year-over-year unit revenue finished up 0.2%, over two points better than our guidance midpoint, nearly three points better than our third-quarter performance. The majority of our RASM beat was driven by underlying demand strength, coupled with loyalty, ancillaries, and other revenue exceeding expectations. Importantly, those trends have carried forward into early first-quarter bookings. We've seen a healthy recovery in domestic performance, with year-over-year RASM for the fourth quarter better than that of international flying. The booking curve further normalizes throughout the quarter with strong close-in booking performance for holiday travel that was more in line with historic levels. And as we've discussed throughout the year, the fourth quarter continued to show strong peak period performance, while off-peak demand remained more pressured. Our positive RASM was propelled by premium growth, with premium RASM outperforming core RASM by 13 points in the quarter, reinforcing the strategic importance of our investments in Mint, Even More, loyalty, lounges, and coming later this year, domestic first. To complement this addition, we are also refreshing our award-winning Mint cabins in-flight food menu later this year. We have over a decade of experience serving the premium customer, and we are excited to continue refining the premium experience, whether in Mint, Blue House, or domestic first class. We are also proud of the improvements we have made to our core with changes to our Blue Basic fare, improvements in reliability and hospitality. We continue to make refinements across the cabin to make sure that all customers have a reason to return to JetBlue. Additionally, the improvements we've made to our operation and customer experience through Jet Forward have translated into even stronger brand loyalty. And we capitalized on that in 2025. Loyalty revenue grew by 8% for the full year, in a year when capacity was down 1.6%, and now accounts for over 13% of total revenue, up from 11% in 2023. The introduction of our Blue Sky collaboration with United has made TrueBlue even more relevant across new geographies, and combined with our loyalty program's leading customer satisfaction, gives us confidence in continued outsized loyalty and premium growth. Brand performance accelerated throughout the year, with double-digit spend growth and over 30% growth in new co-brand account acquisitions in the fourth quarter. Our first launch, called Blue House, is generating great reviews. Since opening, we've seen lounge NPS in the mid-eighties, alongside a meaningful increase in the acquisition rate of our premium co-branded credit card. Turning to the network, in the fourth quarter, we added significant close-in capacity to our Fort Lauderdale focus. The ramp of this strategic expansion, where we've announced over 20 new nonstop destinations plus increased frequency on a dozen others, is materializing faster than our initial expectations. While we initially expected a one-point RASM headwind in the fourth quarter, resulting from the close-in nature of growth, the impact was closer to 0.5 points, reflecting customers' strong response to our scheduled additions and preference for our award-winning customer experience. Fort Lauderdale represents a strong premium leisure market as both an origin and destination. We are now offering up to 26 daily Mint flights touching Fort Lauderdale this winter, offering more domestic first-class seats than any other carrier in Florida. In addition, Fort Lauderdale is set strategically between a strong foothold in the Northeast and a robust Latin and Caribbean network, making it a well-placed connection gateway for customers, with significant upside potential for JetBlue. With our far better customer experience and competitive low fares, and now more destinations, we are pleased to bring even more value and choice to customers in Fort Lauderdale and across South Florida. These initiatives and more contributed to our Jet Forward performance in 2025. Jet Forward delivered a total of $305 million of incremental EBIT last year. On Slide eight of our earnings presentation, we've broken down each priority move and the key initiatives that delivered value in 2025. We're capitalizing on this progress and more in 2026. It will be a big year for Blue Sky, as we expect to roll out the remaining key features of this collaboration with United throughout the year. We expect to activate cross-selling interline flights on each other's websites very soon. This will be followed by mutual elite customer loyalty benefits turning on as the year progresses. Through the second quarter, we expect to begin selling United non-air ancillaries through our Paisley subsidiary. We plan to launch with car rentals, followed by hotels, cruises, vacation packages, and travel insurance, with the expectation to be selling all ancillary products by the end of the year. Lastly, turning to guidance, for the first quarter, we expect capacity to be up 0.5% to 3.5% year over year, with unit revenue growth in the range of flat to up 4%, supported by demand momentum exiting the fourth quarter and a constructive competitive capacity backdrop. We estimate the closure of Caribbean airspace in early January, and some lingering demand impact will be a headwind to RASM of less than a point for the quarter, which is incorporated in our guidance. As Joanna mentioned, not incorporated in our formal guidance are the recent impacts of Winter Storm Fern. For the full year, we plan to deliver unit revenue growth of 2% to 5% on capacity growth of 2.5% to 4.5%, contributing to breakeven operating profitability or better. We expect positive year-over-year RASM growth in each quarter in 2026 but more weighted towards the second half of the year as initiatives ramp. Our RASM guidance is dependent on four key drivers, highlighted on Slide 10 of our presentation. These drivers are part of Jet Forward and largely within our control, which gives me confidence in our ability to execute. The largest driver is loyalty, driving about one point of year-over-year RASM. We expect to grow loyalty revenue as a percentage of total revenue by about one point to 14%, driven by added redemption options and the opening of lounges. Next, our product enhancements, which are expected to contribute three-quarters of a point of RASM. These enhancements help to drive yield and improve load factor as our offering evolves. Additionally, Blue Sky and Paisley are expected to drive another three-quarters of a point, and we believe the maturing of our network changes and improving customer satisfaction will contribute the remaining half a point to get to a full-year RASM midpoint of up 3.5%. Ultimately, we expect the combination of these drivers and over 200 underlying Jet Forward initiatives to result in a more competitive customer value proposition, translating to RASM growth exceeding capacity growth this year and supporting our path back to sustained profitability. While the environment remains dynamic, the progress we've made through Jet Forward gives us confidence we are positioned to deliver on our commitments in 2026. I will now turn it over to Ursula. Ursula Hurley: Thank you, Marty. I want to reiterate what Joanna has said about 2025. I am very proud of our team for controlling what we could amidst a dynamic environment to deliver on our full-year cost outlook and build a strong foundation for what's next. We adjusted our business to navigate a challenging macro environment. We proactively reduced capacity by two points over the year as demand softened. We identified cost savings above and beyond our initial budget, and most importantly, we progressed on Jet Forward and delivered $305 million of incremental EBIT in the face of all these challenges. Turning to Slide 12, the fourth quarter was marked by a high volume of unforeseen external events. Despite this, the team did an excellent job recovering from each event and moving forward under difficult circumstances. For the quarter, CASM ex-fuel was up 6.7%. Disruptions from the government shutdown, the Airbus airworthiness directive, and two major weather events added costs, reduced capacity by nearly two points, and drove the gap to our initial CASM ex-fuel guidance. Fuel price was also a headwind in the quarter, with crack spreads rising sharply in late October and later moderating in conjunction with Brent, resulting in a fuel price of $2.51 versus our mid-expectation of $2.40. For the full year, CASM ex-fuel finished up 6.2%. Given full-year capacity was reduced by nearly two points versus our initial expectations, I am especially proud of the team for managing costs within our initial range of up 5% to 7%. And in our first official year of Jet Forward, we achieved substantial cost savings driven by initiatives like improved tooling and utilization of AI to optimize planning, better manage disruptions, and enable greater self-service. On the support center side, we strengthened efficiencies in our fixed costs. We also began modernizing fuel processes, unlocking cost savings through technology, process, and operation initiatives. Shifting to 2026, we expect full-year CASM ex-fuel growth of 1% to 3% driven by several factors. We averaged nine aircraft on ground from GTF-related issues in 2025, and we expect that number to be in the mid-single digits in 2026. New deliveries will also drive capacity growth this year and provide tailwinds to labor productivity and fixed costs. Additionally, we are seeing benefits from fleet simplification efforts as we are now down to two fleet types. These benefits will be offset by higher rents and landing fees, investments in our customer experience, and the impact of tariffs. CASM ex-fuel in the first quarter is expected to grow the most of any quarter in the range of 3.5% to 5.5%, largely due to elevated maintenance expense. CASM ex-fuel growth is expected to moderate downward over the year and especially in the second half when we expect roughly flat year-over-year CASM ex-fuel as Jet Forward cost savings and initiatives ramp up and year-over-year capacity grows. We estimate fuel price to be at the midpoint of our ranges, $2.34 for the first quarter and $2.27 for the full year. Encouragingly, fuel efficiency remains a tailwind this year. ASMs per gallon are expected to improve by approximately 1.5% in 2026, contributing to an approximately 5% total improvement over the last three years, driven by the retirement of the E190 fleet and substantial fuel savings initiatives as part of Jet Forward. For reference, 5% of our annual fuel cost equates to $100 million of savings in 2026. Powered by an improving macro backdrop and $310 million of incremental Jet Forward EBIT, we expect RASM growth of 2% to 5% and CASM ex-fuel growth of 1% to 3% will drive breakeven or better operating profitability this year. Turning to capital allocation and our financial priorities on Slide 13. In 2025, we invested $1.1 billion in capital expenditures, primarily consisting of 20 aircraft deliveries. For 2026, we expect capital expenditures of approximately $900 million, driven by 14 aircraft deliveries and the start of domestic first-class retrofits. Since the start of Jet Forward, we've worked to secure our financial future by cutting in half our planned 2026 through 2029 capital spending from $6 billion to $3 billion. As a result of these efforts, CapEx is expected to remain below $1 billion annually through the end of the decade, enabling low to mid-single-digit annual capacity growth while also accelerating our return to positive free cash flow. We ended the year with $2.5 billion of liquidity, excluding our undrawn $600 million revolving credit facility. This year, we expect to repay approximately $800 million of debt throughout the year, including $325 million outstanding on our 2021 convertible notes, which mature this April. To address cash needs, we intend to raise approximately $500 million in new financing, supported by roughly $6.5 billion of unencumbered assets. We are focused on aircraft-backed financing and are evaluating all available markets as we prioritize securing low-cost capital. For the year, we expect gross interest expense of approximately $580 million. We know there is still much work to do on our balance sheet, but I am encouraged by steps in the right direction. Gross debt peaked last year, and in 2026, we expect our leverage profile, measured by net debt to EBITDA, to begin to improve and benefit from Jet Forward's substantial growth in our EBITDA and help us reach our goal of restoring full-year operating profitability. As we look ahead, our priorities remain the same: getting back to sustained operating profitability, followed by generating positive free cash flow and restoring the health of our balance sheet. We believe there is a path to generating free cash flow by 2027. In closing, while 2025 brought unexpected challenges, it also marked a year of meaningful progress that strengthened JetBlue's foundation and reinforced our confidence that Jet Forward is working. We enter 2026 focused, energized, and committed to returning to breakeven profitability or better. The macro backdrop is improving, we're excited to be growing again, our operation is performing at a level we haven't seen in years, and our commercial initiatives continue to ramp with new initiatives rolling out, from Blue Sky to the launch of domestic first class and the opening of our second lounge in my hometown of Boston. At the same time, we are returning to disciplined low single-digit cost growth. With these elements coming together, we believe we are well-positioned to restore profitability, and I am eager for what comes next for JetBlue. With that, Krista will open the call for questions. Operator: Thank you. We will now begin the question and answer session. Star one. We also ask that you limit yourself to one question and one follow-up. For any additional questions, please re-queue. And your first question comes from Dan McKenzie with Seaport Global. Please go ahead. Daniel McKenzie: Oh, hey. Thanks for the time, you guys. So premium is clearly outperforming leisure today. So my first question really starts there. And, you know, that is that premium seats today, I guess, are 25% of the total flying. But I'm wondering what percent of revenue they comprise and what you would expect that to be when you exit 2027. So I'm thinking it's probably 30% plus today, and the question becomes, could it be over, you know, could premium revenue be, you know, over 40% of revenue in 2027? Martin St. George: Hey. I'll take that, Dan. Thanks for the question. So we generally have not released that number, and I think as premium becomes a bigger and bigger part, we'll figure out how we want to manage that in the future. The one thing I do want to stress is that with the introduction of the domestic first-class product later on this year, the total percentage of premium seats is not going up dramatically. That product is basically being funded from a reduction in the Even More cabin. However, the quality of the seats actually goes way up, as does the yield. So it is absolutely accretive. The benefit of the domestic first class is clearly in the products and perks initiative under Jet Forward. And we're really excited about the continued momentum we've seen for premium products. You know, whether it's lounges, Mint, Even More, you know, we have a really great track record as far as being able to deliver premium products for our customers. Our customers love them, and we are really excited to use first class later this year domestically. Daniel McKenzie: Mhmm. Yep. Yeah. Second question here just ties to leisure revenue and the, you know, recovery glide path that the current guide embeds. And, I'm thinking leisure fares so far this month are, you know, largely flat year over year, and I'm just wondering if that full-year guide embeds sort of the flattish revenue, you know, leisure component or what that recovery, the shape of that recovery could look like. Martin St. George: So it's a great question. And I will start with the line I use pretty much every call. It's just regard what we see. And the trajectory of 2026 unit revenue is fundamentally based on fourth-quarter performance and first-quarter bookings. So, you know, you'll hear us use a word today that we generally haven't used in well over a year, which is strong. Bookings are strong right now. And I think what I'm especially excited about is, you know, we've seen a nice recovery of leisure customers. And, frankly, I cannot talk enough about how pleasantly surprised we've been with the speed of the adoption of our new capacity in Fort Lauderdale. That's been a very nice contributor. But overall, when you look at our operational improvements, you look at the improvements in the loyalty program, the resulting increase in NPS, I think we sort of have a flywheel of goodness going on right now. That's resulting in great unit revenue. There are no big assumptions of, you know, a GDP snapback quickly, you know, a significant change in the competitive ASMs. Basically, we're sort of forecasting based on what we see right now. Daniel McKenzie: Yep. Thanks for the time, you guys. Operator: Your next question comes from the line of Duane Pfennigwerth with Evercore Partners. Please go ahead. Duane Pfennigwerth: Hey. Thank you. Good morning. Marty, that word demand strength, which you haven't used in a while, what is different about the trends that you're seeing now? Maybe you could speak to changes in the booking curve. And then for my follow-up, which I'll state right up front, you know, to what extent is competitive capacity in the first half, you know, contributing to that? Martin St. George: Hey, Duane. So let me start with a little more color around what we mean by the word strong. I think that the thing that has been most interesting to us is the recovery in the domestic coach market. You know, I made a comment in the remarks about how domestic and international performance has been converging, which I think we're very optimistic about. I'll also say that the booking curve looks very normal. I think if you go back to 2025, what you would have heard us say in calls was the bookings are coming. They're coming very close in. And there was a little bit of apprehension of, you know, you're sort of sitting here with bated breath waiting to make sure the bookings actually came. That's really not what we're seeing now. We're seeing a very normal booking curve, with the exception of The Caribbean, for the first couple of weeks of January where we did see a bit of a drop. Which, by the way, we're back to positive year-over-year in The Caribbean. So that was a blip that's been temporal and much better now. It just looks like a normal demand year, which I'm very, very optimistic about. With respect to competitive capacity, yes. And we're in a relatively good competitive capacity environment right now. We have had our biggest competitor in Fort Lauderdale pull down dramatically. We have not made any assumptions about any further pull downs or any significant change in competitive capacity. I will say that the first quarter is very, very clear as far as what's out there right now. I think the second quarter still has some time to settle down. You know, we're still selling more in the second quarter than we're probably gonna fly. But that's generally what you've seen in the time periods when you've got strong peaks and weak troughs where it appears that there's a sort of a big net strategy, and then you winnow it down a little bit closer in. But there is no, I want to make it really clear in this call, there is no magic hat with a rabbit in it of some sort of a big surprise that's gonna make these numbers. This is just execution of the Jet Forward plan on top of the existing strength in industry revenue right now. That's one of the reasons we're so optimistic about 2026. Duane Pfennigwerth: Thank you. Operator: Your next question comes from the line of Savanthi Syth with Raymond James. Please go ahead. Savanthi Syth: Hey. Good morning. I was wondering, Marty, just to follow-up on Fort Lauderdale. Could you talk about just, you know, how Fort Lauderdale might be changing kind of the current strategy other than just getting bigger? Like, are the connections going to be bigger as a result in terms of total system? Just how should we think about Fort Lauderdale, you know, once this is kind of fully baked in versus kind of the strategy and setup, you know, two, three years ago? Martin St. George: Thanks, Savanthi. First thing I'll say is I think we should acknowledge Fort Lauderdale is our very first destination. The original JetBlue flight flew from JFK to Fort Lauderdale. We haven't felt that. The history of JetBlue and Fort Lauderdale is as long as the history of JetBlue. And we've had a lot of in Fort Lauderdale over the years. I think you go back ten years or so when we announced publicly this concept we called one forty, which was growing Fort Lauderdale to about 140 flights a day. Had trouble executing that mostly because of gate resources in the airport. It is a relatively constrained airport, especially constrained for international gates. And you look at the opportunities to grow, you know, we have a pretty solid slate of destinations in North of Fort Lauderdale. Our challenges are really to, you know, Caribbean, Central, and South America. And for that reason, the lack of international gates has been a problem for us. I'd say with the pull downs that we've seen from Spirit in Fort Lauderdale, gate resources have become available. And, you know, we've wanted this for many, many years. So when the opportunity came up, we jumped on it very, very quickly to make sure that we could backfill. Because this is an aspiration we've had for a long time. And I would say that, you know, starting with crew members and also investors, you know, we have continually gotten this feedback of you need to diversify beyond the Northeast. And, you know, I think if you're looking for diversification beyond the Northeast, this is it. I mean, Fort Lauderdale is a great premium market. South Florida, great premium market, the best premium in Florida. And, obviously, we have a very premium-heavy strategy going forward. Number two, geographically, it is a perfect location between north and south. So I think given the franchise that we already have in South Florida, the opportunity to grow there, we're really bullish on Fort Lauderdale. Specifically, yes, we have more of a bank structure in Fort Lauderdale than we have historically for connectivity. And as gates become available, we'll continue to enhance that. And in fact, you know, we are currently in the process of expanding our banking plans there. We don't really want to become a legacy hub and spoke airline, so it's not going to that extent. But the extent to which we can create casual connections at good departure times in Fort Lauderdale, we will take advantage of it. And so far, it's performed very well from a tech perspective. I think for those customers who have connected in Miami versus connecting in Fort Lauderdale, I think I know which one everybody would pick. And it seems like customers are picking it. And Fort Lauderdale has done very well for that. Savanthi Syth: That's helpful. If I might just quickly follow-up for Ursula. Just on the $500 million that you plan to raise this year, is that reflected in the interest expense guide? Is that or is that kind of potentially an increase to the interest expense assumption? Ursula Hurley: Good morning, Savanthi. Yes. The interest expense is included in the $580 million guide. I will note the $500 million that we're anticipating raising will probably be in dual tranches. So there could be a portion of that raise which happens early in the year to support the convertible debt paydown that is due in April, and then the second tranche of the financing most likely will happen in the back half of the year. Savanthi Syth: That's helpful. Thank you. Operator: Your next question comes from the line of Thomas Fitzgerald with TD Cowen. Please go ahead. Thomas Fitzgerald: Hey, everyone. Thanks very much for the time. It's good to see that the premium credit card sign-ups are exceeding your expectations. I was wondering if that's primarily in the New York area, just given the lounge, or if you're seeing that throughout the network or in new geographies or any details you'd want to expand on there? Martin St. George: It's really throughout the system, and I think it's because the premium credit card itself actually has a great value proposition. And, frankly, a lot of our customers touch New York. So even if you don't live in New York, it's generally an important destination. And I think when we get New York and Boston both up, we're really bullish about the premium credit card. It also has a lower annual fee than other airlines' and banks' premium credit cards. And I sort of mentioned this in the script, and put this in a release, but didn't put it in the script. Our friends at Bain who do, like, industry-level NPS scores, have now given us permission. We can say that TrueBlue has the highest NPS of any loyalty program of any airline in the US. So I think, again, back to the concept of the flywheel, success sort of breeds success. So we're very excited with the card. You know, our partnership with Barclays is absolutely fantastic. And I'm really optimistic about the launch as a contributor. We are, and back to Savanthi's point about Fort Lauderdale, we are exploring whether we can make a lounge in Fort Lauderdale work. It's a pretty constrained airport, so we're not as sure that we have space for it. But if we can make it work and provide a great customer experience, it's certainly something we'll be talking about later in 2026. Ursula Hurley: I'll just add on Marty's comment regarding Barclays. I think what's unique about our program is we're not competing with a bank's proprietary card. This is a fully dedicated Barclays card for JetBlue. And so when you think about the depth of the relationship, and, you know, two entities really rowing in the same direction, that's very much what you see with the JetBlue card. Thomas Fitzgerald: Okay. Great. That's really helpful. Thank you for that. And then just as a follow-up on Blue Sky, I was just kind of curious, do you see upside potential to that 75 points of RASM expansion? And then just within the various buckets, do you see the wider funnel from being on their distribution website driving a lot of the gains? Or do you see it kind of split evenly? Or Paisley? Just wondering if you could kind of break out the different drivers within Blue Sky and Paisley. Thanks again for the time. Martin St. George: Thanks, Tom. Honestly, all those things are important. We obviously, Paisley is very, very important. What we love the most about the Paisley upside is that first, you know, we have really built a better mousetrap with the Paisley platform. And especially important for us is that Paisley is an extremely capital-light way to grow earnings. You know, the only capital there is based on IT capital, and it's de minimis compared to our overall capital expenditure. With respect to the other substantial Paisley, I do fundamentally believe that the benefit, excuse me, to Blue Sky, I do fundamentally believe that the benefits of Blue Sky are focused in TrueBlue. As you look at the TrueBlue program, the ability to compete with the big three legacy airlines, the biggest challenge we have is that we do not have a full roster of worldwide destinations to earn and burn. And through this partnership with United, we finally plugged that hole. And I think the utility with TrueBlue points has skyrocketed in the last six months with the addition of this program. We're also relatively early along in the game, so I think it's, yeah. We'll see how that works with customers, but I love the value proposition of TrueBlue, and I very much appreciate this relationship with United to make this possible. I do also believe that the mutual distribution is gonna be important. You know, I think about places where we offer services, United doesn't. You know, JFK to the West Coast, you know, even when they do eventually enter JFK, I'm not sure where they're gonna go, but, you know, sometime in '27, they'll be in. Today, if you want to earn MileagePlus points from anywhere in New York to the West from, you know, this side of Hudson to the West Coast, we're really the only option. I love having those flights on united.com. And, you know, even though United may not have the same direct penetration that JetBlue does, it is a significantly big airline. We don't really know the traffic to their website other than what we can pull publicly, but I love the thought of all the JetBlue flights getting the eyeballs of all these United customers going to united.com all the time. And, frankly, I'll remind you, you know, we have a very high NPS. So I think when United customers get to fly JetBlue, the reaction is gonna be, hey. This is great. Have a great customer experience, and I can also earn my MileagePlus points. So we're really excited about that as well. Operator: Your next question comes from the line of Michael Linenberg with Deutsche Bank. Please go ahead. Michael Linenberg: Yeah. Hey. Good morning. Just two here. Ursula, just you called out the $6.5 billion of unencumbered assets. And I just, that seems a little bit higher than maybe what you shared in the past. I thought it was more like $5 billion, and so maybe it reflects some debt paydown or maybe, you know, you reappraised, I don't know, a pool of spare engines. Did that, has that changed at all? Ursula Hurley: It did. Good catch, Mike. So the previous number that we publicly quoted was $5 billion. As we were assessing our liquidity needs for 2026, we did go through and update all of our appraisals on the unencumbered assets. So as a reminder, we purchased our aircraft deliveries last year with cash. So those were added into the pool. In addition to that, there's still incremental value on our loyalty program as well. Those were really the two main drivers of the increase. As a reminder, as we look at the unencumbered asset base, the breakdown is about 30% of their aircraft and engines. About 20% of it is loyalty, and then, obviously, the remainder is slots, gates, and routes and our brand. So, yeah, we're really pleased to continue to have this cushion. And the cushion is really a healthy culmination of assets. Michael Linenberg: Great. Thanks for that clarification. And then just, Marty, you talked about the LOPA changes with the rollout of First Class. When actually do you start selling that first First Class seat, and how long is that rollout gonna take before you get to all of your domestic flights with First Class? Thank you. Martin St. George: So hey, Mike. We're expecting the first airplane to roll out in the third quarter, and we're right now in the middle of certification, so we're not ready to pin the date down yet as far as when that will be. And the implementation is actually relatively quick. We'll have, you know, 20-something percent of the fleet done by the end of this year. The overwhelming majority of it will be done by '27, but not all of it, the rest comes in at '28. And the benefits, you know, it's obviously an important part of the products and perks initiative in Jet Forward. It will not be fully ramped by the end of Jet Forward. They'll be continuing to ramp in 2028. So we're really excited about it. And we'll be making more specific announcements later on this year. Michael Linenberg: Okay. Did you say 20% or 27% by year-end? Martin St. George: 20%. Michael Linenberg: Great. Thanks for taking my questions. Operator: Your next question comes from the line of Catherine O'Brien with Goldman Sachs. Please go ahead. Catherine O'Brien: Hey. Good morning, everyone. Thanks for the time. So, Marty, you know, you talked about the Fort Lauderdale capacities driving by the expected, less of a drag to the fourth quarter. Would you say that's more a function of improving overall demand? Did you see faster than expected share shift? You know, was the competitive response better than you expected? Just, you know, can you talk about how Fort Lauderdale is performing, you know, versus the system? And then higher level, like, as you're thinking about this additional capacity in the Mint ads, how do you expect that to impact the medium-term hub profitability versus system profitability in Fort Lauderdale? Martin St. George: Thanks, Katie. I'll say two things. First of all, we have multiple databases that help us measure share shift. The one that is the most close in, Spirit actually does not participate in. So right now, I cannot tell you if the fourth-quarter upside has been share shift or has been stimulation. But when we get the DOT data, which should be coming in the next, you know, several weeks, I think we'll have a better answer for that. So I don't want to get ahead of my skis here because I don't actually have the real data. I do know that we're certainly carrying a lot more customers than we expected at higher yields than we expected. So whether it came from Spirit or from people coming off their couches, I'm happy to have it either way. With respect to profitability, we do expect Fort Lauderdale to be accretive to our overall system profitability. And frankly, I feel like with the change of the competitive environment down there, and also, you know, the ability to compete with, you know, a tough customer experience in Miami with one of our competitors. Just, you know, Fort Lauderdale is a very easy airport, it's simply located in the region. You know, we would not be doing this if we did not think that Fort Lauderdale would be a significant upside contributor to the system. Obviously, we could put airplanes anywhere. We're specifically choosing to put them in Fort Lauderdale for a reason. Catherine O'Brien: Got it. Makes sense. Maybe Ursula, one for you. You mentioned you're thinking this year's financing needs will be about $500 million. How sensitive is that to your 2026 profitability outlook? I realize you're guiding to breakeven plus, not a range. But does it look different at breakeven versus above breakeven? And how does the E190 and XLR asset sales help offset fund rise requirements this year, if at all? Thanks again for the time, guys. Ursula Hurley: Yeah. Good morning, Katie. Thanks for the questions. So the first one is we're targeting what the need to be anywhere between 17% to 20% of trailing twelve months revenue. So, obviously, that excludes our revolver as well. So there's a little bit of buffer there. Just in regards to, you know, the operating performance of the business. So, you know, I will say, you know, I feel really confident based on what we know today in the team's ability to hit the breakeven or better operating margin. And so as we head into rates, look for the date, you know, like I said, we'll target that 17% to 20% range. We'll pivot if we have to. Obviously, we have the very healthy unencumbered asset base to choose from if we do need more liquidity. I'm pleased that I believe that we've hit peak debt levels last year, so I'm really leaning hard into the EBITDA growth driven by Jet Forward to help improve the leverage metrics. And then in regards to your cost question on fleet, last year, we had a meaningful amount of fleet transactions, the most impactful being the sale of the E190 in January. We also took advantage of some market opportunities in regards to engine sale leasebacks. As we look at 2026, we do have about a half a point of controllable cost benefit baked into the full-year guide. That's really driven by the remaining sales of the E190. So we have about eight aircraft that we will be selling in the first half of this year. And we'll continue to monitor, you know, the markets as well in terms of sale leaseback opportunities. Hope that answers your question. Catherine O'Brien: Thanks so much. Operator: Your next question comes from the line of Jamie Baker with JPMorgan. Please go ahead. Jamie Nathaniel Baker: Oh, hey. Afternoon. So, Marty, I wanted to go back to the question you were answering before. Savanthi's question, you mentioned the rabbit. Can I just confirm there are no specific assumptions in your full-year guide as to what potentially happens with any of your competitors who might be facing, shall we say, a precarious situation at the moment? Is that a correct interpretation? Martin St. George: Yeah. And let me give you a little more clarity on that, Jamie. There has been capacity added by some other airlines to Fort Lauderdale with the reduction of Spirit ASMs. Those ASMs are there, and they're not going away. So that growth is still there. We're not assuming that that was temporal. We're also not assuming that Spirit goes to any significant shrink versus where they are right now. I mean, our view is, okay, we want to make sure that as we give a guide, there's no sort of little secret upside in there. I mean, we've been trying to guide this thing very straight for the last two years. And we're not gonna change now. I mean, obviously, the rumors are out there. You know, I think that, you know, there's certainly probably more rumors than they have airplanes. But I don't think there's any upside for us to try to make any assumptions on that. Ursula Hurley: But I will say, Jamie, we do have multiple plans in place depending on the outcome of Spirit. So, you know, we're ready for a number of scenarios to ensure that customers are protected and that we bring the JetBlue product and the offering to more folks in South Florida and beyond. Jamie Nathaniel Baker: Excellent. I appreciate that clarification, both of you. And then, you know, just round numbers. Jet Forward contribution was about $300 million last year. But total EBIT went down about $250 million year on year. So that implies simplistically that your core was down $550 million. Now last year was obviously, you know, a tumultuous one for JetBlue and the industry. Do you attribute that entire $550 million entirely to the macro, as opposed to any, you know, idiosyncratic challenges your franchise was facing? Ursula Hurley: Yep. Yep, Jamie. So I'll take that. Yeah. We attribute it entirely to the macro. And as we've looked back at 2025, we've been able to isolate out the Jet Forward initiatives and the value that they've driven. And if not for the macro, we're quite confident we would have hit our full-year operating margin guide. So we're actually very excited about '26. This is gonna be our year. If you think about the initiatives that we continue to execute in 2025, whether it was operational performance and improved NPS, our premium loyalty benefits like the JFK Lounge, you know, Even More changes, the Blue Sky partnership, and our network changes. These are all initiatives that are built to ramp over time. And as Marty mentioned, you know, these initiatives create a flywheel effect where operational reliability and NPS will enable premium growth, which will then strengthen loyalty and revenue. And then you layer in network optimization, amplifying that impact. So, you know, we really are excited that this really sets us up for continued acceleration and up in '26 as we then add things like the lounge, domestic first, and the full implementation of Blue Sky. So, you know, that's behind, you know, our guide for this year. You know, last year was definitely a step back for JetBlue, but also the industry as a whole. And this team continued to execute, and we look forward to taking advantage of all that execution and more in '26. Jamie Nathaniel Baker: Okay. Thank you very much. We appreciate it. Take care. Operator: Your next question comes from the line of Conor Cunningham with Melius Research. Please go ahead. Conor Cunningham: Hi, everyone. Thank you. More rumors than aircraft, I'm gonna potentially steal that one. The bridge in the deck was interesting to me. I just, the 50 basis point macro or industry setup, I think, that you have there is, I think it feels really conservative. If you could just frame up what you assume there. Like, are you assuming that there's some sort of competitive fallout from the Chicago situation? Just any thought process on how you got there. Thank you. Ursula Hurley: No. Yeah. So, I mean, the half a point of base RASM growth is tied to the demand trends we're seeing exiting Q4 into Q1 and beyond, and then obviously, normal GDP and macro inputs. And so to the extent that there's upside, the upside would come in macro, the upside in terms of the, you know, incremental three points of RASM growth for Jet Forward, you know, it could come in things like improvements in Fort Lauderdale beyond what we've assumed, premium ramping faster, you know, sort of the flywheel effect really kicking in. So, you know, I think as you look at the guide, we guide what we see. And we do not assume any kind of snapback on macro. Martin St. George: I just want to add one thing, Conor. And it's something that I think as Jet Forward has progressed, we started to feel the tension between the base airline and the Jet Forward numbers because honestly, it's kind of the same thing to a certain extent. There's a lot of interaction between those two numbers. You know, when we laid out the $900 million proposal for Jet Forward, a lot of those things at other airlines would be normal course of business. So when you say, like, this is what the base airline's doing versus what Jet Forward is doing, it's getting to the point where you almost can't make those distinctions because there's so much relation between the two of them. We're very, very proud of all the initiatives, and it was a lot of change in a year. But I think that it's tougher and tougher to measure it, I think, as we go forward because the individual Jet Forward initiatives, you know, other elements are doing them when that's in their base. So it's just a little bit tough to do that apples-to-apples comparison, doing RASM as a Jet Forward, and their RASM without any sort of branded program. But, you know, to be clear, if you think there's upside in macro, that's upside to the JetBlue plan. Conor Cunningham: Got it. Okay. Helpful. And I realize that you're not guiding including the impact of Fern, but I mean, the feedback I've gotten this morning is that it kind of derails your 1Q already. So just any thoughts, like, are the ranges wide enough to assume that you can weather, like, I mean, you canceled 1,200 flights. So just trying to understand the risk to the January outlook already given the weather events that's already happened? Thank you. Ursula Hurley: Yeah. Sure. I mean, we canceled just over 1,100 flights. We didn't cancel, you know, some of the numbers that other carriers are posting. So I think that's an important distinction, and the impact will be proportional to those cancels. So we'll definitely see some pressure on CASM. We'll see some pressure on ASMs. But this hit us, I want to be clear, during a trough. When you think about the time, it could not have come. We never ask for these things. We never want these things, but it could not have come at a better time. And so really proud that the team is executing and getting us back on track. If you see the cancellations today, you know, the number is much, much, much lower. Others still have, you know, the impact lingering. And I'm confident that as we move through the week, we'll be back up and running fully. Martin St. George: I would just add, Conor, like, this is, we're still gonna hit our full-year guide. I mean, this is something that obviously can be weathered within the full-year context. Conor Cunningham: Okay. Thank you very much. Operator: Your next question comes from the line of Ravi Shanker with Morgan Stanley. Please go ahead. Ravi Shanker: Great. Thanks. Good morning, everyone. Apologies if I missed this. You guys did quantify the impact of The Caribbean shutdown of airspace in January. But some of your peers have noted that the kind of warnings or the restrictions, kind of on flight activity issued a couple of weekends ago, that's had somewhat of a chilling impact on bookings and the forward curve in The Caribbean. Are you guys seeing any of that as well for the forward view? Martin St. George: Hey, Ravi. Good question. Thank you. We certainly saw an impact for a couple of weeks. And there's no question that it was a tough time. It was a peak day when we had the disruption. You know, it's New Year's return. So it was an incredibly poorly timed event for us. But, and we did see a couple of weeks of booking depression, but nowhere near what we heard other airlines say. I will say that our Caribbean is actually very, very diversified. You know, you think about the size of operations in the Dominican Republic, Puerto Rico, we have a lot of markets that were not affected. Yes. We certainly saw an impact in places like Aruba, Curacao for a couple of weeks, but those have both rebounded, and we're back to normal course of business. There is a, I keep using this word divot. I'm not sure that's the right word. We still have a bit of an impact in the first quarter, but forward-looking bookings, that'll be fine. We're actually not worried about it at all. Ravi Shanker: Understood. And maybe just on the lounges, can you just share early feedback on the JFK lounge so far? Are you seeing any kind of loyalty or any measurable impact from opening that? And also, you said that you're looking at the potential for Fort Lauderdale. Is that just like a one-off given your strength there, or do you think that there's an opportunity for having, like, a network of domestic lounges over time? Ursula Hurley: Yeah. So, Ravi, we're not, we've been going on a network of lounges, but we're not there. I mean, JFK has been great, as Marty mentioned in his prepared remarks. You know, 80 plus percent NPS. We're seeing it absolutely drives sign-up for the premium card. We're excited to bring Boston online later next year. You know, as we think about Fort Lauderdale, we think it's got a great premium base that could lend itself to a lounge. We haven't announced anything yet. But we're really focused on, you know, if it makes sense for a particular market, we will evaluate it. It has to have a strong return, and it has to be tied to driving our Jet Forward initiatives around premium customers. Martin St. George: Yeah. Just to be clear, Ravi, the Boston lounge is this year. Ursula Hurley: Yeah. Sorry. I would say, like, yeah, later this year. Martin St. George: The number one thing we're worried about, sorry, my bad. Later. I will say one thing. As we mentioned when we announced that, is we have to give the customer feedback of their hatred of lines. We do have a picture floating around of the first line outside the lounge. And it was a line of people who were signing up for instant approval of Premier Tax. They wanted to get in. So it's doing exactly what we want to do, and we're really, really bullish about it. That being the case, it's a big CapEx investment. You know, we work with Barclays obviously to make sure the math works for something like this, but I think the, you know, given how our network works, which is, you know, we have a handful of cities above 30 something flights a day, this is not something we're expecting to have in 20 cities. Ravi Shanker: Understood. Good to hear. Thank you. Operator: Your next question comes from the line of Scott Group with Wolfe Research. Please go ahead. Scott Group: Hey. Thanks. Good morning. Marty, your answer on Jet Forward versus core earnings a couple of questions ago was totally fair. But so you might not like the spirit of the question, but I do have a follow-up. So if I just take the guidance for this year, you're saying the bridge has $310 million of Jet Forward benefits. And I think if we're doing, like, I think that implies, like, flat core earnings. So I guess my question is, like, if base RASM's up half a point and CASM's up two, what are the offsets there that keep core earnings more flat? And what are the upside and downside risks to core earnings being flat? Martin St. George: Okay. I'm writing this down. I need to go through that math and try it. I wish to get back to it, I want to make sure I understand the exact question. I mean, at the core, overall industry RASM is on a very good trend right now, and that's driving a big chunk of the 2026 guide that we laid out there. And, again, back in this issue of what's core for us and what's core for the competitors, there's a lot of stuff that's in Jet Forward that will be core for our competitors. So it is very difficult to do an apples-to-apples comparison. When you look at what other airlines are doing with things like, you know, how they price their extra legroom seats or how they price things like, you know, their domestic long-haul premium products. So I think that it's actually much, much tougher than you think to actually split those two things apart. I'm really focused on the top-level guide, which is the high-level guide for RASM this year. And remember, it's, you know, two to five is our range. And that's on two and a half to four and a half in ASM growth. So I think if you look at the combination of those two things, you know, we're really excited about this guide. I think it's the ability to produce that level of RASM growth with this amount of ASM, I think it's testimony to the strength of the franchise and of the positive output we're seeing from all the changes we've made in Jet Forward. Scott Group: Okay. That's, I think that's fair. So your point is don't get too caught up in the individual bridge. Like, look at the whole level. Look at the big picture. ASM up. RASM up, it's working. Kind of thing. Martin St. George: Yeah. Yeah. I mean, listen, Scott. At the highest level, right, we're projected to grow our op margin by over four points. Right? Like, the majority of that is driven by Jet Forward. We are, as a company, growing again, which is fantastic. The AOG outlook has improved, and so when you take the powerful combination of the revenue initiatives, growth, the efficiency and execution on the controllable cost structure, I mean, we believe that this is a material step forward in terms of margin progression. And, you know, right now, what we're seeing in the demand environment is strong. The macro is, you know, constructive, so that's why we're, you know, super confident in being able to hit this and get on a path to sustained profitability. I mean, step number two is free cash flow and have a path to deliver positive free cash flow at the end of '27. And we'll turn to improving the health of the balance sheet. So we feel good about 2026 and our ability to execute. We're in execution mode. Scott Group: Thank you, guys. Appreciate the time. Operator: Your next question comes from the line of Chris Strapolovikis with SIG. Please go ahead. Chris Strapolovikis: Morning. Thanks for taking my questions. Ursula, if for whatever reason, there's a macro downtick, seasonal or unanticipated seat growth in New York or other markets, what are some of the levers you can pull to still get to the breakeven mark? You know, I realized that there's some or perhaps a lot of leverage here in the fleet, and areas like maintenance and fuel efficiency, but what are some of the other, I guess, cost buckets we should consider should a macro or seat growth move in an unanticipated direction? Thanks. Ursula Hurley: I'll take that. I mean, I think if you look back at 2025 and what we did in '25 when we did see that macro step back, I mean, first, we matched supply with demand in the trough period. We pulled two points of capacity, I mean, after it, and we still hit our annual cost guidance, which I think is a true testament to the team. And then we ultimately made some really hard decisions around discretionary expenses, leadership structure, and other budget cuts. So if you think about 2026, if there were a macro setback, we're gonna focus on controlling what we can. We're gonna continue to execute on Jet Forward, and then we will pull some of those levers if need be as we move forward. Obviously, you know, capital expenditures, we would relook at that list. So this team is one that has a track record of hitting the cost targets because that is something that we control more so than obviously revenue. And so you'll continue to see us lean into that. A macro setback as we did in 2025. Chris Strapolovikis: Okay. And then on free cash flow, I think I heard you're targeting positive year-end '27. If you could maybe size that, so assuming you hit all your targets in Jet Forward, you move within the CapEx profile you outlined earlier. What exactly does that positive look like? Thank you. Ursula Hurley: Maybe I'll take that. We're not going out with any guide or specific numbers. But if you think as earnings grow and CapEx moderates, this is going to enable a path for JetBlue to deliver positive free cash flow and ultimately delever the balance sheet over the next couple of years. So first, we need to deliver positive operating margin in 2026. We've got a great plan to do that. That plan takes advantage of everything we built this year and then all the additional initiatives that are layering on in '26. And then that should hopefully, as we think about exiting '26, allow us to generate free cash flow by 2027 and then ultimately beyond that, restoring our balance sheet health in 2028 and beyond. Chris Strapolovikis: Okay. Thank you. Operator: Your next question comes from the line of Brandon Oglenski with Barclays. Please go ahead. Brandon Oglenski: Hey, good morning. Thanks for taking the question. Joanna, maybe to follow-up on that, I mean, I know it's been a difficult couple of years here. I've been targeting breakeven for a while and there's been some macro setbacks for sure. But how do you think about longer-term profitability at JetBlue once you get to free cash flow and things like that and delevering? Can you get back to, you know, ROIC in excess of your cost of capital? Or do you see fundamentally there's issues of scale here that, you know, a lot of airline CEOs will talk about just given how important rewards programs have become? Joanna Geraghty: Yeah. No. We absolutely see a path back. This is all about improving our operating margin. When you think about scale, I mean, there's two ways to look at it. One is scale within the market that you're in. And we continue as we're growing this year again in Fort Lauderdale, but we continue to focus on trying to ensure that we have strong franchises in our core geographies. And then the Blue Sky partner is really designed to provide scale to our loyalty program and scale beyond JetBlue for our customers. And so, you know, that's our approach. And I think, you know, we look at the initiatives we're delivering, the fact that customers are coming back to us because we've improved operational performance in NPS. We've got a whole series of initiatives we executed last year that are fully in ramp this year and then layering on our first-class product, bringing Blue Sky further to life, and then, obviously, domestic first. So we're really bullish about the next few years who will absolutely get us back on a path and delivering, you know, more than positive free cash flow restoring the balance sheet in the longer term. And taking it one year at a time, the last year was a pretty big challenge for the industry, and so we're being cautious about how we step into this year with a guide that we think is very achievable given the initiatives we have laid out for the plan, and looking forward to hitting that breakeven number this year. Brandon Oglenski: And I know it's been a long call, but, Ursula, you brought up AOG and the GTF issues, which I think is impacting you less now. Can you talk through the financial impact there in '26 and maybe any recourse you're getting from Pratt? Ursula Hurley: Sure. Yeah. So we're pleased that the AOG situation has improved year over year. So we had nine aircraft on the ground last year, and we're expecting mid-single digits this year. It did take over the last few weeks a slight step backward. We thought we would be in low single-digit land in terms of aircraft on the ground this year. We got a recent update from Pratt, you know, they continue to struggle on the A321 fleet type with supply chain and shop capacity. So we're now getting through it. It clearly continues to be a dynamic, you know, environment for the A320 fleet type. We are still working through with Pratt and Whitney the compensation. We're focused on getting what we believe we deserve. Given we're such a large customer of Pratt, there could be many forms in which compensation comes through. And in light of, you know, accounting treatment, while the settlement is important to us, you know, the amount is not meaningful to whether or not we achieve our full-year guidance for 2026. But in the end, you know, improvement year over year, allowing us to grow again, we're pleased. Brandon Oglenski: Thank you. Operator: And that concludes our question and answer session. I will now turn it over to Joanna Geraghty for closing remarks. Joanna Geraghty: Great. Thanks so much. I appreciate all the questions. As you can tell, this group is very excited to deliver on breakeven or better operating margin this year, underpinned by what we see as a strengthening macro backdrop, returning to growth. I have to emphasize that, very excited about that. Constructive capacity backdrop and then all of the Jet Forward initiatives really coming into a really nice place for 2026 and beyond. So thanks for the call today, and then I'll just end with, congrats to the New England Patriots as the official airline sponsor of the Pats. This is your year too. Thanks. Operator: Ladies and gentlemen, this does conclude today's call. Thank you all for joining, and you may now disconnect.
Operator: Ladies and gentlemen, welcome to HCA Healthcare Fourth Quarter 2025 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Frank Morgan. Please go ahead, sir. Good morning, and welcome to everyone on today's call. With me this morning is our CEO, Samuel N. Hazen, and CFO, Mike Marks. Sam and Mike will provide some prepared remarks and then we will take questions. Frank Morgan: Before I turn the call over to Sam, let me remind everyone that should today's call contain any forward-looking statements, they are based on management's current expectations. Numerous risks, uncertainties, and other factors may cause actual results to differ materially from those that might be expressed today. More information on forward-looking statements and these factors are listed in today's press release and in our various SEC filings. On this morning's call, we may reference measures such as EBITDA, which is a non-GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling net income attributable to HCA Healthcare, Inc. is included in today's release. This morning's call is being recorded, and a replay of the call will be available later today. With that, I will now turn the call over to Sam. Samuel N. Hazen: Good morning. Thank you for joining the call. We closed out the year with strong results that were mostly consistent with the previous quarters in 2025. We delivered our nineteenth straight quarter of volume growth reflecting continued solid demand across our markets. The benefit of network investments and improved results in capacity management, quality patient outcomes, and stakeholder engagement. Revenue increased 6.7% compared to the prior year quarter. And with disciplined expense management, margins improved both sequentially and year over year. For the quarter, net income attributable to HCA Healthcare increased almost 31%. Diluted earnings per share as adjusted increased 29% and adjusted EBITDA increased around 11% versus the prior year period. Reflecting on 2025, this was another successful year for HCA Healthcare. Throughout the year, our teams executed at a high level, we gained ground with our strategic agenda, and we stayed focused on the fundamentals. Additionally, we invested significantly in network expansion, workforce development, and clinical capabilities. These investments help deliver positive outcomes across the HCA Healthcare System. As a result, our networks had approximately 47 million patient encounters during the year, representing a record level of patient care activity for the company. I want to thank my colleagues for their outstanding work, their dedication to our patients, and their unyielding commitment to our mission. Now let me transition to the policy environment. We continue to monitor several policy matters including the expired enhanced premium tax credits, the ongoing developments related to Medicaid supplemental payment programs, and the Rural Health Transformation Program. These matters continue to evolve. As we learn more, we will provide updates at the appropriate times. That said, we believe our core business remains strong with forecasted volumes in our long-term 2% to 3% growth range. This past year, we strengthened the company's resiliency program in three important areas. And this gives us confidence that we can navigate effectively through these policy dynamics. The first was organizational. In this area, we added new capabilities that were aligned around the company's operating imperatives. Next, we strengthened the management systems to enhance execution. And lastly, we ramped up leadership development. The second area relates to competitive positioning. We increased hospital capacity, clinical service offerings, and outpatient facilities across our networks to create greater patient access and address the needs of our communities. The third was financial. Here, we advanced our cost management agenda and improved our balance sheet with strong cash flow and disciplined capital allocation. These results allowed us to invest significantly in our networks, our people, and our AI and tech agenda. In closing, we are well positioned to move forward as we begin 2026. We continue to believe the HCA way of combining high-quality local provider networks with the distinct capabilities, talent, and scale of a national healthcare system creates sustained value for our stakeholders. It allows us to deliver more effectively on our mission. With that, I will turn over the call to Mike for more details on the quarter and our outlook for 2026. Mike Marks: Thank you, Sam, and good morning, everyone. We were pleased with the results of 2025, which reflected strong operational performance combined with disciplined capital allocation. Let me note some same facility volume comparison to 2025 versus 2024. Admissions increased 2.4%, and equivalent admissions increased 2.5%, in line with our expectations of 2% to 3%. Inpatient surgeries were flat, outpatient surgical volume was down slightly. ER visits increased 50 basis points. Overall respiratory volumes had no material impact on year-over-year volume. Regarding payer mix for the quarter, same facility total commercial equivalent admissions increased 1.1% over the prior year, with exchanges growing 2.5%, and commercial excluding exchanges increasing approximately 1%. Medicare increased 3.5%, and Medicaid increased 2.2%. Same facility net revenue per equivalent admission increased 2.9% versus prior year quarter. The 80 basis point improvement in adjusted EBITDA margin in the quarter was driven primarily by solid revenue growth, good results in labor management, and improvements in other operating expenses. Adjusted EBITDA grew approximately 11% compared to the prior year quarter, primarily due to strong operating performance and an approximate $150 million increase in our hurricane markets. As we have said in the past, Medicaid supplemental payment programs are complex, variable in timing, and do not fully cover our cost to treat Medicaid patients. Due to a retro payment from Virginia in the fourth quarter, the net impact of supplemental payments was approximately flat versus prior year quarter. Now let me discuss full-year results for 2025, which reflected good demand growth in our markets. On a same facility basis, we posted growth in revenue of 6.6%, equivalent admissions of 2.4%, and net revenue per equivalent admission of 4.1% versus prior year. Consolidated adjusted EBITDA increased 12.1% over prior year, and we delivered a 90 basis point improvement in adjusted EBITDA margin. The net benefit from supplemental payments increased by $420 million. Hurricane impacted markets contributed approximately $125 million in adjusted EBITDA growth. Diluted earnings per share as adjusted increased 28.5%. Moving to capital allocation. Capital expenditures totaled $1.5 billion in the quarter, and $4.9 billion for the year. Additionally, we purchased $2.6 billion of our outstanding shares during the quarter and $10 billion in the year. We paid $162 million in dividends for the quarter and $679 million for the year. Cash flow from operations was $2.4 billion in the quarter, and $12.6 billion for the year. This represents a 20% increase in operating cash flow in 2025 over full year 2024. Our debt to adjusted EBITDA leverage remained at the low end of our target range. Given our strong balance sheet, we are well positioned for the future. So with that, let me speak to our 2026 guidance. Expect revenues to range between $76.5 billion and $80 billion. We expect adjusted EBITDA to range between $15.55 billion and $16.45 billion. We expect net income attributable to HCA Healthcare to range between $6.5 billion and $7 billion. We expect diluted earnings per share to range between $29.01 and $31.50. Further, we continued to see opportunities to deploy capital and drive organic growth in our markets through investing in high acuity programs, increasing our network through new access points, and building new inpatient capacity. As a result of these opportunities, we have increased our capital spending range from $5 billion to $5.5 billion. Our 2026 guidance includes the following assumptions. Growth in equivalent admissions between 2% to 3%, an adverse impact on adjusted EBITDA between $600 million and $900 million related to the health insurance exchange. This includes impact from administrative reforms enacted in 2025, the One Big Beautiful Bill Act, and the expiration of the enhanced premium tax credits. We expect an offset to this exchange headwind of approximately $400 million through resiliency initiatives, designed to generate efficiencies throughout the organization. We anticipate a decline in supplemental payment programs net benefit between $250 million and $450 million. The expected decline in net benefit is driven primarily by Tennessee's program reverting back to four quarters of net benefit versus six quarters in 2025. A pause on one specific program in Texas and a one-time retro payment from Virginia. This guidance does not include any potential impact in 2026 from additional approvals of grandfathered applications. We do not anticipate any significant growth to adjusted EBITDA from our hurricane impacted markets over prior year. We expect full-year margins to be slightly above 20%, consistent with 2025, and cash flow from operations to range between $12 billion and $13 billion. Lastly, we plan to continue investing in our technology and digital innovation strategy, which we expect will deliver long-term value and help position the company for the future. Considering these factors, our overall 2026 adjusted EBITDA guidance reflects strength and momentum in operations. Increased investment in strategic initiatives, consistent business fundamentals, and a disciplined approach to capital allocation. Given what we see today, including the demand in our markets, our resiliency program, and our digital transformation initiatives, we remain comfortable that we will perform within our long-term plan over time. As noted in our release this morning, our board of directors has authorized a new $10 billion share repurchase program. We currently anticipate completing a majority of the existing authorization in 2026, subject to market conditions and other factors. In addition, our board declared an increase in our quarterly dividend from 72¢ to 78¢ per share. In conclusion, 2025 marked another year of solid operational performance for HCA, and we believe that we are well positioned for continued progress and success in 2026. With that, I will turn the call over to Frank for questions. Frank Morgan: Thank you, Mike. As a reminder, please limit yourself to one question so we might give as many as possible the opportunity to ask a question. Toby, you may now give instructions to those who would like to ask questions. Operator: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star then the number one on your telephone keypad to raise your hand and enter the queue. Simply press star one again. Your first question comes from the line of A.J. Rice with UBS. Your line is open. A.J. Rice: Hi, everybody. Thanks for the comments and the detailed commentary on the guidance. I wondered maybe because the focus is on the top line, of course, in your comments, can you talk about the expense items, SWB, supplies, other operating expenses, professional fees, etcetera? What are your underlying assumptions there that are embedded in the guidance? Is there margin improvement opportunities on any of those lines in '26? Mike Marks: Good morning, AJ. When I look at the margin and I noted this in my comments, but, you know, the midpoint of our revenue and adjusted EBITDA guidance range suggests expectations for pretty stable margins in 2026 compared to 2025. As we noted on our third quarter call, we continue to assess mostly stable trends in our operating costs consistent with the last couple of years. I might note that we do see and would expect continued physician cost pressures and believe that those could even be maybe in the high single digits of growth in '26 versus '25. So those would be kind of some comments on the cost side of our guidance. A.J. Rice: Okay. In the contract labor and just general labor, that's steady year to year is the underlying assumption? Mike Marks: It is. I mean, the only thing I might mention is that contract labor as a percent of SWB we came in at about 4.2% for the fourth quarter. And that feels like, you know, kind of our run rate now as we come into 2026. But other than that, I mean, the resiliency plan is in our guidance, as I noted in my comments. And largely, the resiliency plan is there to help us offset much of the adverse impact of the exchange headwinds possible. And you see that in our guidance as well. I think it reflects, you know, really strong cost and operating leverage as we head into 2026. A.J. Rice: Okay. Great. Thanks so much. Operator: Your next question comes from the line of Ann Hynes with Mizuho. Your line is open. Ann Hynes: Great. Thank you. So it sounds like the net negative headwind from ACA subsidies is in the $200 to $500 million range. Can you just go into more of the resiliency programs, provide some more detail on what's up that $400 million and obviously, the confidence in executing throughout the year just from a timing perspective and when you expect to lose potential volume? Mike Marks: Sure. I'll start with resiliency, and I'll pick up the second part in your question related to the exchanges. But, you know, as we've talked about over the last really, year plus, we have been implementing steps to try to mitigate the impact of this health insurance exchange headwind. We've been working to both enhance and accelerate our financial resiliency program. I would make a couple of contextual notes related to our program. The first is that our program has four key areas of focus: revenue integrity, variable and fixed cost efficiencies, and capacity management. We are leveraging three primary capabilities in driving our financial program. First, internal and external benchmarking and advanced analytics. Second, digital transformation with AI and automation. And third, expanding and leveraging our shared service platforms. The 2026 plan includes significant efforts at corporate, in our large shared service platforms, and in our hospital operations. We have planned elements to drive better capacity management, including managing throughput and length of stay in our inpatient settings, in our emergency rooms, and our operating rooms. On the cost side, we have robust plans to drive labor efficiency, supply cost actions, and operating costs covering both variable and fixed costs. We're proud of our teams, and I think they've done a wonderful job embracing resiliency as a strategic imperative. And we have confidence that we'll be able to achieve this $400 million of incremental cost savings in '26 versus '25. A little bit more on your question related to HICS. And let me just say this. You know, our estimated range as I noted in my comments, of $600 to $900 million adverse impact to EBITDA, includes the potential impact from administrative reforms, that were passed as part of the One Big Beautiful Bill Act, and enacted through rulemaking as well as the expiration of the EPTC. And so as a reminder, our health exchange volumes represent approximately 8% of admissions and 10% of revenue in 2025. And the estimate impact centers around some key variables that are included in our calculations. First, you know, how many people lose exchange coverage? What form of coverage, if any, do those lives migrate to? And for those retaining coverage, is there a change in metal tier or utilization? As you can imagine, assumptions around the variables are informed through our own data and experience as well as incorporating external studies and analysis. These variables are difficult to predict and require significant judgments. Our model contemplates a 15% to 20% decline in our HICS volumes for 2026. We assume this volume will migrate to either employee-sponsored insurance or to uninsured. Of the decline in our HICS volumes, we assume approximately 15% to 20% will move to employee-sponsored coverage, which carries a benefit with the remaining migrating to uninsured which includes a decline in utilization from those individuals no longer having coverage. From a timing perspective, we are watching the enrollment figures carefully. As you know, they were released recently by CMS. But these recently released enrollment data include a couple of key areas that will dictate the timing of the impact. And the first one is whether people can pay and sustain their premiums given the significant increase they are facing from EPTC expiration. The second one is if there will be a metal tier shift from silver to bronze, and the impact on utilization and collectability of our patient due balances. So we're watching these trends carefully as we go through the opening days, weeks, and months of 2026. And we will keep you informed as they play out during 2026 on our quarterly calls. Ann Hynes: Great. Thanks. Operator: Your next question comes from the line of Pito Chickering with Deutsche Bank. Your line is open. Pito Chickering: Hey, thanks, and good morning, guys. Thanks for taking my questions. A 2026 guidance question here, just are there any one-timers you should be adjusting out for 2025? But if you take the baseline of '25 and pull out, I think, $450 million to $900 million from HICS as supplemental payments, offset by the resiliency programs, I want to make sure that I'm calculating the core growth of what each is doing at sort of 3% to 12% the 7% of the midpoint versus just your long-term guidance of 4% to 6%. So you're still guiding core above your long-term guidance? Mike Marks: Let me say, I think from a range perspective, that I would just reiterate two or three of the moving parts for clarity. You know, we've noted the range of potential adverse impact from the exchanges of $600 million to $900 million. We've noted that we believe that the supplemental payments could have a $250 million to $450 million decline in net benefit. And that decline in net benefit does not include any potential new approvals of grandfathered applications by CMS. And lastly, resiliency. You know, we are confident that we'll be able to execute on our plans for 2026 given the $400 million target. So I think in taking those kind of swing factors into account, Pito, we do agree. We're pleased with the strength and the performance of the company and the momentum of the company as we go into 2026. Pito Chickering: And then if you can size up the potential default approvals come through, how much they could add to '26 unit tops? Mike Marks: Yeah. We're not sizing the approvals until we get a sense of the actual approval from CMS, and what changes, if any, they make through their review and approval process. So not quite sizing that yet. Pito Chickering: Thanks so much, guys. Operator: Your next question comes from the line of Justin Lake with Wolfe Research. Your line is open. Anna: Hi. Thanks. This is Anna on for Justin. To ask the $400 million of resiliency benefit in '26 is impressive. Can you talk about how much of that comes from ramping AI initiatives and how we should think about further resiliency opportunities beyond 2026? Some of the Medicaid cuts begin in the out years. Thanks. Mike Marks: Yeah. And we've mentioned this before. But I think that the way to think about our resiliency program is that it's a multiyear program. The $400 million came from our assessment of implementation status of the long list of opportunities that we're working on. And based on that assessment of our implementation status, it gave us confidence to include $400 million of savings in '26 versus '25 in our overall guidance. As we move forward, we continue to work on our plan. It's a program, and I mentioned on the previous question, components that we're working on, but we're really pleased with the depth and breadth of our resiliency program and believe that it gives us good support here as we move through the back half of the decade. Operator: Your next question comes from the line of Whit Mayo with Leerink Partners. Your line is open. Whit Mayo: Hey, thanks. You guys have been working on some digital efforts with payers recently. I think at least some of the large national ones around data and disputes. Can you maybe talk about that and how it's manifesting into revenue cycle, yield, collections or pricing or maybe just reduce payer friction? Thanks. Mike Marks: Sure. Hey, Whit. Thank you. We have, over the last year, launched a series of engagements with many of our major payers. And these engagements focus on digital integration. So think about electronic data exchange, think about the kinds of activities that HCA and our payers can partner on to produce administrative simplification. And I think they also include dispute resolution and trying to find better ways to resolve disputes between the parties. We're pleased with these engagements, and I think it gives us strength in our overall relationships with payers. And frankly, we continue to work with our payers to find ways to make things better for their members and our patients. And to digitize the whole workflow between ourselves and our payer partners. So I think overall, these engagements have produced good progress with the relationship between us and our payers. And so we're excited as we head into 2026 to continue to work with our payers on these initiatives. Samuel N. Hazen: And, Mike, speak to the working capital improvements this year, which are part and parcel to some of that, not entirely all of it, but I think that is reflected in the cash flow production that the company had and then our working capital improved this year. Mike Marks: For sure. And we had a nice reduction in net days in AR, especially in the fourth quarter. That really reflects the benefits of sharing data and exchanging data to payers digitally and certainly is a part of what's driving those enhancements. So I think the efforts here are clearly on administrative simplification. I do think they have impacts on our revenue cycle, both in terms of getting claims paid more timely but also through potential mitigation of denials and disputes. Which is beneficial for both us and our payers. Samuel N. Hazen: And, Mike, let me add to the just the whole resiliency agenda. You know, this is not an episodic event for us. It just happens to be a maturation of what in my estimation is cultural within HCA, and that is being cost-effective in finding ways to leverage scale, utilize best practices. Now we have tools, as Mike alluded to, that are in front of us as opportunities to create even more consistency, efficiencies, transparency in the company's overall cost. And that's why the program is lining up in a well-timed manner with some of the enhanced premium tax credit challenges but we see this program continuing to mature. And as we get more capable at using these tools, it's going to help us find even more opportunities. But this is not a one-time event. It's a cultural dynamic in our company around being cost-effective. Being high quality, and finding ways to improve from a process standpoint and a leverage standpoint with our overall scale. Operator: Thanks. Your next question comes from the line of Brian Tanquilut with Jefferies. Your line is open. Brian Tanquilut: Hey, good morning guys and congrats on the quarterly guidance. Mike, as I think about the rural benefit from One Big Beautiful Bill, curious if you have any updated thoughts they finalized some of that. The rules there. And then just any call outs in Q1 of think about other than sort of the tough comp that we should be contemplating? Thanks. Mike Marks: On the rural health transformation, you know, under the One Big Beautiful Bill Act, you know, all 50 states have been allocated their program funding but these are largely state-driven programs, and most of the details have not yet been released. We do not yet know the timing structure of the size of any state-level awards or how much of the funding will be distributed within each state. So our approach, Brian, has been to really stay actively engaged with our state and federal partners regarding both the program design and then our response to program design to ensure that once the applications are open, that we will participate in a way that's meaningful. At this stage, we do view the Rural Health Transformation Fund as a potential opportunity but it's not something that we have reflected in our guidance given the remaining uncertainty. When I think about the quarter, you know, we had a strong performance. You know, we noted that there's maybe one part of that that was a little different than we anticipated. When we gave our third quarter update, and that's the state settlement payments. You may recall that on our third quarter update, we thought we would finish the full year at a $300 million net benefit state supplemental payment programs for the quarter for the year of 2025. Because we were anticipating a year-over-year decline in the fourth quarter given some known headwinds from the prior year. We ended up getting a retro payment from Virginia in the fourth quarter which kind of pushed us flat in the quarter and led us up to a $420 million net benefit for the full year. So that's about the only thing I can think of, Brian, that would be a little different than when we gave our update for guidance in our third quarter call. I mean, volumes came in largely where we anticipated. Our rates were stable, stable operating environment with rates. And our expense management, I thought, was really good in the quarter. So overall, we deem our fourth quarter performance being strong. Samuel N. Hazen: Mike, let me add to the rural discussion just one minute here. Roughly 15% of our hospital, we believe, are rural hospitals of some sort. And so that's a large footprint that we have that's complementary to the networks across the company. So we have a number of assets in rural communities. Secondly, we have a number of programs where our health systems from one community to the other provide services in rural communities, whether it's telemedicine, transport systems, satellite clinic with our physicians, urgent care, whatever. And so that's another vehicle. The third piece for us is workforce. Our graduate medical education programs, even our nursing rotations with our Galen College of Nursing programs, create opportunities for us to we believe, participate in the programs. But as Mike said, we're having to work through roughly 20 different programs in our company to understand how those funds are going to be applied. So we do think we have elements of the company that are in rural America in a way that deserves funding through these programs. Operator: Your next question comes from the line of Ben Hendrix with RBC Capital Markets. Your line is open. Ben Hendrix: Great. Thank you very much. I was wondering if you could provide some thoughts on the potential for a transition to a health savings account construct for the enhanced subsidies. Assuming those funds go directly to customer HSAs, is there any initial thoughts you have on how that would impact your current assessment of the EPTC expiry headwinds? And then how should we think about the impact on uncompensated care if some patients have access to the funds but may not be purchasing insurance? Mike Marks: So, hey, Ben. Good morning. You know, I think if you think about President Trump's health care plan announcement last week, I think the plan, as we understand it, was really aimed at improving affordability. The themes seem to be including insurance plan account and pharmaceutical prices increasing price transparency. And to your point, potentially changing the way that the instead of exchanges with tax credits, maybe a little bit more related to cash coming into health care savings accounts. It's a little early to get a sense for what aspects of that plan will come to fruition. We're monitoring it, as you can imagine, closely as Congress picks those up and decides how they will react. So at this point, it's a little early to try to size potential impacts related to those kinds of potential changes. We're just going to have to see how they flow through Congress and see what comes. But, obviously, we're monitoring it just like you are, and we'll update when we know more. Operator: Your next question comes from the line of Matthew Gillmor with KeyBanc. Your line is open. Matthew Gillmor: Hey, thanks for the question. I want to follow-up on the exchange discussion for '26. Can you give us a sense for how the exchange reforms and the subsidy expirations will impact the volume outlook? I'm curious if there's a drag that's being absorbed within the 2% to 3% volume outlook from the exchange expiration. And can you also give us a sense for how you're thinking about the decline in utilization from folks that moved to uninsured within your outlook? Thanks. Mike Marks: Sure. So if you just think about the modeling, and, again, I think it's important to always start with context. This model and these judgments are significant. And they're early. So, you know, part of our work as we go through the next days, weeks, and months will be to test these assumptions against our actual experience. And so we're going to know more, Matthew, at the end of the first quarter, end of the second quarter, and we will keep you updated as we learn more. But, yes, I do think that the overall volume of the company, although it's within that range of 2% to 3%, has an impact here on exchanges. And if you think about the walk through of the map, so I'll just go back through it because I think it's instructive. You know, we contemplate a 15% to 20% decline in our HICS volumes, and 2026. And that this volume will migrate to either employee-sponsored insurance or to uninsured. All the decline in our volume we assume approximately 15% to 20% of those people will end up with employee-sponsored insurance coverage. Which does carry a benefit. But the remaining will go to uninsured. And for the ones that go to uninsured, we do anticipate a decline in utilization from those individuals no longer having coverage. And we believe that that decline is somewhere in the 30% range. Compared to their utilization of health care services when they had health care insurance through the exchange. The only other thing I might mention with the exchange population is we find that they tend to utilize the emergency room in a way that's heavier than our traditional managed care or commercial population. And so clearly, you know, that's the folks that would come uninsured even with this slight decline of utilization, that population is well almost entirely uses the emergency room. So those will be some additional comments on the impact of volume. Operator: Your next question comes from the line of Andrew Mok with Barclays. Hi. Good morning. Outpatient surgery declined year over year on a negative comp and moderated from the previous quarter. Can you elaborate on what you saw there? And if there are any payer categories you would call out driving some of that volume pressure? Thanks. Mike Marks: Hey, Andrew. Absolutely. You know, if I pull up out of just outpatient surgery, let me just talk about outpatient in general first, and then we'll touch surgery. But overall, the outpatient side, we were pleased with our outpatient revenue growth. Which actually grew at a rate higher than our inpatient revenue growth. As a reminder, we kind of characterize our outpatient revenue into four categories: emergency services, outpatient surgery, which includes both hospital-based and ASC. Our ambulatory platforms, which include physician clinics and urgent care clinics, and other hospital-based outpatient services, including cardiology, diagnostics, and the like. All four categories experienced solid revenue growth over prior year in the quarter. A couple of notes on outpatient surgery specifically. Our same facility cases were down about 50 basis points in the fourth quarter over prior year. With hospitals being about flat and ASCs down about 1.5%. Payer mix, though, continued to be soft with declines to prior year primarily driven by Medicaid. In addition to the payer mix environment, we saw a decline in lower intensity cases like ENT. As a result, we had good growth in net revenue and earnings in our outpatient surgery overall, inclusive of both the hospitals and the ambulatory surgery center platform. Samuel N. Hazen: And, Mike, let me just add to just the whole outpatient discussion. We continue to invest significantly in outpatient facility development just as past year, we added roughly 100 business units to our outpatient footprint across the company, and we find ourselves heading into 2026 and 2027 with significant capital in the pipeline that's geared toward yes, some inpatient capacity and inpatient capabilities, but also quite a bit of outpatient development. Moreover, I would suggest that we have a better pipeline for acquisition opportunities inside of our outpatient footprint than we've seen in a few years. Again, allowing us to complement the existing networks that we have. And so when we look at overall revenue production of the company, I think, Mike, in the fourth quarter, our outpatient revenue as a percent of total was actually up on a year-over-year basis. Some of that is due to the components that Mike laid out, but it's also due to the fact that we're adding units at a greater pace than we are, obviously, our inpatient hospitals. And so the combination of that we think is important to our overall resiliency. And by that, we mean creating an environment where patients have easier access into the HCA Healthcare system and our payers actually have better price points for their members such that they can get into the system with urgent care or physician clinic an ambulatory surgery center in a manner that is most productive for them as a patient, but also for their insurance company. So we're pretty excited about the overall construct that's evolving for our company. I think today, we have about 2,700 outpatient facilities or so that continues to grow. And we see that, pushing toward our target of 18 to 20 outpatient facilities per hospital as we finish out this decade, and that, again, will come through capital development in Greenfield projects, but also acquisitions that make sense for us strategically. Operator: Your next question comes from the line of Sarah James with Cantor Fitzgerald. Your line is open. Gabby: Hey, everyone. It's Gabby on for Sarah. I just wanted to double click on the payer mix and if you can share any color on how it played out. Compared to your internal expectations, specifically Medicaid inflecting positively for the first time in 2025, and if that's something you expect to persist? Thank you. Mike Marks: Yeah. Good question. So when I think about fourth quarter volume, and the composition, and I mentioned this in Paul, you know, I think on the exchange side, the we had a 2.5% growth. We were actually down a little bit smidge sequentially from third quarter to fourth quarter. Think that really reflects a couple of things. One, and this also impacted Medicaid, is just the timing of the Medicaid redetermination process in the prior year. So we think we have fully sunsetted that timeline in prior year. And so you saw you know, less exchange growth, and you also saw a bit more Medicaid volume. And Medicaid is 2.2% growth over prior year. Seems to be now back to kind of a normal growth rate, more consistent with our overall volume. Growth rate for Medicaid. The health care exchanges, you know, clearly, we did not see a pull forward of demand as people were anticipating premium increases. But yeah, the 2.5% growth, we do believe, reflects that timing of pending of the Medicaid redetermination process prior year. Otherwise, I think, you know, we were generally pleased with our payer mix in the quarter. And our overall volume growth. I mean, Medicare up 3.5%. In total, equivalent admissions up 2.5%. I think you know, really reflects a solid demand for the company as we finish the year. Operator: Your next question comes from the line of Ryan Langston with TD Cowen. Your line is open. Ryan Langston: Good morning. I guess with the balance sheet, a pretty good place and maybe fair to expect smaller hospitals and health systems, seeing more detrimental impact from subsidy expiration and impacts from the One BBB. I guess now that subsidies are expired, can you give us a sense on your M&A opportunities, if that pipeline is bigger, smaller, size of the assets? And then maybe kind of touch on capital budget priorities for 2026? Thanks. Samuel N. Hazen: So as I just mentioned, this is Sam. We have seen some acceleration in the outpatient space in our pipeline through acquisitions is a little greater than it's been in past years, and we continue to execute on those appropriately. Assuming we can get to a reasonable deal and we've been able to accomplish that. In certain circumstances. So from that standpoint, that's been what we've seen mostly in the market is in-market type transactions that are complementary to the network and, again, create a better patient offering for us overall. With respect to hospitals and tax-exempt hospitals, specifically, you know, we just haven't seen it yet. That there is a significant opportunity for the company that makes sense from a financial standpoint. We continue to be well positioned as you just mentioned with our balance sheet being in a great position the capabilities of the company as a scaled player allows us to assimilate individual hospitals or hospital systems synergistically, but we haven't seen it. And then so we obviously are open to those type of transactions if and when they present themselves. We're fortunate, as we've in the past, that we do have great markets within HCA's portfolio overall. And the opportunities to invest in those markets organically is compelling. And we've been able to do that, again, in our outpatient space, but also with our hospitals. Our hospitals are running 73%, 74% occupancy. We have many strategic positioned hospitals that need capital. I think our capital is at an all-time high for approved projects that will come online in '26, '27, maybe early '28. It's almost $7 billion of capital that's in the pipeline. Mike alluded to the fact that we're lifting our capital spending because of those circumstances to somewhere between $5 and $5.5 billion. We will continue to evaluate that. So we're finding ways to invest productively as well as use our assets productively with acquisitions where appropriate, investing in our networks, and then looking for out in-market opportunities if in fact they do present themselves in an appropriate way. Operator: Your next question comes from the line of Scott Fidel with Goldman Sachs. Your line is open. Scott Fidel: Curious if you could talk a bit about your expectations for growth in terms of specialties and procedures in 2026. Maybe talk about some of the areas where you're expecting outsized procedure growth around some of the categories that, you know, we've certainly seen, the company investing in and, and then also just underlying growth due to different trends that we're seeing in the market. Thanks. Samuel N. Hazen: So this is Sam. You know, we've said this in the past and, you know, we have geography that's diversified in a sense that no one division in HCA generates more than 10% of the profits of the company. We also have similar diversification, if you will, in services, in that no specific service line generates any more than 15% of the revenue the company. So given that, we haven't seen anything that's disproportionate vis a vis one other service line. I will tell you that we've seen reasonable demand for cardiac services. Some of that's technology-driven in electrophysiology. We continue to believe that that pattern will persist into 2026. Obviously, within our emergency room, we continue to believe that our emergency room services are a very important component to community health and at the same time to our networks, and so we're investing in our emergency rooms both from patient care standpoint, an operational throughput standpoint, as well as a supply standpoint to make sure we have sufficient resources in that particular area. And then within surgeries, I mean, do have specific efforts afoot but they're more generic, if you will. They're not necessarily specialty oriented. I will tell you that our case mix continues to grow. And that growth is driven, we believe, by the acuity of the patients in many instances in our medical space. So we see a lot of patients who have intense medical needs creating more acute care requirements, whether it's intensive care or deeper med surg capabilities, and that's part of what is going on in the communities that we serve as well. So that's a bit of an overview. I don't have any other specifics for 2026 around different categories of growth that we expect, but we can try to get that to you if that's something that would be helpful. Operator: Your next question comes from the line of Raj Kumar with Stephens. Your line is open. Raj Kumar: Maybe just to in line to kind of recent winter storm, maybe any operational disruptions to call out and maybe kind of any considerations for the one Q relative to annual guidance that we should be kind of thinking about related to any potential impacts there. Samuel N. Hazen: Well, it looks like Armageddon out here in Nashville right now. So to say that we are aware of what the impacts are going to be at this point, we're not. I mean, we've had snowstorms before. We had a massive storm in Texas a few years ago. And we were able to navigate through that. My sense is as we close out January, we'll have some sense of the impact of the storm here in Nashville as well as a few other markets for the company. But I don't think it's as significant in most other markets as we maybe are experiencing here. Having said that, we have plenty of opportunity, I think, to recover some of the challenges that, you know, are typical for these type of storms. Operator: Your next question comes from the line of Steve Baxter with Wells Fargo. Your line is open. Steve Baxter: Yes. Hi. Thank you. Could you expand a little bit on the pause Texas Medicaid supplemental payment that was mentioned during the guidance color. I guess, what exactly is happening there? And what needs to happen for that payment to come back online in 2026? And how much, I guess, of the year-over-year impact is that driving? Thank you. Mike Marks: So the pause program is called Atlas. Stands for aligning technology by linking interop systems. There was a commissioner that issued a termination notice on that program on their way out as they were leaving office. The new executive commissioner that has is now in place has agreed to review that program, effectively putting it on pause versus terminate. We don't know yet the timeline for this review. But we are encouraged that the department is willing to review the program consider a potential reinstatement. From a sizing standpoint, you know, when I think about the overall guidance for '26, we've highlighted a $250 million to $450 million decline in net benefit from state supplemental payments. This Texas pause is about a third of that decline. The other two that we noted that are the other two-thirds of that decline. One would be the retro payment from Virginia that we received in 2025. And then the second is the Tennessee program where we had six quarters of benefit in '25 and only four quarters of benefit in '26. So that's the they're each of those three items. About a third of that decline of $250 to $450 million. Operator: Your next question comes from the line of Joshua Raskin with Nephron Research. Your line is open. Joshua Raskin: Thanks. Good morning. I know that came up a little bit, but can you speak to your technology agenda and where you think the greatest opportunities are for HCA and specifically interested in areas where you think AI can help already looking at both the administrative cost, but also as well as the revenue enhancement opportunities. Samuel N. Hazen: So we are investing, as Mike said, heavily in our tech agenda, and it's got multiple components to it. We're investing in our electronic health record transition from one system to another, and we're accelerating into that platform. That's a very important foundational piece for our company and that we're going to be able to standardize datasets across all of our hospitals. Heretofore, our hospitals had a variable dataset that created for us, we believe, is the next some challenges for us when we were using the big data, and big data scalable asset inside of HCA to produce three domains. Better performance broadly. So we've organized ourselves into three domains. And we are extremely energized by the possibilities here in each of the domains. The first domain is administrative, and you alluded to that. That is an area that's focused on revenue cycle, human resources, IT supply chain in many instances, and a few other areas. That we think we can accelerate into because we're more consolidated in our operations. And so we're implementing as we speak in our revenue cycle, in supply chain, and other areas to move, through some transitions into artificial intelligence supporting better functioning, more efficiencies, better interaction with payers and vendors and so forth. And we should start to see some value, and that's part of what Mike alluded to again in our resiliency agenda in 2026. The second domain for us is what we're calling operational, and that's where we're delegating operational responsibilities to each of our hospitals and facilities. Here again, we have areas of focus that we think are going to create incremental value for the company and allow us to be better at throughput, asset productivity, scheduling, and staffing our hospitals scheduling and running our ORs, and so forth. And so, again, a lot of good ideas and a lot of tools that we think AI can bring to the operations of our hospital. Allowing us to be a little bit more standardized, allowing us to be a little bit more consistent in performance, and then giving our management teams greater tools to run their business even better than they do today, and they run it incredibly well. Currently. The third area is what we've called the holy grail. And the holy grail for us is really centered around clinical. And what we can do to support our doctors with insights that come from the patterns that we know exist in the services that we offer because of our volume. We believe with HCA's proprietary database that we have a wonderful opportunity to use those patterns to help our physicians in the moment make better decisions more informed decisions potentially for their patients in a way that will improve care. The second thing on the clinical side is nursing. The opportunity to support our nurses with tools that make it easier for them to do shift change, to have a safety net underneath their day-to-day activities so they can make the patient environment safer and more efficient is in front of us. Again, we have some solutions that we're implementing this year. Our leadership challenge and our leadership responsibility is to help our facilities manage this change, get to the other side of it, so that we can create value for our patients, value for our facilities, and ultimately, for the organization. We are all in on the possibilities with artificial intelligence, merging with what I call the human intelligence that exists within our facilities. And if we can put that together in an effective way, and we think we can, we see a lot of value potential across quality, efficiency, and just management effectiveness. Operator: Great. Thank you. Your next question comes from the line of Jason Cassorla with Guggenheim. Your line is open. Jason Cassorla: Great. Thanks. Good morning, and thanks for taking my question. Maybe asking the payer mix questions in a little bit of a different way. I know you've talked, with the exchange enrollment kind of transitioning into uninsured. But can you give us a sense, in terms of what 2026 guidance assumes for overall bad debt and uncompensated care? And how that compares to 2025 levels. And perhaps if there's offsets at the external level in terms of state uncompensated care pools or programs, that you could tap into as offsets there. Thanks. Mike Marks: Well, you know, I would say that our assumptions in our guidance certainly include this movement for the people who lose the exchange coverage. You know? The ones who don't go to employee-sponsored insurance will likely become uninsured. And, you know, for the you just think about kind of that component, when someone enters our hospital, this and they're uninsured, we do anticipate, it's inherent in our guidance, that, you know, we'll see an increase in the amount of people who are entering our facilities with no insurance in 2026 versus 2025. And that is part of the math that I walked through earlier. As you know, when someone without insurance comes into the hospital, you largely those patients are reserved right away. Right? So that growth kind of immediately transitions into uncompensated care. The other component that we're studying carefully is the amount that patients owe when they do have insurance. And so within the exchanges, you know, I think the potential impact here is when someone goes from silver to bronze. And if we see a significant movement in metal tiers from silver, I do think there is a potential for there to be a bit more due from patients. That's our past experience is that, you know, that the folks on the exchanges owe a bit more than people with traditional managed care. Then when we think about collectability, the collectability of patient balances within the metal tiers on the exchanges, the bronze enrollees have a lower collection rate than the silver. In our modeling and based on our past experience, with silver and bronze, though, I would say that our belief is that the impact to patient balance collections appear to be relatively immaterial. And so, overall, I think the bigger impact will be just the growth in the uninsured versus the uncollectibility of patient balances due as people go from silver to bronze. Again, a lot of modeling assumptions in that, a lot of judgments in that, and we're going to have to test as we go through the first, you know, weeks, days, and months of 2026, but that's our current thinking. Samuel N. Hazen: Toby, let's take one more question. We're almost at an hour. Operator: Okay. Your last question will come from Kevin Fischbeck with Bank of America. Your line is open. Kevin Fischbeck: Great. Thanks. Maybe just one clarification on that last point. And then so what is the collection rate on, like, a bronze versus a silver just so that we can think about it? But then I guess, more importantly, you know, you guys have been over 20% margin last year, this year, even though you've got these headwinds coming in. Kind of think about 20% margin as kind of the high end for you guys, but you're out competing that even with pressure. So how do you think about what kind of margin HCA can achieve? You tend to be bullish about cost savings going forward. Should we be thinking about something north of 20% as a sustainable margin for HCA? Mike Marks: Well, let's start with 2026. I mean, I think given the headwinds from the exchanges and from supplemental payments, and the fact that, you know, we've been able to develop and implement a resiliency program that has allowed us to offset as much of that as we can. We're really pleased with the guidance around margin, which we've been able to get pretty consistent with where we've been in 2025. That obviously reflects a ton of hard work in our resiliency plan, our ability to drive operating leverage through our volume growth, and our overall cost management activities as a company. It's a little premature to talk about what could happen in future other than to just point you back to my comments, Kevin, where we noted that, you know, given the demand in our marketplaces, our resiliency programs, and the digital transformation that Sam just talked about that, you know, we are comfortable that we will be able to, you know, maintain the long-term plan over time. And so you know, I think that's a good sense of the confidence we have in the company in our performance. I think we'll end there. Frank? Frank Morgan: Okay. Thank you, Toby, for your help today, and thanks to everyone for joining us on the call. We hope you have a good earnings season. We're around this afternoon if we can answer any of your questions. Thank you. Operator: This concludes today's conference call. You may now disconnect.
Operator: Please standby, your meeting is about to begin. Good morning, everyone. Welcome to today's fiscal second Quarter Fiscal Year twenty twenty six Earnings Conference Call. At this time, participants are in a listen only mode. We will begin with opening remarks and introductions. At this time, I would like to turn the call over to Mr. Kevin Kim, Vice President of Investor Relations. Please go ahead, sir. Kevin Kim: Good morning, everyone, and welcome to Sysco's second quarter fiscal year twenty twenty six earnings. On today's call, we have Kevin Hourican, our Chair of the Board and CEO and Kenny Chung, our CFO. Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations, or predictions of the future are forward looking statements within the meaning of the Private Securities Litigation Reform Act, and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward looking statements is contained in the company's SEC filings. This includes, but is not limited to, risk factors contained in our annual report on Form 10-K, which for the year ended 06/28/2025 to subsequent SEC filings and the news release issued earlier this morning. A copy of these materials can be found in the investors section at sysco.com. Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures is included at the end of the presentation slides and can also be found in the Investors section of our website. During the discussion today, unless otherwise stated, all results are compared to the same quarter in the prior year. To ensure we have sufficient time to answer all questions, I'd like to ask each participant to limit their time today to one question. If you have a follow-up question, please reenter the queue. At this time, I'd like to turn the call over to Kevin Hourican. Kevin Hourican: Good morning, everyone, and thank you for joining us today. I am pleased to report that Sysco delivered strong results in the 2Q 2026. Our results were enabled by improving case volume trends, strengthening gross margin performance and disciplined expense management. Given the strong start to the year, we now expect full year adjusted EPS to be at the high end of our previously provided annual guidance range of $4.50 to $4.60. We are delivering sequential improvement in our business, setting the stage for further momentum in the second half of the fiscal year. During our call today, we will share insights into the progress that we are making, provide color on each major business segment, we will discuss the external business environment and we will highlight progress on select growth initiatives. After my remarks, Kenny will highlight our financial results; he will share why we are confident in our ability to deliver adjusted EPS at the high end of our guidance range. Let's jump into our business results starting on Slide four. Our Q2 performance exceeded our previously communicated targets for U.S. Foodservice local volume and adjusted earnings per share. Sysco delivered nearly $21,000,000,000 of total revenue, a growth rate of 3% versus the prior year. Importantly, we delivered positive case growth in our local, specialty, national, and international business units. U.S. Foodservice local case volume was up 1.2% in the quarter, an improvement of 140 basis points versus Q1. This improvement in performance was approximately 40 basis points stronger than what we had guided on our last call. The improvement in our performance can be seen on Slide eight. Sysco's 140 basis points of local case growth improvement was delivered in an environment where traffic to restaurants, per Black Box, declined more than 200 basis points year over year and a similar decline quarter over quarter. We are strengthening our performance at Sysco in a softening macro backdrop. Our improvement gives us the conviction in our ability to gain share profitably in the current market conditions. We are pleased with the positive momentum in local volumes over each of the last three quarters in the U.S. As seen on Slide number eight. We are now solidly in positive volume growth territory and we expect continued positive momentum for the second half of the year. More specifically, we expect reported local volume growth of at least positive 2.5% in both Q3 and Q4. To double click into that 2.5% back half growth, we expect at least 2.1% to come from organic local case growth representing a 100 basis points improvement versus Q2 with approximately 50 basis points additional contribution from M&A activity recently completed. Turning the page to our national contract business, during our second quarter, our National business generated volume growth of 0.4%. Unpacking this segment further, we saw strong growth in our Foodservice Management business, solid growth in Travel and Entertainment and positive and strengthening volume growth in our healthcare business. The positive growth from these business units was partially offset by softness in our national restaurant segment. The declining foot traffic to restaurants per Black Box has negatively impacted our national chain restaurant customers as can be seen in our results, as volume with these customers was down year over year. For the remainder of fiscal year, we expect case volume growth for national contract customers in total to be greater than 2% due to the onboarding of net new customer wins in the national restaurant customer business and continued strength in our non-restaurant business. Having covered top line results, will now transition to the middle of our P&L and highlight our expanded gross margins year over year. Our buying and merchandising teams are doing a solid job of ensuring best price in our procurement efforts and partnering with our sales teams to highlight that value to our customers. As I have mentioned on previous earnings calls, we are working extensively to increase the availability of products in what we call the value tier of a good, better, best product hierarchy. Sysco currently under-penetrates in the value tier, and there is an opportunity for improvement, especially in an environment where restaurants are seeking ways to save money. Historically, Sysco has had a strong position in the premium or better best segments of the business and our merchandising focus on the value tier is intended to supplement our existing assortment. Doing so will enable us to win net new lines from existing customers. The development of a stronger value assortment is actively underway and will progress constructively over the next calendar year. I want to be very clear that these efforts are not intended to trade customers down from better to good. This is about filling voids in the Sysco product assortment, meeting the customer where they are, and growing our business profitably with existing customers. Sysco delivered solid expense control in the quarter, with supply chain productivity continuing to improve quarter over quarter and year over year. Warehouse and driver colleague retention improved in the quarter, driving improvement in productivity. We are delivering strong service to our customers and improving our supply chain cost performance. Turning to our International segment, we are extremely pleased with the performance being delivered by our International team. During the quarter, we delivered sales growth of 7.3% on a reported basis and up 9.9% when excluding the divestiture of Mexico. Starting in Q3 2026, we will have fully lapped our Mexico business exit. The momentum in our international business was fueled by every international geography. To that end, local case growth in our international segment was up 4.5% in the period. This growth is being generated by expanded supply chain capacity, increased availability of Sysco branded merchandise, increased sales headcount and easier to use technology. The 4.5% local case growth coupled with disciplined expense management delivered adjusted operating income growth of nearly 26%. This represents the ninth consecutive quarter of double digit operating income growth and highlights the reality that Sysco International is a growth engine within the company. I am proud of the progress that we have made in international, and we are very bullish on our future in this segment. Now like to transition into a brief update on select growth initiatives that are driving our positive U.S. local case growth. First off, I would like to provide an update on sales colleague retention and productivity. As was the case in Q1, our colleague retention rate in Q2 was at or above our historical high watermark. We have fully stabilized sales colleague retention and we are now focused on increasing selling productivity. Due to the higher than normal percentage of sales colleagues that are newer to role, we are focused on product and selling training. We have full confidence that these training efforts are improving selling effectiveness. In Q2, we can see the improvement through important internal sales metrics. We continue to onboard net new customers at a high level, and we have made meaningful progress in improving customer retention. Spread between new customer onboarding and existing customer lost is measured in a new versus loss ratio. That ratio expanded solidly in the second quarter. To assist our colleagues, we have deployed tools to improve selling productivity, most notable is our AI360 CRM tool, which is now four months live in production. Engagement with AI360 remains very high, with 95% or more of our colleagues using the tool weekly. More importantly, we can track utilization and selling performance through AI360. Across all sales colleague tenures, those that are using the tool more often are outperforming those that use it less often. The math is very clear: if you use the tool, you sell more. Our goal in the second half of the year is to ensure all of our sales reps are actively engaging with the selling suggestions that come from AI360. To that end, have new functionality being deployed to the tool on a regular basis. Coming soon will be something that we call swap and save suggestions for our sales consultants to introduce to customers. With the click of one button, the sales consultant will have access to prioritized suggestions of products that can save a customer money. These suggestions are cuisine specific to the restaurant and are generated by our internal data science team. The key is in the data, knowing which items are acceptable solutions and substitutions. We are able to identify which of the item substitutions will save the customer money, will help Sysco make more money, and importantly, make our sales reps more money too. The suggestions that will be prompted will be those that check each of these three boxes—a win-win-win. AI360 will enable our sales teams to put more of these swap and save opportunities in front of our customers, more often. Lastly, I'd like to provide a quick update on Sysco Your Way and Perks loyalty program performance. Sysco Your Way neighborhoods continue to deliver mid single digit volume growth year over year despite being in the fourth year of existence. That durable growth success proves that the program resonates well with customers. We are growing our customer count and the lines purchased per existing customers within Sysco Your Way neighborhoods. The revamp of Sysco Perks is delivering results as we had anticipated. We are seeing improved customer retention year over year and we are seeing increased share of wallet with these important customers. Our local business is now growing, as a result of improved colleague productivity and the sales driving programs that I just mentioned. We are confident we will continue to make progress and therefore we are confident in the projection that we will improve local volumes to at least 2.5% in the FY 2026. As I wrap up my prepared remarks, I would like to provide an update on two miscellaneous topics from the quarter. First is to communicate that we completed a small tuck-in acquisition at the end of the second quarter. Are pleased to welcome Ginsburg Foods, a premier broadline distributor in the Northeast to the Sysco family. This transaction increases our customer count in a high value region of the country and helps Sysco's leverage its supply chain network more completely. We are excited to create additional scale and growth potential in the geography as we welcome the Ginsburg colleagues and customers to Sysco. Over time, we are positioned to unlock additional top line growth and margin expansion opportunities as we introduce Sysco's buying programs and product assortment to the expanded customer set. Lastly, I want to acknowledge the retirement transition of our Chief Operating Officer, Greg Bertrand. Greg began his Sysco journey in 1991 and quickly advanced through the ranks, serving as our global COO since September 2023. Greg will be missed personally and professionally, and we thank him for his substantial contributions to Sysco across his thirty-five year career. Over the next year, Greg will serve as a strategic advisor in a part-time capacity. Greg will focus his time and efforts on helping develop newer Sysco field leaders and will support me directly on select strategic initiatives like the Ginsburg acquisition that I just mentioned. We expect a smooth transition over the next year as we have a strong depth of experienced leadership talent in our field organization. In closing, I want to reiterate that we are encouraged by our strengthening results and that we are confident in our business momentum as we head into the second half of the year. We expect improved productivity from our sales colleagues, driven by strong retention and improved selling effectiveness by leveraging our selling tools and from leaning into select growth initiatives, all backstopped by a supply chain that is performing at exceptionally high levels of service. It is these factors that give me, Kenny, and our leadership team the confidence that we will deliver 2.5% plus local case growth in the second half and adjusted EPS results at the high end of our guidance range. With that, I'd now like to turn the call over to Kenny. Kenny, over to you. Kenny Chung: Thank you, Kevin, and good morning, everyone. Our Q2 results were strong with sales growth of 3% and adjusted EPS growth of 6.5%. Our financial results this quarter also demonstrated high quality of earnings as free cash flow grew by 25% year to date. Our balanced portfolio of business and keen focus on operations enable us to deliver continued momentum versus last quarter with results coming in ahead of our previously communicated expectations despite the choppy macroeconomic environment. We entered the fiscal year detailing how company specific initiatives would help us deliver on our external commitments. With a focus on the key inputs of retention and productivity across our sales and supply chain organization. During the quarter, these were material drivers that enabled us to deliver on our expectations for the first half of the year. Looking ahead, our continued focus on go-to-market and operational excellence is expected to drive our second half results. As Kevin highlighted, we are creating structural improvements, and we are confident in raising our FY 2026 guidance to the high end of the adjusted EPS range. Our adjusted EPS growth in Q2 included continued tailwinds from our strategic sourcing efforts aiding in the delivery of 3.9% growth in gross profit and translating to 15 basis points of gross margin expansion year over year. The increase in dollar and rate reflects the carryover benefit from structural improvements that we expect to continue in our third quarter. Our stabilized sales colleague retention rates paired with ongoing productivity improvements drove the local volume growth across our U.S. Foodservice local business. During the quarter, our supply chain continued to perform at a very high level as a result of productivity enhancements stemming from improved tenure strengthened operational execution. This in turn helped to improve execution of the basics and are supporting improved fill rates and order accuracy while strengthening safety and enabling on-time deliveries. These efforts, alongside continued investments in both sales headcount and capacity, supported steady business momentum and enabled adjusted EPS growth of 6.5% in the quarter. As Kevin noted, we also recently expanded our distribution capabilities in the population-dense Northeast Corridor in late December with the successful acquisition of Ginsburg's Food, one of the nation's leading regional wholesale distribution companies. This is a compelling strategic and financial fit for Sysco that is accretive to our portfolio. We are excited about the opportunity to unlock incremental growth as we complement our unique specialty capabilities with the addition of this top tier broadline organization. Looking ahead, we expect our positive momentum to continue as we drive growth across the region. Turning to international, this segment remains a great case study in the power of the playbook. The positive momentum over the past few years continued in Q2, with sales growth of 7.3%, including local case growth of 4.5%, gross profit growth of 9.5%, and adjusted operating income growth of 25.6%. Our strategy is driving results across all geographies, underscoring significant operational advantages enabled by our size and scale. Now let's discuss our performance and the financial drivers for the quarter starting on slide 12. The second quarter, our enterprise sales grew 3% on an as-reported basis driven by U.S. Foodservice, International and SYGMA. Excluding the impact of our divested Mexico business, sales grew 3.5%. Total U.S. Foodservice volume increased 0.8% while local volume increased 1.2% in the quarter. These results were sequential improvements as compared to Q1. For our U.S. Foodservice local business, this represents a sequential volume improvement of 140 basis points, outpacing the industry's negative 230 basis points of sequential traffic decline for the quarter. We are encouraged by the meaningful acceleration in our local volume performance even as the industry decelerated throughout the quarter. The continued momentum in our performance drove a widening gap of outperformance over the course of the quarter. Although remains early in our fiscal third quarter, I am encouraged to share that we are seeing continued year over year momentum volume growth rates during the month of January. As Kevin highlighted, the benefits from our stabilized colleague population are fueling our performance as newer sales professionals continue to work up productivity curve. This momentum is just getting started and serves to strengthen our confidence in delivering our FY 2026 guidance. Additionally, SYGMA results this quarter were solid, reflecting 0.5% sales growth and 10.5% operating income growth, reflecting increased strength in our supply chain operations. For the remainder of the year, we expect more moderate results reflecting the follow-through on our efforts to drive continued operating efficiencies. Sysco produced $3,800,000,000 in gross profit, up 3.9%, gross margins expansion of 15 basis points to 18.3%, and improved gross profit per case performance. This notable margin improvement reflects strategic sourcing efforts and effective management of product cost inflation across our baskets, which continue to moderate. Including categories were deflationary in Q2. Inflation rates for the enterprise were approximately 2.9% and the U.S. Broadline were approximately 1.4%. This rate moderated slightly on a sequential basis which we believe will help the affordability across the industry. Importantly, we just as we deliver in the first half, we continue to expect our disciplined actions to generate strong gross profit dollars per case and margins in this backdrop. Overall, adjusted operating expenses were $3,000,000,000 for the quarter, or 14.4% of sales, a 15 basis points increase from the prior year, reflecting planned investments in higher growth areas of the business with fleet, building expansion and sales headcount along with the lapping of $60,000,000 in incentive compensation in the second quarter of the prior year. The incentive compensation last negatively impacted adjusted operating expenses by approximately 60 basis points and adjusted EPS growth by approximately 270 basis points. As I mentioned earlier, our operations expense this quarter included benefits from supply chain productivity enhancements stemming from improved tenure and strengthened operational execution. Corporate adjusted expenses were up 3.8% from the prior year, reflecting continued investments, lapping in certain compensation from last year and other costs. Excluding the impact of incentive compensation from the prior year, corporate expenses were approximately flat year over year, reflecting cost savings and efficiencies effort over the past few years. Overall, adjusted operating income grew to $870,000,000 for the quarter, reflecting continued improvements in our local case volumes along with strong growth in our international segment. For the quarter, adjusted EBITDA of $1,000,000,000 was up 3.3% versus the prior year. Let's now turn to our corporate balance sheet and cash flow. Our investment grade balance sheet remains robust and reflects a healthy financial profile. Our $2,900,000,000 in total liquidity remains well above our minimum threshold and offers flexibility and optionality. We ended the quarter at a 2.86 times net debt leverage ratio. Turning to our cash flow year to date, our free cash flow was $413,000,000, up 25%, highlighting strong quality of earnings and reflecting both typical seasonality and timing of CapEx. Now I would like to share with you our expectations for FY '26. We are pleased today to announce a raise to our FY 2026 adjusted EPS guidance. We now expect full year 2026 EPS to be at the high end of our prior range of $4.50 to $4.60. Keep in mind that this continues to include an approximate $100,000,000 headwind from lapping lower incentive compensation in fiscal 2025, an impact of roughly negative 16 cents per share. Excluding the negative impact of the incentive compensation on 2026, our outlook for adjusted EPS growth in FY 2026 will deliver at the high end of approximately 5% to 7%, which is in line with our long-term growth algorithm. Now at the halfway point for the year, remain confident in our Sysco specific initiatives delivering results in the second half of the year. Our teams expect a similar macro and industry traffic backdrop for the remainder of this fiscal year. Guidance also includes continued expectations for net sales growth of approximately 3% to 5% to approximately $84,000,000,000 to $85,000,000,000 driven by inflation of approximately 2%, volume growth and contributions from M&A. Transitioning to our expectations for the second half, we have now fully lapped both the headwind from the intentional FreshPoint business exit in the U.S. and the year over year comparability impact related to the exit of our Mexico JV for international. Specific to volumes, we expect to deliver year over year local case growth of at least 2.5% in Q3 and Q4. By segment, we continue to expect positive adjusted operating income growth across U.S. Foodservice, international and SYGMA segment for the rest of the year. More specifically, we expect U.S. Foodservice profitability to return to growth in Q3 and Q4 driven by volume growth and continued discipline around margin management coupled with continued focus on ROIC. To help with the phasing for adjusted EPS, Q3, we are comfortable with the current consensus estimate of 94 cents. As outlined on slide 18, this includes the carryover impact from the incentive compensation specific to Q3 is $63,000,000 and Q4 is $11,000,000. Excluding the negative impact of the incentive compensation on 2026, our outlook for the second half adjusted EPS growth is in line with our long-term growth algorithm. We are proud of our strong track record of dividend growth and dividend aristocrat status. For FY '26, we remain on target for shareholder returns through approximately $1,000,000,000 in dividends and approximately $1,000,000,000 share repurchase plan for the year. As we've said before, this is all based on our current expectations and economic conditions that could flex based on M&A activity for the year. Specific to our share repurchase, we expect to resume repurchase activity starting in Q3. Specific to our dividend, our expected payout for FY 2026 equates to 6% year over year increase on a per share basis. In terms of leverage, we continue to target a net leverage ratio of 2.5 times to 2.75 times and maintain our investment grade balance sheet. Specific to our adjusted D&A, we now expect approximately $820,000,000 for the year. This includes approximately $210,000,000 in both Q3 and Q4. This updated outlook reflects the combined benefit from our ongoing efforts on driving returns on invested capital and marginally lower capital expenditures for the year. All other modeling items previously outlined on our Q1 call, including interest expense, other expense, tax rate and CapEx remains unchanged. Looking ahead, we are confident in our position and remain focused on leveraging our strength as the industry leader to drive customer growth while continuing to create value for our shareholders. With that, turn the call back to Kevin for closing remarks. Kevin Hourican: Thank you, Kenny. Q2 was a quarter displaying momentum and progress at Sysco in a macro backdrop with soft traffic to restaurants. We are confident that our internal progress will continue and we will plan to deliver local case growth of at least 2.5% in the second half. There is still much progress to be made and work to be done, but we are pleased with the improvement we are delivering and the momentum that is building within the company. Importantly, the improved U.S. local volume we are delivering will enable the stellar performance in our international division to shine through more clearly. We are excited for the progress that we are making, and we are committed to strong execution in the second half of the year to deliver these outcomes. With that operator, we now turn it over for questions. Operator: Thank you. We go first today to Mark Carden of UBS. Please go ahead. Mark Carden: Good morning. Thanks so much for taking our question. So you've put together the 140 basis point sequential local case growth improvement against pre tough restaurant backdrop industry wide. Sounds like a lot's coming together. Did you guys see much variation in local case growth on a monthly basis? And then is it safe to assume that January has accelerated even further given your momentum comment? And then finally, are you expecting to see much of a headwind related to the recent winter storms? Kevin Hourican: Good morning, Mark. It's Kevin. Thanks for the question. I'll start with the factual component: The performance of Sysco relative to the industry strengthened each month of Q2. So we got better relative to the industry for each of the months consecutively. We've seen that strength continue into January. As we step back and think about why is this performance happening? What are the drivers? We have three new things year over year. As I mentioned, the most important by far is SC retention (sales consultant retention). SC productivity is up meaningfully year over year. We launched our AI360 selling tool approximately ninety days ago. We're getting traction from that tool. We launched Perks 2.0, which is a revamp of our loyalty program. We are seeing increased customer retention and improved penetration rates with those existing customers. These three things have nothing to do with restaurant traffic. They're 100% Sysco specific and we're making tangible progress. Specific to Q3, we had a strong January. To your point on whether we saw favorability in weather in January versus prior year, we're gonna give some of that back this week given the huge swath of the U.S. impacted. We'll find out at the end of the quarter if there was a positive or negative contribution from weather. January is off to a strong start on the controllables. Kenny? Kenny Chung: Hey, Mark. Three things for me. Just a double click on the phasing: between October through December, foot traffic softened from down 2% to over 3%. The good news is our inflection versus the market strengthened throughout the quarter, with December being the strongest. Point number two: we are encouraged to see numerous geographies already hitting our growth expectations. Point three: remember Sysco has proven we can grow in any environment. Two-thirds of our national footprint is non-restaurants, and we have an international segment which serves as a strategic counterbalance. Operator: Thank you. We'll go next now to Jeffrey Bernstein of Barclays. Jeffrey Bernstein: Great. Thank you very much. Another question on the sales growth for the FY 2026. You mentioned how you've been strengthening in a softening macro, and you've repeated at least 2.5% growth in U.S. local in both the third and fourth quarter. Looking back, it does look like the compares are much easier. Is it correct to assume you're assuming no change in trend from where you were running in the second quarter? And then just curious, do you share the broader industry's optimism for coming months? Seems like there's talk of easing compares, lower gas prices, increased tax refunds, and newfound stimulus. Kevin Hourican: Morning, Jeff. We anticipate two-year stack improvement in the second half versus the first half. You are right that Q3 in particular has softer compares; that's included in what we shared. Do I share some optimism? The answer is yes. Independent restaurant operators have leaned into the consumer need for value. They've adjusted menu prices, looked at portion sizes and alternative proteins. Independents are outperforming national chains. National chains are now leaning into the value tier themselves with value menus and protein bowls. The guidance communicated today is about Sysco. It's about the five things: SE retention and productivity, AI360, Perks 2.0, Sysco brand improvement, and merchandising efforts to improve our value proposition. That gives us the confidence to accelerate our organic performance by at least 100 basis points in the second half. Kenny Chung: Hey, Jeff. For Q2, local case growth was up 1.2%. Bifurcating that, organic was 1.1% and Ginsburg was only 10 bps because we did it at the tail end of the quarter. In the back half, the 1.1% organic goes to at least 2.1%, and Ginsburg goes to 50 bps. That's how you bridge the 1.2% to the at least 2.5% growth. Operator: We'll go next now to Lauren Silberman of Deutsche Bank. Please go ahead. Lauren Silberman: Nice quarter. How much of the growth is coming from new account wins relative to expanding penetration with existing accounts? Any color on the spread between new versus lost accounts? And on the Salesforce side, how is the growth in Salesforce tracking in FY 2026? Kevin Hourican: New customer win rate in Q2 remains at all-time highs. What improved nicely in Q2 was our customer loss rate. That can be directly attributed back to our improved colleague retention. The spread between new and lost widened in the quarter versus the prior quarter and prior year. We also improved penetration, which I'm frankly most proud of because traffic to restaurants was down. Kenny Chung: Hey, Lauren. We had the highest growth of new and the lowest level of loss in the past twelve months. Regarding sales headcount, we are committed to growing in FY 2026 but will be disciplined on pacing to volume expectations. We are deliberate in when and where we add, investing in high-growth markets. We now have tools like AI360 and our training program to reduce lead time and optimize the hiring mix. Operator: We go next now to Jake Bartlett of Truist Securities. Please go ahead. Jake Bartlett: I want to make sure I understand what's driving the increased EPS guidance. Is it simply the adjusted D&A being lowered? And then for local case growth in Q3, should we not expect growth to be faster than Q4 given the easy compares? Kenny Chung: The increase of EPS is actually not driven by D&A. We beat in Q1 and Q2, having that flow through. It’s driven by top line momentum, SE retention, and AI360. On the national business side, two-thirds of our business is non-restaurants, which is inflecting versus the marketplace. For gross profit, we have several levers: local growing at a faster clip is a mixed benefit, strategic sourcing efforts are providing a carryover benefit, and Specialty has momentum as we lapped the FreshPoint exit. Kevin Hourican: Jake, the second part: the Q4 two-year stack will be stronger than the Q3 stack. Let's just unpack Q3 last year—I can't predict weather. Last January we had wildfires in California and in late February we had tariff disruptions impacting consumer confidence. January this year is off to a very strong start. Foot traffic to restaurants improved in January versus Q2 quite notably. Given this week's weather, some of that favorability will be given back. If there is favorability from weather in Q3, we'll talk about that next call. Operator: Go next now to John Heinbockel of Guggenheim. Please go ahead. John Heinbockel: Hey, Kevin. Couple of things. Local drop size—is that still in negative territory? And regarding the loss ratio, I assume you are still above the best performance you've had historically? Kevin Hourican: John, local drop size was down slightly, approximately 1% in the quarter. We are using technology for routing efficiency to help with that as we move forward. Regarding the loss ratio, yes, we have the expectation that we will get to a new all-time best in customer retention, new customer acquisition, and colleague retention. Operator: Thank you. That does conclude the question-and-answer session. I would like to turn the conference back over to Mr. Kevin Hourican for any additional or closing remarks. Kevin Hourican: Thank you, operator, and thanks to everyone who joined us. We are pleased with the results and remain confident in our ability to continue to drive positive growth. Thank you.
Luke Wyse: Good morning. It's 09:30 in Dallas and cold and icy, but we all made it. We're looking forward to visiting with you this morning. Thanks for your interest in Triumph Financial, Inc., and thanks for joining us this morning to discuss our fourth quarter 2025 results. With that, let's get to business. Aaron's letter last evening highlighted our progress on our stated goals: revenue growth and our focus on lean operations. Aside from the core business improvements, there were a few nonrecurring items that went our way also. This demonstrates two things. First, our focus gives us the ability to hold non-core elements of our operations loosely and execute on capital-creating opportunities when they arise. Second, our results this quarter demonstrate metrics moving in the right direction for our long-term goals and that we are keeping the main things the main things. The quarterly shareholder letter published last evening and our quarterly results will form the basis of our call today. However, before we get started, I would like to remind you that this conversation may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to publicly revise any forward-looking statement. For details, please refer to the safe harbor statement in our shareholder letter published last evening. All comments made during today's call are subject to that safe harbor statement. With that, I'd like to turn the call over to Aaron for a welcome and to kick off our Q&A. Aaron? Aaron P. Graft: Good morning. Thank you for joining us. As Luke mentioned, the conditions outside are not stellar, but we all made it. For the call. Before I do some opening remarks, I want to welcome David Valier to the table, president of Load Pay. Since he was the new guy, we made him wear a tie for this call. But going forward, we'll see. Maybe he can take the tie off. But welcome, David. Glad you're here. And we're glad to do this, and as usual, we're going to jump into Q&A quickly, but I did want to make one or two brief comments before I turn the call over for questions. I know that different investors have different perspectives. Some of you are focused on growth, some are focused on efficiency, and some are focused on balance sheet strength and credit quality. All three of those we know are important. As a management team, our goal is first and foremost to help the industry transact confidently. That means strengthening our network so that people can more efficiently and securely transmit data and payments. Pursuit of that goal over the last five years has generated volume and revenue growth even as the trucking industry has been mired in a historically bad recession. We believe in the value proposition of what we're doing, as do eight now of the largest 10 freight logistics companies in the country. To that end, we were excited to recently welcome JB Hunt to our network. The second thing, as I alluded to earlier, that is important to invest is to translate our vision of a secure network into profits for our enterprise and investors. We are on that trajectory, growing revenue and holding expenses in check is a sure path to greater profitability. That is what I expect to continue to do this year. For just one example, our core payments business will trend above its 30% EBITDA margin currently in 2026 and on its way to our ultimate goal of 50% or greater. And if you look out over the longer term, Load Pay should contribute in that segment at even more accretive and capital-efficient margins. So that in the end, our payments segment should have all the financial metrics of the most successful financial technology companies. Underlying that, the industrial logic of directly connecting the payor and the payee across the payment rails of our bank is very clear to us and it is becoming increasingly clear to the market. And finally, we want to build the network and improve our margins and profitability with a balance sheet that is strong enough to withstand unforeseen cycles. We have done that to date and going forward, we will continue to do the same. Even as we work through legacy assets and narrow our fairway for credit exposure going forward. In doing that, we will always maintain enough capital to persevere through a rainy day or many rainy days. That is our plan. We will now turn the call over for questions. Operator: We will now move to our question and answer session. If you have joined via the webinar, please use the raise hand icon, which can be found at the bottom of your webinar application. When you are called upon, please unmute your line and ask your question. We will pause now for a moment to assemble the queue. The first question is from Joe Yanchunis from Raymond James. Please unmute yourself and begin with your question. Luke Wyse: Morning, Joe. Joe Yanchunis: So I was hoping to start with expenses here. So in your shareholder letter, you reiterated your 2026 expense outlook. And was the sale of the building and airplane in subsequent $6 million savings baked into that initial guide, or are those expenses being redeployed to other areas? Luke Wyse: It'll be a combination, Joe. We've got so many moving pieces coming in and out, but you're always going to see a jump in expenses a little bit in the first quarter of any year, just given the natural resets that happen. And that's going to require us to find additional efficiency as we go throughout the year. But, yes, that building and the plane, the savings from that, about that $6 million a year, that is baked into the first quarter estimate. It will be part of the run rate going forward. Joe Yanchunis: Okay. I appreciate that. And then kind of shifting over to Load Pay. So maybe, David, you could help with this. Yes. So Load Pay exited the quarter with annualized revenue of $1.5 million. You guided to tripling this amount in 2026. So I know you're working on some enhancements to the product that could increase the revenue per account. You know, to triple Load Pay revenue in 2026, what are the underlying assumptions around account growth versus increasing revenue per account? David Valier: Yeah. So it's going to be a combination of the two things in 2026. So first and foremost, right, we're expecting to open between 7,000 to 12,000 accounts over the course of the year, building off the momentum from last year. And second, you know, what we really look for is being able to link and fund the accounts. Right? So account opening is our first step in the process, but then getting high levels of utilization. So as we talk about in the letter, we still forecast that we'll be at about $750 per account on a revenue basis. But if we look at the total portfolio, our customers are very different in the way that they use the accounts. And so some, we haven't had linked and funded. However, our top 10 accounts are all tracking to over $5,000 a year in revenue. So in that mix is how we're going to get to $750. And so the goal of the team as we look at improvements throughout the course of 2026 is really about how do you drive that linked and funded percentage higher. Operator: The next question is from Tim Switzer at KBW. Please unmute yourself and begin with your question. Timothy Switzer: Hey, good morning. Thank you for taking my questions. Aaron P. Graft: Morning, Tim. Timothy Switzer: My first question, Aaron, is on the outlook you provided in your letter, specifically on the low teens growth in factoring. What, you know, how much of that is driven by factoring as a service? If it, you know, if it contributes a lot at all? And, you know, what does that assume in terms of the freight recovery and, like, what's the potential upside if we get, you know, a true recovery in the industry? Aaron P. Graft: Sure. If I answered that second question, Kim, who's sitting next to me, would start punching me. So I'm going to be circumspect in how I answer that. But on the first part, factoring as a service as a percentage of that low teens growth is immaterial. It is growing way faster than everything else, but you're talking about growth off of a very low revenue base versus the rest of the business. Secondly, for the projections of next year, we just assume the market stayed as it finished Q4. And remember this from an earnings perspective, in Q1, you will see I very much expect you will see a decline over where we ended the year because of normal seasonality in our business. So we assumed a flat freight market for the course of the year, which just means that as we work as the team is growing our factoring business organically, we're widening the amount of customers we serve. We're going deeper with those customers. Kim has the difficult job of both serving the very largest end of the market. We serve some extremely large customers in our factoring business. And then we also serve thousands of small carriers who also use us for Load Pay. And so the assumption is that we will organically grow that penetration and that's where the underlying low teens revenue growth comes from. Timothy Switzer: Interesting. Okay. That's helpful. And then another thing in your letter you talked about was, you know, only 22% of your customers are using both payments and audit within TPay. But now that you've, you know, reached agreements with it sounds like most of the legacy contract customers, you know, how does that change over the rest of the year? Assume a lot of them are now going to be on NextGen audit. We'll probably be using payments and audit. Just curious, like, how that moves, and I assume that helps revenue quite a bit. Aaron P. Graft: Certainly. So when we talk about the fact that we have not cross-sold payments and audit to the extent that we would have liked, a lot of that goes back to the legacy of how we built the network and the acquisitions that we made. So a lot of the audit clients came over with the Hub Train acquisition, whereas the payments network was built basically on our own, bringing clients onto payments one after another. Intersection there, obviously, has a lot of room to improve. And as we get through repricing of the payments business, keep in mind that the audit business is always charged a per invoice fee. You'll see, you know, more and more overlap, more and more opportunity for us to be able to leverage one part of the relationship for the other. Timothy Switzer: Okay. Gotcha. And I think historically, you guys have disclosed in the letter, like, the percentage payments for which you charged the fee, I think, was 31% last quarter. Are you guys able to update us on where that was in Q4? Aaron P. Graft: Sure. So, for fourth quarter as a whole, it moved up to 35%. In December, it was 38%. And January 1 was another key date where more of the new contracts went into effect, so you'll see significant increases in the first quarter. Timothy Switzer: Wow. Very impressive. Alright. Thank you. Operator: The next question is from Matthew Olney at Stephens. Please unmute yourself and begin with your question. Matthew Covington Olney: Hey. Thanks. Good morning, everybody. Wanna go back to the factoring discussion, and ain't that pretax margin of factoring was around 33% in the fourth quarter. A really good improvement over the last year. Can you talk more about the drivers of that improvement? And then looking forward, that pretax margin within factoring, what does the guidance imply as you exit 2026 and then longer term what do you expect that pretax margin to approach? Aaron P. Graft: Yeah. So the margin is really from our focus in technology and automation. And also a reduction in headcount through the back end of 2025 so our focus is to continue to drive all of our automation in our back office so you'll continue to see that margin expand through 2026 and '27. Matthew Covington Olney: Yeah. And, Matt, on the long term I think what you would expect and and first of all, just to backing up to set the context for a few things. Number one, there was a season of time in the in the building of the network where growth in factoring was not prioritized. And it was last quarter we made it clear that we now see that the opportunity to grow is very real and connecting factored customers to Load Pay accounts back to the network is a very real thing even while we serve network factors. Right? Those two things can both be true. And so that being said, you're you're seeing us now and you will see, I expect, over the course of this year us to grow customers in a way that we haven't in the past. The second thing is just to understand, at least as it relates to last year, we held a higher staffing base as we were trying to understand what the volume of growth in factoring as a service would be. Which was not coming out of the gates quite as fast as we thought, and so we we've normalized that base. And then finally, the addition of technology the use of artificial intelligence, machine learning, that sits on top of these massive piles of proprietary data that we've built up that allows us to do things well. If you extrapolate that into the future, I believe that our core operating margin and factoring will eventually be over 40%. Will it be there this year? I don't think so. But as we go forward, that would be our target. And of course, in certain windows of time, and if invoices spike, that will push up margin a lot. One of the fantastic things that I think Kim and team have done in that business is the margin improvement of where we sit now didn't just come from invoice size growth. It came from getting more efficient. And those efforts are not done. And I'm very excited about where it's headed. Operator: The next question is from Gary Tenner at DA Davidson. Please unmute yourself and begin with your question. Gary Peter Tenner: Thanks. Good morning, everybody. Aaron P. Graft: Morning, Gary. Gary Peter Tenner: Hey, I wanted to ask, in terms of the transportation growth outlook, the 25% in the payments revenue, specifically for 2026. I think that's you know, the the the overall mix of revenue growth for this year is kinda similar to what you kinda suggested in October. Obviously, that I guess, that would suggest that J. B. Hunt and any revenue impact from that relationship is already embedded in the guide as you're looking out to 2026. Aaron P. Graft: That's correct. Gary Peter Tenner: You'd be any more specific about what type of revenue contribution or benefit you'd expect from that relationship over the course of the year? Aaron P. Graft: Yeah. We're we can't talk to the specific of pricing or revenue associated with any individual client. I would say that generally, it's consistent with the guidance that we provided in the past about how we intend to price relationships. Gary Peter Tenner: Okay. And then the follow-up, in terms of the I think you got into EBITDA margin of 30% or better in the first quarter in the payments. Segment. Can you give a sense of kind of the the TPAY or in its specific expense run rate you'd expect for the first quarter? Just trying to kind of get a sense of how that moves relative to your more consolidated guide on expenses for the first quarter? Aaron P. Graft: Certainly. Yep. So within the core payments business, that's the business where we reported the 29.5% EBITDA margin for last quarter. Going to see continued revenue growth associated with the repricing associated with the new names that are coming on board, and we're going to hold expenses relatively flat. They're not gonna be completely flat but they won't grow anywhere near as fast as the revenue is growing. And so that's what's gonna drive that EBITDA margin higher. Gary Peter Tenner: Okay. And that core bandage I got it. Aaron P. Graft: Well, I just I just wanna make it clear. Hopefully, for you and for investors listening, when we describe mean, we have a payment segment. And the payment segment by the way I view the world, you have payors, which are generally brokers and shippers, and you have payees, which are generally carriers and their factoring companies. And I think based on feedback from analysts and investors, they wanna understand what the core business has done. That's the business we announced back in 2021, although I'm not sure it really is the business we've announced back in 2021 because so many changes We've learned so much. It it shocks me how little we knew when we set off on this journey as I look at it now in hindsight. But that business is generating a 30% EBITDA margin and is trending higher, and you already heard Todd talk about the number the percentage of invoices that we are monetizing continues to grow. Because the value has grown. When we say that, I think it's important for the long term thinkers to understand that doesn't mean Load Pay is not core to payments. Like, Load Pay is once again a drag on earnings. Right? Just like back in the day, core payments was a drag on earnings. But Load Pay over the long term and all that connectivity and the source and the type of revenue is is really exciting, and so when you look at a 16% EBITDA margin, for that segment, just know that there's a lot of investment in Load Pay Obviously, we believe in that investment. We think we can triple revenue next year. But I just wanna say that continue to describe, quote, unquote, core payments, so that people can see what has happened to this business we began in 2021 and mark our progress. Totally understand Wanna be accountable for that. But please don't ever view that what payments is doing and Load Pay's part of that as anything other than part of the core long term strategy. And together those businesses, I believe, will generate 50% EBITDA margin or better. You will see it continue to progress. And the type of revenue in that in that segment is going is is extremely attractive. So sorry to riff on that. I just think it's helpful, and I want you understand how we think about it so investors can understand internally how we view those two lines of business working together in a single segment. Gary Peter Tenner: Very good. Thank you. Operator: The next question is from Joe Yanchunis from Raymond James. Please unmute yourself and begin with your question. Joe Yanchunis: Thanks for answering. A couple more for me here. I was hoping we could pivot to the intelligence segment. So segment revenue was relatively flat. But in your shareholder letter, you noted you contracted, you know, a million dollars of incremental annualized revenue. So when should that begin to show up in reported results? And then additionally, what is the expected revenue contribution from the trusted freight exchange with Highway, excuse me, embedded in your 2026? And, you know, kinda little more on that. How should we think about the potential intermediate term revenue opportunity from the freight exchange? Aaron P. Graft: Yeah. Thank you for the question. So that bookings from Q4 were generally thirty days, right, from booking to billing. So that has already started show up in in the Q1 numbers, and that will continue to do so. As for TFX, the contribution, TFX is still very new. While we are counting on it as a driver for revenue growth for this year, it is not, the largest opportunity that we see. We believe the largest opportunity is actually the cross selling opportunity, with our audit and payment customers. For example, only 14% of our current audit and payment customers are also using our intelligence solution. That's really where we see the largest opportunity. And Todd and I are both already working very closely with our sales and commercial team to ensure that that happens in 2026. Joe Yanchunis: Great. That was very helpful. And just you know, with with the inter quarter announcements of JB Hunt, you know, you mentioned earlier, eight of the 10 brokers are now in your payments network. I understand TPay's business model has evolved since inception. Success, you know, really isn't reliant on the adoption from competing factoring companies. At what point do factors, you know, feel pressure from the brokers to adopt your payments network? You know, I'm curious to hear your opinion on that potential catalyst. Aaron P. Graft: Yeah. That's a great question. The answer is, Joe, I don't exactly know. If you think about how the network actually works and how factors work, I mean factors are very technological forward businesses, way more I think than than people expect. And so what they are trying to consume in the network is information about the transaction to make a pre-purchase decision, and I'm gonna let Kim come clean up anything I say afterwards because she knows this stuff so much more deeply than than I do. But we have, you know, 60 to 70 network factors, and we serve those factors, we try to make their processes easier, obviously we're pushing data to them, So I don't know if ultimately the quote unquote pressure comes from the brokerage industry. I think at some point, factors will just decide, have they updated their own technological stack to be able to ingest the data we can give them in a way that makes their business easier, more than it's brokers forcing them to do something they don't wanna do. Kim, add on to that. Kimberly Fisk: Yes. What I would say is that I think the payments network really helps factors become more efficient and being able to transact through payments rather than directly with the broker. And so you have one place to go for many rather than contacting many brokers for just a single invoice. Aaron P. Graft: Okay. Perfect. Well, I appreciate you. Just Oh, go on. Last thing. I mean, it's a great observation Like, I think we owe it to you to admit what or we can celebrate what we got right, but we should also own what we got wrong. Like, I thought the way this would work for factors would turn out differently than it has. The network has grown in ways I didn't foresee, The ability of other factoring companies to come in and use this has had some success. The majority of the 100 use it, but for the largest, they you know, they haven't they don't consume it in quite the same way I foresaw, so look, that's what happens when you set off to do something that hasn't been done before. You get some things right, and you get some things wrong. Joe Yanchunis: And I totally understand that. And completely fair, but it with the current business model, if a top 10 factor were to opt in you know, you're gonna see those conforming or network transactions go up. In general for the network. But is there enough volume right now where a factoring company could derive savings from lower headcount from joining the network? Kimberly Fisk: Yeah. I would absolutely think so. I mean, talking about a top 10 factor, you're talking about a lot of invoices that are being processed. And so you're not looking at just pre-purchase decisions. You're also looking at payment statuses. So I do think that they're gonna get front-loaded and back-loaded efficiencies through the network. Joe Yanchunis: So it sounds like the biggest so we're still at the care phase of getting factors to join versus the stick phase. That fair? Aaron P. Graft: Yeah. And I don't look I don't think you build the best business models doing anything with a stick. That's just not in our DNA. It's not how we operate. Like, we have a value proposition we've offered to shippers, brokers, carriers, and other factors. And when we tell you what the value's gonna be, we're gonna do our dead level best to deliver it, and if that works for you and the way you run your business, because not every factor runs their business the same way, not every factor uses the same technological stack, technology stack, then I think that they can trust our brand reputation to do what we say we will do. But if they built their business a different way, then you know, I think they'll continue to operate it a different way And ultimately, Joe, I think we talked a lot about network transactions We still report it as a KPI. I'm not sure it's the greatest KPI of as important as it once was, since we gave to you, we want to continue to give it to you, I think things that I focus on is what Todd disclosed earlier, we need to put in the letter going forward, which is the percentage of actual payments that we are charging a fee on because that means that demonstrates in black and white that the network has gotten more valuable. So in the end, the way the network is delivering value and is being monetized is not exactly what we thought it would be. Five years ago. But the long term prospects are at least as rosy as we thought it was going to be. Five years ago. Joe Yanchunis: Understood. Thanks for taking my follow-ups. Aaron P. Graft: For sure. Operator: And the final question is from Donald Broughton at Broughton Capital LLC. Unmute yourself and then give me the question. Donald Broughton: Ladies and gentlemen, the oh, we're as a Aaron P. Graft: Oh, no. I thought that was going to be an extremely interesting question. Oh, heavens. Woah. Woah. Woah. We can work it into one. Donald Broughton: We can it sounds a little bit like the the qualified versus opinion by an auditor. Right? I read it a couple of times. I'm like, I think I know what it means. But it dulls me. What does that mean? Aaron P. Graft: Okay. I am so sorry, but first of all, what we saw on our side was a picture of two very attractive dogs when you started the competition. With my horses. Yeah. And then it went blank The audio went down for a second. Sorry. Indulge you about what does what mean. Donald Broughton: Oh, it's it's one of those things that's kinda like a kinda like a qualified or unqualified opinion by auditors. It's it's I know it's counterintuitive. I sat there and read it a couple of those. The negative credit loss expense a net benefit. Aaron P. Graft: Go ahead. Todd N. Ritterbusch: A negative credit loss expense just implies that we had greater recoveries than we did new provisions or charge offs. It was recoveries of prior period expense that we took. Donald Broughton: Oh, okay. That would have been my guess, but it was like, I'm really don't know. So and don't feel special. Companies out there, GE and others who had all kinds of issues with, say, these are these. Can you explain a little bit more about about the risk in that business? Is it duration matching the what you're borrowing and what you're lending at? Is it improperly assessing the creditworthiness of the person you're lending? Is it the assets underlying What where is the risk exactly? Todd N. Ritterbusch: If you're referring to our credit loss expense in aggregate, I would say it's the second of those things. It's understanding the risks associated with the underlying borrowers. We lend in a lot of different ways to a lot of different clients and looking specifically at those clients within each of those businesses is the most important thing that we do. It's not really about duration. Duration plays to our advantage because we have very, very short duration on average, specifically in our factoring business and the mortgage warehouse. And so as we think about how we manage credit risk going forward, we're focused on things, first of all, that are aligned with our transportation strategy. So those are areas where we're gonna tend to lend more and more over time. And we will continue to lend in other areas that provide other strategic benefits to us. So if you take the community bank, for example, that is the source of our low-cost deposits, which really is valuable to the enterprise as a whole. Other lending businesses may contribute to the business, but it's very important for those businesses to have very tight credit policies and discipline to avoid creating any noise or distraction for management or for And so that's how we look at those businesses. Donald Broughton: So the but the ABL I would think that that would be not necessarily is. What you wanna be pursuing the most, but isn't it just kind of a complementary business to other things you're doing? If I'm using you to factor freight bills, then I own trucks and trailers and those are assets you obviously understand. Todd N. Ritterbusch: Sure. The ABL business, we did expect to have strategic benefit to transportation. You know, you can think of other offerings, ABL light, ledger lines, things like that, that might work with clients that no longer need factoring or for which those offerings would be a better solution than factoring. In practice, that hasn't really played out. We haven't seen that really take off, and so we've been left in the ABL business with non-transportation related exposure. Donald Broughton: Okay. That makes a lot more sense. I've thought I would have thought it would have been something complimentary to your business, but, you know, like many businesses, you think that's gonna be a great thing, you're walking into it, then you spend a little time in it. You go, well, not quite what I planned. But, anyway, congrats on a good quarter. Thanks for answering the questions. Aaron P. Graft: Of course. Operator: There are no more questions at this time. I would now like to turn the call over to management for closing remarks. Aaron P. Graft: Thank you all for joining us. Stay warm, and we'll see you next time.
Operator: Thank you for standing by. Good day, everyone, and welcome to The Boeing Company's Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's call is being recorded. A management discussion and slide presentation plus the analyst question and answer session are being broadcast live over the Internet. To ask a question on today's call, please press star then 1 on your telephone. At this time, I'm turning the call over to Mr. Eric Hill, Vice President of Investor Relations for opening remarks and introductions. Mr. Hill? Please go ahead. Eric Hill: Thank you, and good morning. Welcome to Boeing's quarterly earnings call. With me today are Kelly Ortberg, Boeing's President and Chief Executive Officer, and Jay Mollave, Boeing's Executive Vice President and Chief Financial Officer. This quarter's webcast, earnings release, and presentation include relevant disclosures and non-GAAP reconciliations, which are available on our website. Today's discussion includes forward-looking statements that are subject to risks and uncertainties, including the ones described in our SEC filings. As always, we will leave time at the end of the call for analyst questions. With that, I will turn the call over to Kelly Ortberg. Kelly Ortberg: Thanks, Eric. Good morning, everyone. Thanks for joining today's call. As we start this year, we've set the foundation for our turnaround with stronger performance and record-breaking backlogs across our businesses. We haven't fully turned the corner, but we're making real progress in getting back to the Boeing everyone expects of us. When we spoke a year ago, we were just in the early stages of our four-point plan to stabilize our business, execute on our development programs, change our culture, and build a new future for Boeing. Today, our customers and stakeholders are seeing the difference in how we work together to uphold our commitments and deliver high-quality products and services. Before discussing the work ahead of us and our plan to meet the 2026 goals, I'll first touch on some important accomplishments in the quarter and the year that position us well for moving forward. In 2025, we methodically increased commercial production guided by our safety and quality plan. This enabled our team to deliver the most commercial airplanes since 2018. We delivered 600 airplanes and won more than 1,100 commercial orders for the year, making this one of our highest order totals ever as our portfolio continues to win in the market. Earlier this month, I joined Alaska Airlines as they announced their largest order ever. This was a clear reminder that our customers place their trust in us with every order. We must keep earning that trust by delivering safe, high-quality airplanes on time. To do this, the fundamental changes we've made this past year will serve as a base for continuous improvement as we look to increase commercial production. For example, we've simplified more than 5,100 work instructions. These are the instructions that the mechanics and inspectors use each day to do their jobs. These types of activities reduce complexity, support consistent performance, and strengthen factory health. On July production is stabilizing at 42 airplanes per month, and we're continuing to see improvement in the program as its on-time delivery performance has improved threefold compared with the previous year. We also continue to get positive customer feedback on the quality of the airplane. As we look to move to higher rates, we'll use the same process as previous rate breaks, monitoring factory health, and following our safety and quality plan. For production above 47, we'll add our new North Line in Everett, where facility and tooling investments are now complete, and we're executing a deliberate staffing plan to support production there. In Charleston, the 787 program continues to progress well and is stabilizing at rate eight. I'm pleased with the operational metrics we're seeing in the factory. As an example, during 2025, the program reduced average rework hours nearly 30%. Going forward, as with the 737, we'll use the same disciplined processes, including monitoring our KPIs, to assess readiness for the next planned rate increase to 10 airplanes per month, which is targeted for later this year. As previously announced, we're also investing in the future, breaking ground on our factory expansion to support higher rates and meet the exceptional demand for the 787. We also made progress in our defense business and scored a transformational win to build the US Air Force sixth-generation fighter. Over the past year, we've also focused on reducing the risk profile of our BDS development programs by driving improved performance and leveraging active management to deliver better outcomes for our customer. In the quarter, our defense business also hit several key milestones. The US Navy's MQ-25 successfully completed its inaugural engine run, moving it closer to first flight. We also delivered the first operational T-7A Red Hawk to the US Air Force at Joint Base San Antonio Randolph. These milestones are just a few where our programs are progressing and meeting our customer commitment. Importantly, we also ratified a new five-year labor agreement with our IAM representative workforce in Saint Louis during this past quarter. Our team there is back to work focusing on delivering and supporting our customers. Before the year-end, we took another important step forward, supporting our production stability by completing the acquisition of Spirit AeroSystems. Bringing together our companies reinforces our efforts to improve safety and quality throughout our factories, operations, and supply chain. There's a lot of work ahead of us with an integration of this magnitude, and we have thoughtful, detailed plans in place to help enable a smooth transition for our new teammates while maintaining continuity for our customers and suppliers. We also successfully completed the $10 billion Jefferson sale, solidifying our balance sheet while retaining essential digital capabilities for our customers. With a streamlined portfolio, our service business is well-positioned to support our global commercial and defense customers. BGS secured Boeing's largest-ever commercial component service deal, and our government services business received its highest orders ever in 2025, including a contract with the US government in the quarter to support C-17 modernization. BGS also launched a new unified e-commerce platform, which brings together Boeing's distribution portfolios of products and services into one streamlined digital destination, simplifying how customers and suppliers connect, transact, and grow with the company. Across commercial, defense, and service, we've built a strong foundation for the year ahead. While I'm proud of what we accomplished in 2025, we also know expectations are rising, and we must continue to elevate the performance that we've demonstrated over the past twelve months. As important, I am pleased with the progress we're making on culture that will ensure these improvements become a critical part of our success and further strengthen trust with our stakeholders. I remain confident in our team and our plan to deliver on the opportunities and address the challenges in front of us in the year ahead, particularly on our development programs. Past delays to the certification timelines for the new 737 MAX derivatives and the 777-9 have been challenging, but we are making steady progress in performing than our revised schedules. The 737-10 recently gained type and inspection authority two or TIA two to expand flight testing. This final TIA opens up the majority of the certification flight testing, which is focused on validating the airplane's avionics, propulsion, auto flight capabilities, and other airplane functions. In addition, as we previously shared, we have a final set of design changes to permanently address the engine NII issues on the 737-7 and 737-10. We're following the lead of the FAA as we work to certify the suite of design changes. We still anticipate certification for both the 737-7 and 737-10 in 2026. On the 777-9, in the quarter, we received approval for TIA3 and continue to perform certification flight tests. TIA3 is a major phase of testing focused on avionics, environmental control systems, and the auxiliary power unit. As I've said before, overall, the aircraft and engine continue to perform well. We have identified a potential durability issue during a recent inspection on the 777X engine, and we're working with GE to better understand that issue and finalize root cause and corrective action. Importantly, as we work through this issue, we continue our certification flight testing, and we don't expect this to impact our delivery in 2027. Demand for the airplane remains strong, and we remain confident that the 777X will be the next flagship airplane for our global customers. Moving now to KC-46 tanker. As we came through our quarterly process, we revised cost estimates for elements including the production support and supply chain, which Jay will cover in more detail. While it's disappointing to recognize another impact on this program, we are seeing encouraging operational performance trends, which, if sustained, should enable us to meet our customer delivery commitments and set us up well for the next tanker order beyond the current program of record. You've heard me say you're never done until you're done on any of the development programs, but across defense and commercial, we are making progress. Clear-eyed on the work remaining and committed to delivering better performance in the year ahead. As I finish my prepared remarks this morning, I want to thank all of our employees, including our newest teammates from the former Spirit AeroSystems. From our frontline mechanics to our engineers and our management team, we're all committed to continuous improvement guided by our culture with a sharp focus on safety, quality, and performance to deliver for our customers and other stakeholders. We know there's more work ahead in 2026, but the strong foundation we're building by stabilizing the business, executing these development programs, building our future, and changing our culture will position us to put our recovery behind us and restore Boeing to the company we all know it can be. With that, I'll now turn it over to Jay to discuss the results in more detail. Jay Mollave: Thanks, Kelly, and good morning, everyone. Let's start with the total company financial performance for the quarter. Revenue was $23.9 billion, the highest quarterly total reported since 2018. Revenue was up 57%, primarily driven by improved operational performance across the business, including higher commercial deliveries and defense volume. Core earnings per share of $9.92 primarily reflects the $11.83 gain associated with closing the Digital Aviation Solutions divestiture. Free cash flow was positive $375 million, slightly higher than the expectations I shared last month, driven by higher commercial deliveries and working capital that improved compared to both the prior year and the prior quarter. Turning to BCA on the next page. BCA delivered 160 airplanes in the quarter and 600 for the year, the highest annual total since 2018. Revenue of $11.4 billion and operating margin of negative 5.6% both improved materially and primarily reflect better operational performance and higher deliveries compared to last year's results that were impacted by the work stoppage. Results also include impacts associated with acquiring Spirit AeroSystems, which impacted segment margins by roughly 1.5 points in the quarter. BCA booked 336 net orders in the quarter, including 105 737-10 and five 787-9 airplanes for Alaska Airlines, and 65 777-9 airplanes for Emirates. Importantly, BCA booked 1,173 net orders for the year, and backlog ended at a record-setting $567 billion that includes over 6,100 airplanes, with the 737 and 787 both sold firm into the next decade. Let's click down to the commercial programs. Starting with the 737 program, BCA delivered 117 airplanes in the quarter and 447 for the year, in line with expectations shared last month. The factory increased the production rate to 42 per month in the quarter, and the program is on course to increase production to 47 later this year. The year ended with one 737-8 built prior to 2023, down five from the prior quarter, and we expect to deliver this final shadow factory airplane in the first quarter. On the 737-7 and 737-10, inventory levels were stable at approximately 35 airplanes. As Kelly said, we received approval from the FAA in the quarter to begin the final phase of 737-10 certification flight testing and continue to partner closely on a certification path for these programs, including the engine anti-ice solution set. On the 787, we delivered 27 airplanes in the quarter and 88 for the year. During the quarter, the program completed a successful capstone review and is continuing to make good progress, stabilizing at the new production rate of eight per month. The year ended with approximately five airplanes in inventory that were built prior to 2023, down five from last quarter. We still expect to deliver the remaining airplanes in 2026, which is aligned with our customers' fleet plans. Importantly, the 787 recorded 395 net orders in 2025, the program's highest annual order total, which highlights the market-leading capabilities that the Dreamliner will continue to deliver to our customers for decades to come. Finally, on the 777X, as Kelly mentioned, we continue to make progress on 777-9 certification flight testing. 777X inventory spend in 2025 finished at nearly $3.5 billion, in line with expectations. 777X booked 202 orders in 2025, the second-highest annual total since the program's launch, underscoring the trust that our customers have placed in this game-changing wide-body family as well as our team that's building it. Alright. Let's shift over to BDS on the next page. BDS delivered 37 aircraft in the quarter, and revenue grew 37% to $7.4 billion on improved operational performance and higher volume. Operating margin of negative 6.8% improved significantly compared to last year and also reflects the better operating performance across the business. This improvement was tempered by a $565 million loss on the KC-46A tanker, which I'll address further in a moment. BDS booked $15 billion in orders during the quarter, including awards for 15 KC-46A tankers from the US Air Force and 96 Apaches from Poland, both contributing to a backlog that grew to a record $85 billion. Overall, we continue to make progress stabilizing our fixed-price development programs, even with the cost updates on a few programs this quarter, including the tanker adjustment. As Kelly mentioned, the tanker adjustment was driven by higher BCA production support and other allocated costs in the Everett facility, as well as higher estimated supply chain costs, including Spirit. The added production support costs include keeping higher levels of quality and engineering support in the factory, which are a key part of driving improvement. For example, as compared to the first half of the year, we saw average factory rework levels decrease by 20% in the fourth quarter. So while these investments are starting to evidence progress, we need to sustain them for longer than previously planned to promote stability. Across these fixed-price development programs, we continue to see benefits from our active management approach in retiring risk and developing win-win opportunities with our customers. We remain focused on delivering these important capabilities and achieved several important milestones in the quarter. In addition to the highlights Kelly referenced on T-7A and MQ-25, we also partnered with NASA to modify the commercial crew contract to better align our long-term objectives. The remainder of the portfolio continues to benefit from increased demand supported by the global threat environment. Performance on these programs continues to reflect the operational improvement that began earlier this year. For example, on the PAC-3 seeker program, over the course of 2025, the team was able to increase output by 33%, enabled by prior investments in capacity and a focus on lean to drive more efficient production. Overall, the defense portfolio is well-positioned for the future as evidenced by our record backlog. We still expect the business to return to historical performance levels as we continue to drive execution and transition to new contracts with tighter underwriting standards. Moving to global services on the next page. BGS continued to perform well, again delivering strong financial results in the quarter. Revenue was up 2% to $5.2 billion, primarily reflecting improved government volume. Operating margin was abnormally high due to the Digital Aviation Solutions gain. Adjusting the 2025 and 2024 for Digital Aviation Solutions, BGS adjusted revenue of $5.1 billion grew 6%, and adjusted operating margin was 18.6%. On the same basis, both our commercial and government businesses again delivered double-digit margins in the quarter. BGS is driving a keen focus on continuous improvement. For example, on the C-17 sustainment program, the team achieved an 18% flow reduction over the course of 2025 as a result of nearly 200 discrete projects generated by the team, a key enabler of improved customer satisfaction. BGS also received $10 billion of orders in the quarter and an annual high of $28 billion in 2025, and the business ended the year with a record backlog of $30 billion. Shifting over to cash and debt. Cash and marketable securities grew to $29.4 billion, primarily due to $10.6 billion in proceeds associated with closing the Digital Aviation Solutions transaction, partially offset by debt repayment of $3 billion associated with the acquisition of Spirit AeroSystems. The debt balance ended at $54.1 billion, slightly up from last quarter, primarily reflecting the retained Spirit debt. The company also maintains access to $10 billion of revolving credit facilities, all of which remain undrawn, and we remain committed to strengthening the balance sheet and supporting our investment-grade rating. Okay. Let's shift to full-year performance on the next page. Full-year revenue was up 34% to $89.5 billion, primarily reflecting the improved operational performance across the business. Core earnings per share of $1.19 was up significantly, primarily driven by the $12.47 gain on the Digital Aviation Solutions sale and improved performance. Excluding the impact of the gain, EPS was up $9.1 year over year. Free cash flow was at $1.9 billion usage for the year. This was slightly better than expectations shared last month and improved significantly year on year, primarily driven by higher commercial deliveries and improved working capital. Our improving cash flow performance in 2025 provides a solid setup to deliver positive free cash flow for the full year in 2026. Let me provide some additional context on our free cash flow outlook. As we continue turning the corner in 2026, we expect positive free cash flow of $1 billion to $3 billion, aligned with the expectations I shared last month. For clarity, this outlook contemplates an unfavorable impact of roughly $1 billion in 2026 associated with incorporating Spirit. Consistent with the profile we have discussed previously, cash flow is expected to grow year over year, primarily on higher commercial deliveries, better performance at BDS as that business continues to stabilize, and continued steady growth at BGS. This outlook continues to assume significant capital expenditures for future products and growth, particularly in St. Louis and Charleston. CapEx ramped up over the second half as we expected, with nearly $3 billion invested in the business in 2025. These higher investment levels will continue into 2026, and we expect to spend closer to $4 billion this year, including the incorporation of Spirit. Within 2026, we expect first-quarter free cash flow will be a usage similar to 2025, driven by normal seasonality. We expect 2026 to be a use of cash, with the second half turning positive and accelerating sequentially. As we've discussed, there are a number of impacts to 2026 free cash flow that we expect to be temporary in nature and improve over time. Let me add a bit of color on each category and highlight the actions required to work through them. As I just covered, we expect 2026 free cash flow to be between $1 billion and $3 billion. Part of where we end up in that range may be influenced by the realized impact of these issues. The most significant impacts are related to the delayed certification and first delivery on the 777X program, as well as the prior delivery delays on the 737 and 787 programs. On 777X, regarding net cash burn, with first delivery planned for 2027, our production system expenditures will be much higher than the pre-delivery payments we expect. PDPs for 777X are lower than they otherwise would be, given customers have been paying into a schedule that previously assumed first delivery in 2026. 2026 is planned to be a higher use than 2025, but we expect the net cash use to improve over the next few years before turning positive in 2029. Our focus here remains on progressing through flight testing with the FAA. Additionally, and just as importantly, we are making sure the production and delivery system is ready to ramp up to include working through built airplanes that will undergo a systematic change incorporation program. Regarding the 737 and 787, there are two issues, both driven by previous delivery delays. The first is customer considerations, and the second is excess advances. To be clear, customer considerations for prior delays are not diminishing the pricing levels we are applying to new business. Indeed, we are seeking to better manage delay exposure in new contracts with tighter underwriting standards. We expect the impact of these items to improve over the next few years, and our path to resolve the impacts of both customer considerations and excess advances is all about production stability and continuous improvement in on-time delivery for our BCA customers. Partially offsetting these negative impacts on 737 and 787 is the plan to methodically work down selected excess part inventory and complete the final deliveries of previously built 737s and 787s. As we have said, with 737 moving to higher rates, we will address excess inventory on a commodity-by-commodity basis in order to preserve stability across the supply chain and production system. The next category of legacy issues we have discussed is the cash impact of running off prior BDS charges. Since 2022, there have been significant charges across the five fixed-price development programs. We expect sequential improvement from 2025 to 2026 and gradual improvements thereafter. Obviously, this is predicated on successfully completing these programs without taking additional charges and leveraging the active management playbook to continue to de-risk these programs. As the tanker charge this quarter highlights, there remains risk on these programs, even if the envelope of risk has been significantly reduced over the last year. Rounding it out, we have the in-year impact of the expected DOJ payment sliding from 2025 to 2026, in addition to the two-year spike in CapEx in 2026 and 2027, supporting growth and a stable production system. Our focus as a leadership team will be on closely managing these investments to drive budget and schedule performance. Adjusting for these impacts would result in high single digits 2026 free cash flow and highlights the strong underlying cash generation potential of our business. Accordingly, we continue to believe the $10 billion free cash flow mark is very attainable, including impacts of the Spirit acquisition, which aligns with my remarks last month. Okay. Summing it all up, a strong foundation was set in 2025, and we're focused on elevating our performance in 2026 and delivering on the long-term potential of this business. With that, let's open up the call for questions. Operator: We will now begin the question and answer session. In the interest of time and to allow for broader participation, we ask that you limit yourself to one single-part question. Our first question comes from the line of Myles Walton from Wolfe Research. Your line is open. Myles Walton: Thanks. Good morning. Good morning. A lot of detail there. Jay, within the context of the cash flow. So maybe I'll just start there and Myles, I'm afraid we've lost you. Operator: Operator now? Myles Walton: Yes. I can hear you now. Can you hear now? Yep. Okay. Please start over with the question. Yep. Apologies. So Jay, a lot of color on the cash flow building blocks to get to that high single-digit ex-bad guy. Could you just clarify the excess advances in customer considerations, the quantum of those, and then the duration by which they normalize? Is that 2027, 2028, or further out? Jay Mollave: Okay. You know, as I mentioned, you know, Miles, again, the total overall quantum goes from low single-digit to high single-digit. So we know that in the total. Yeah. I'm not going to give an individual breakout on each specific impact, but I'll give you a little bit more of a directional color. What I can tell you is the excess advances coming in from 25 to 26 as well as the considerations at least in 2026. They're generally close to each other, so almost the same impacts. The excess advances over time actually will burn down quicker than what we expect on the consideration. So that will take a little bit longer to burn down on the 737 and 787. Considerations. You know, again, when you think about this and take a step back, it's pretty much what I said in the prepared remarks. Burning this down all is about the production rates and getting us to the higher production rates over time. One other thing at 777X, even though you didn't ask me, you know, I colored that as well. Again, that'll take us a few years. The key thing there is while it is a higher cash burn this year, it'll improve over time with it turning positive in 2029. Similarly with BDS, that'll that's actually coming down and improving from 26 over 25. And that will burn down over time as well. So again, it's all predicated on our improvement plans. It's predicated upon our delivery plans. We've got a very good line of sight, which is why I walked you through all this detail. But as things potentially change, these could change as well. And so, we'll give you more color. 2026 is a big, big year for us. As Kelly mentioned, had to get through our certification programs. We also have rate ramp increases as well. As we get the learnings and get informed by those events, that'll give us a little bit more ability to really zone in on specific quantification as well as the timing of these. But, hopefully, this works for you. Now, and then we'll give you more color in the future. Myles Walton: Okay. Thanks for the detail. Operator: Your next question comes from the line of John Godin from Citi. Your line is open. John Godin: Taking my question. I also wanted to follow up on free cash flow. The conversation, I think, is really focused on normalized free cash flow a few years out. The $10 billion number, Jay, that's not one that you created. And I just wanted to, you know, as you spend more and more and more time thinking about this, I wanted to just give you a chance to kind of revisit that. You mentioned a lot of moving parts at the end of the prepared remarks. But needless to say, if high single-digit is, like, an adjusted starting point at the end of '26, with the benefit of substantially higher production rates that the FAA allows. It stands to reason that the normalized free cash flow figures out could be much higher, many billions higher than $10 billion. I know there's a lot there, but I'd love your take. Jay Mollave: Thanks, John. Well, let me just start by saying first things first. And the first order of business is getting ourselves to this $10 billion, which I believe we are absolutely on the right track. You're right, John. I mentioned the term I actually used was very attainable in December, and I'm repeating that again today. I went through this, you know, in the fourth quarter, and I'm very comfortable with our ability to achieve $10 billion. Again, you know, it's a little bit of a repeatable sequence of events, but we have to get through the certification programs. Have to ramp up on our BCA production rates. Need to see the improving performance at BDS related to our margin profile as well as burning off the prior charges and then continued performance at BGS. You know, again, on an adjusted basis, when you look at BGS this past year, they delivered 6% organic growth as well as 18% plus margins. We expect that to continue as well and be a contributor to cash flow. So if you're asking me, can we be above 10? I think the potential of our cash flow app supports being above 10. But first things first, let's get to 10, and we'll talk about how we go from there. John Godin: Perspective, Jay. Thank you. Operator: Your next question comes from the line of Doug Harned from Bernstein. Your line is open. Doug Harned: Good morning. Thank you. Jay Mollave: Morning. Hey, Doug. Doug Harned: When you look at the production ramps that you're focused on, I'd like to understand a little bit more about where you see the bottlenecks when you're going to 47 to 52 on 737 when you're getting to ten, and then they'll to twelve and fourteen. I mean, what are the hardest breaks to get to and, you know, what are the biggest challenges? And I want to highlight one because if I look back in 2018, when the rate increase was going to 52, Spirit had some very significant issues getting there. And so perhaps you could also address what you may be doing to ensure you don't have those kinds of issues again with Spirit. Kelly Ortberg: Yeah, Doug. Let me start and break that down. Let's start with the 737 MAX program. As you know, we've gone from rate 38 to 42 as we've said. Just to give you a little bit of color, actually gone really well. The KPIs look really good. We achieved that effective rate in November and December on the 737 line. Now recognize that November and December are heavy holiday months. So now we'll be coming into more wholesome full months, and we need to continue to see stability. But so far, so good. And as I said, the good news is the KPIs still look good, so no deterioration there. Supply chain on that ramp, not a big issue for us right now. And we projected that. As you know, we've got a lot of inventory there. And I actually don't think supply chain is going to be a big challenge for us in the next rate ramp from 42 to 47. But that's where we start to normalize with the supply base in terms of burning off the excess inventory. And as we've said, going from 47 then to 52, that will be where we'll have to see improved performance from the supply chain, and, you know, we've got time. We're working that diligently with the supply chain. Right now, nothing says we can't do that, but a lot of work yet ahead of us. And again, I think it will be a tougher rate ramp to go from 47 to 52 than it was to go from 38 to 42 because of that inventory level. You mentioned Spirit, so I'll address that right now. You're right. In that Spirit, we're going to need to continue to invest in the capacity growth from Spirit. You know, I think this is one of the big and underwrites why we've made the acquisition so that we can guide that ramp and help them move forward. I think, you know, if they had continued in a distressed environment, I think that risk would have been significantly higher than our ability to go manage that. But that, like the rest of the supply chain, moving to that rate, Spirit has some work to do, and we've got a plan to go accomplish that. If I switch to 787, as you know, we don't have the large inventory levels there on 787. That is more normalized with the supply chain. And we're working to stabilize at this rate eight now, and our plan, as we said, is to go to rate 10 here in the next year. There's no particular supply chain constraint that I see there. We still are dealing with seat and seat issues. That's less of a constraint to our production output, but more of an issue with deliveries. And so, particularly for airlines that are taking a new seat configuration that requires a new certification baseline. Those have typically been tough to get through the cert programs both with the ASA and the FAA. And so we're, you know, we're still working through that, but that's no change from what we said before. I think that's going to be with us for a little while going forward. So, you know, I think the top-level story here is that we've got these rate increases in front of us, the 42 to 47. We'll stabilize here at 42. We'll use the same process we used to move to 42 to move to 47. We'll have a rate review with the FAA, and then we'll go ahead and increase that rate. And the same is true on 787 as we go to 10. Now longer term, as you know, we've invested both in the expansion of another line on the 737 MAX up in Everett, and I commented on that in my prepared remarks. So capital's all in place. We're going through the process of training up the people, and, you know, that's really important as we move past the 47 rate that we have that line up and running. And then, likewise, to move past 10 a month rate on 787, we believe we need to have additional capacity in Charleston, and we've made a major capital investment and kicked that off for groundbreaking here last year. So our plan's in place. We're working it. I think in general, we're going to see supply chain harmony has to happen in that 47 to 52 rate, and, you know, we'll continue to work that with the suppliers. Doug Harned: Very good. Thank you. Operator: Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Your line is open. Sheila Kahyaoglu: Good morning, Kelly, Jay, and Eric. Maybe if we could just talk about the momentum in Renton is very clear. How do we think about BCA margins? Jay, you mentioned Spirit is about $1 billion and the comment about delays not affecting pricing going forward potentially as much. And the $10 billion future free cash flow state. So I guess, do we think about 737 and 787 cash margins in the near term? How much they're depressed longer term as well? And then relative to history. Jay Mollave: Thank you, Sheila. And you're right. Right now, 737 and 787 cash margins are depressed, and that's reflected in our free cash flow. We do assume and expect, given what's in the backlog, that those will improve over time to support these cash flow types of numbers that we're talking about. The Spirit impact itself, in terms of the cash flow impact of $1 billion negative this year. And we've looked at that, and we've played out their impact and their contribution to our cash margins in 737 and 787 program. And forecasted that out. And we don't believe that over time, that's going to materially impact what we believe and what we need to deliver on these types of cash flows. So over time, Spirit's performance will get better. That'll be reflected in the financials through just productivity, through synergies. And higher quality and delivery performance, as Kelly mentioned. We do have what we would expect over that time period as well is a boost from pricing. And so we haven't really focused on that as much, but that will provide a boost to our margins in the out years as well. So that is what gives us the confidence that what we've seen here at Spirit, what we're absorbing at Spirit, it doesn't really alter what we're expecting in these out years. Sheila Kahyaoglu: Got it. Thank you. Operator: Your next question comes from the line of Peter Arment from Baird. Your line is open. Peter Arment: Hey, Jay. Just maybe sticking with BCA. The BCA team had a really strong delivery year in '25. I think you mentioned 447 MAXs, and you had 88 787 deliveries. And with the rate breaks that we're seeing this year, maybe you could just level set us on kind of 2026 delivery expectations for both the MAX and the 787 programs and also just maybe any cadence that we should expect first, you know, first half versus second half? Jay Mollave: Thanks, Peter. So let me start with the 737. Our expectation for deliveries on that program is around 500 aircraft. If you look at it, kind of if you compare this year to last year, last year in the 447 that we delivered, we delivered around five aircraft out of inventory. So our production rollouts are going to significantly improve. This year, as I mentioned in my prepared remarks, we've only got one left carryover. Going in. So our production performance and rollouts are going to increase substantially. When you do the math, as you indicated, Peter, in terms of just taking a look at the assumption for rate breaks, might get into around, call it, 530 aircraft or so. What we're going to be doing in this production build is building around 30 aircraft on a 737-10. Those will not be delivered in 2026. Be delivered in 2027. Upon certification. And so that would bridge between, you know, a higher expectation and 500. As far as the 787, a little bit simpler there. We're expecting around anywhere between 90 to 100 aircraft, and that'll be dependent upon real-time production rollouts. Again, just like 737, we had about 20 aircraft that came out of inventory. That we delivered in 2026. And so the production rollout system will be the primary source of our deliveries again, here in 2026. So very similar type of approach there. Overall, we expect BCA deliveries to be up close to approximately 10%. All in. And so, again, that'll be driven, I mean, led by the 737 and 787 programs. I hope that gives you the clarity you need. Peter Arment: Yeah. That was very clear. Thanks, Jay. Operator: Your next question comes from the line of Seth Seifman from JPMorgan. Your line is open. Seth Seifman: Hey, Thanks very much, and good morning, everyone. Maybe if you could talk a little bit more about defense. We saw a charge there for the first time in 2025. But it sounds like it's something that can, perhaps help in the future. Maybe you could talk a little bit about how KC-46, to the extent that you see it turning the corner, how is it turning the corner? And then, you know, moving beyond that, the state of BDS and maybe how you prepare for some of these production increases that the Defense Department is looking for. Should we think about a multiyear contract for Boeing on PAC-3 seekers and how do we think about the investment associated with that? Kelly Ortberg: Yeah. Good question. So first of all, let me just say that the charge we took on the tanker in this quarter doesn't really reflect at all on any of the other BDS programs. It's a discrete charge against that particular program. And in fact, the predominance of the charge is increased cost on the actual 767 commercial airplane production, as Jay outlined. And we look. We took a look at the program. It is taking us more resources to make the deliveries. We delivered 14 tankers in 2025, and we are planning to deliver nineteen in 2026. And we made the conscious decision that needed to keep resources at a higher level to assure that we make those deliveries on time. As you know, the Department of War is super focused on us, first of all, making investments to support growth. And also ensuring that we're delivering on time. And so you know, we took that decision, albeit, you know, a big gulp to have to take a charge here on the tanker program. I think it will pay off in dividends with us in terms of allowing us to make sure we meet delivery the 19 deliveries next year. The other thing I'll just lay out is as you know, the Air Force has made a decision to go sole source for the follow-on tanker contracts. We will be pricing that in the fall time frame according to the current schedule. So we are laser-focused on making sure we understand the cost base of that airplane. Obviously, you know, this has been a bad contract for the last decade, this existing contract. And as we enter into a new opportunity where we get to reprice, we want to make sure that we, as Jay has said, underwrite that contract to ensure it's a fair contract, and we can make money on that. You know, as I look at the broader question about increasing in rate or increasing an investment from the executive order and the Department of War. Look. We've invested ahead of contract on F-47. I think it was a key part of our win strategy, and I think the department clearly recognizes that we went out at risk and made significant investments. We have also invested in the PAC-3 capital to increase the PAC-3 production line. I suspect we will get to a multiyear similar to what you've seen elsewhere with the government on the PAC-3 contracts. So we're in discussions now with the Air Force on that. So I don't see a big step up in CapEx relative to that multiyear PAC-3 because, for the most part, we've made the major investments already going forward in terms of CapEx. You know, the rest, finishing the F-47 investment is probably our major, you know, our major capital investment here going forward in our defense portfolio. Seth Seifman: Great. Thank you very much. Operator: Your next question comes from the line of Ron Epstein from Bank of America. Your line is open. Ronald Epstein: Yeah. Hey. Hey. Good morning, guys. Kelly, maybe a broader, bigger picture question for you. You know, we can, I guess, nail that on some of the financial details with Eric after the call. But so you've been to the company now for well over a year. Doing god's work, running around. Fixing things. But here's the question. It's an effective duopoly with you guys in Airbus. I mean, there's some folks on the fringe, but it's really the two of you guys. And it seems like on a very fundamental level, that it's just not a very profitable industry. It seems like everybody else is making money on planes. From, you know, the guys doing, you know, seats, faucets, engines, aftermarket parts, even nowadays, even airlines. But it just seems like building airplanes isn't that profitable. And you've been on both sides of this. Right? So, you know, you're at an OE now, and you were on the supply side. Yeah. Can that change? And, like, on a future airplane, can that change? Like, what has to change to, like, really make this industry shine? Kelly Ortberg: Well, look. I think as you point out, I have been on both sides of this. So I, you know, I know how you can make really good margin in this aerospace market, and I see how you can not make very good margin in the aerospace market. I think the fundamental is we have to get a handle on what risks we're taking. And understand the risks. And I think building an airplane is not an easy task. There's significant risk, and we'll continue to take the risk. The issue that I think we've got to improve upon is how we manage ourselves through those risks and how we enter into contracts associated with knowing that we've got these risks out there. So concurrency, how we price things, what damages we accept, how we do that, I think are all opportunities for us to improve. And I think a new airplane program gives us that opportunity. For the most part, there's not much we can do about what we've got at hand. Other than fix our performance, and that's what we're doing, day in, day out. I really can't change the structure of the, you know, the aftermarket and OE construct. It kind of is what it is. I think this is a big part of the discussion and our strategy going forward for the next airplane is, you know, where is the value chain? What do we do? What do we partner to do? And how do we assure that we're participating? There's a lot of value in this commercial aerospace market. You're right. We should participate in that value. So, you know, that's a lot of work for us to do strategically. I don't see any impediment to do it, but we gotta understand the risks we're taking when we take them and make sure we've got plans to manage those risks. And if they go unmitigated, then you end up with situations like we're in where we don't, you know, we're not sharing in the profitability of the overall market. That would be my take. Ronald Epstein: Got it. Yeah. Yeah. Thank you. Operator: Your next question comes from the line of Robert Stallard from Vertical Research. Your line is open. Robert Stallard: Thanks so much. Good morning. Kelly Ortberg: Good morning. Hey, Rob. Robert Stallard: Kelly, again, a strategic sort of question for you. Given the recent geopolitical volatility, are you worried about a return of tariff risk at BCA this year? And similarly, on the defense side of the business, a longer-term shift in Europe to more local procurement. Kelly Ortberg: Yes, Rob, I wouldn't say worried. It's something we have to continue to watch as we saw last year. This is super dynamic. Right? It could change tomorrow. But I think if you step back from all the dynamics day in, day out, look. I think at least the US fully understands the importance of commercial aerospace to the economy. To the US economy. They've been very supportive, and we've worked through what initially looked like some pretty hairy tariff environments to resulting in pretty good outcomes. So I think we'll be able to continue to focus on that. And, again, I think this administration is fully supportive of this industry. It's not going to do things that, you know, that cause us major harm. Having said that, as we saw last year, you know, we were shut down for a little while and deliveries into China. That got resolved, we got the deliveries done. We do have about the same number of deliveries this year into China as we had last year. So, you know, we gotta watch these trade barriers. Certainly, we have a lot of deliveries into Europe. So watching how, you know, that whole negotiation plays out to assure that, you know, we don't get in a tit-for-tat environment on commercial airplanes. Something we're going to have to just continue to work. But, again, I'll just say, the administration has been accessible to us. Has listened to our concerns when we've had them, and I think we've ended up with pretty good outcomes so far. Robert Stallard: Okay. Thank you very much. Operator: Your next question comes from the line of Noah Poponak from Goldman Sachs. Your line is open. Noah Poponak: Hey, good morning. Thanks, everyone. Jay, I know you don't want to, I know you're not quantifying the pieces of the free cash bridge you just gave back to normalized, but I guess I wanted to try to ask is the total of those pieces greater or less than $7 billion? Because you have commented on most of those in the past, and if I take the midpoint of one to three of two and add all those back, it seems like more than high single. So I didn't know if you're netting out some positives or if I'm just missing something. And then what is BCA cash if you exclude the abnormalities and you were just, you know, basically just 737 and 787 price cost, is that generating cash in your 2026, or is that closer to breakeven? Jay Mollave: So, Noah, let me just go back to your first question here on these items. Again, you're talking in that range going from low single to high single. You know, kind of call it $6 to $7 billion in the aggregate. Forget in my prepared remarks, what I talked about was the benefit of excess inventory coming down over time. So that mid is a mitigator. The only thing I'd say is, you know, the DOJ payment is a one-time event that occurred here in, occurring here in 2026, and that just doesn't repeat. It's not something that draws down in any way. So that's the best way to look at it in the aggregate. With between that six and seven. As far as a BCA look, what I'll tell you there is that we continue to expect that that's going to improve. The cash margins are going to improve on our programs. I said previously. And, you know, it's a key enabler to our cash flow at getting to $10 billion. And, you know, I think as it becomes necessary or, you know, we have the visibility, we'll give you more there. But I think I'm going to stop here with the directionally what it needs to be. Noah Poponak: Okay. Thank you. Jay Mollave: Alright. Time for one more analyst question. Operator: And your final question today comes from the line of Gavin Parsons from UBS. Your line is open. Gavin Parsons: Thank you. Good morning. Jay Mollave: Hi, Kevin. Gavin Parsons: Jay, I think you're restricted from looking at all of BDS previously. So have you been able to get under the hood of all those programs at this point? Jay Mollave: Yeah. Let me just talk about it. I mean, you're right, I was restricted through the end of the year, and I started here in January doing reviews with BDS. I think I need to put some context in there because, again, I think there's some expectation that I'm doing some kind of an outside-the-process EAC kind of deep dives that it kind of circumvents processes that we have already in place. And I'm not doing that. What I am doing is really reviews with our programs as well as my first reviews where we're just with the BDS business in the aggregate. And it's really focused on three things. One is there's just a strategic element to it. One is an operational element, and then third is a financial element. And just to kind of give you a little color about that is as I look at program to program, it's trying to understand, make ensure I understand the capabilities being delivered, developed for our customer, understanding the relevance of that capability today and what that means in the future just strategically. Looking at our current backlog and our delivery profile and how that fits our customers' capability requirements, and whether or not we're meeting that mark. Operationally, looking at program status, things that are we on track schedule-wise? Things that don't necessarily translate directly into a financial, but think about earned value type metrics. And just so understanding, get myself baselined on the programs, where they are strategically, where they are operationally, and, of course, a review of EACs, but more in the context of again, baselining, what needs to happen, what are our key assumptions in those, what are the risks, what are the opportunities, how do we realize the opportunities, and how do we mitigate the risk. So I'd call it a little bit higher level than some type of EAC deep dive. To the extent that something pops up in a review, then we'll follow up with that. And I would expect that to occur, continue to occur throughout this quarter as well as the rest of the year. And that will basically convert and transition over to the normal reviews that we do. The team does with Kelly and the rest of the leadership team. So it's more of a holistic view. If there's anything on a specific EAC or anything like that, that will be handled through the regular EAC process. And going from there. So just to give you a little bit of color on terms of how I'm approaching this, and so far, it's been a great experience. The team is doing a great job. As Kelly mentioned in his remarks, they're improving each and every day. And, again, they're heavily focused on driving to the customer requirements and meeting their schedule and budget requirements. So a good start on my BDS indoctrination. Gavin Parsons: Appreciate it. Jay Mollave: Thank you. Operator: And that completes The Boeing Company's fourth quarter 2025 earnings conference call. Thank you for joining.
Operator: Thank you for standing by. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Northwest Bancshares Fourth Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the call over to Michael Perry, Managing Director, Corporate Development and Strategy and Investor Relations. Please go ahead. Michael Perry: Good morning, everyone, and thank you, operator. Welcome to Northwest Bancshares Fourth Quarter 2025 Earnings Call. Joining me today are Lou Torchio, President and CEO of Northwest Bancshares; Doug Schosser, our Chief Financial Officer; and T.K. Creal, our Chief Credit Officer. During this call, we will refer to information included in the supplemental fourth quarter and full year 2025 earnings presentation, which is available on our Investor Relations website. If you'd like to read our forward-looking and other related disclosures, you can find them on Slide 2. Thank you. And now I'll hand it over to Lou. Louis Torchio: Good morning, everyone. Thank you for joining us today to discuss our fourth quarter and 2025 full year results. I'll let Doug take you through the specifics of our strong fourth quarter performance. I would like to take a step back and reflect on a transformational year for Northwest and how our achievements position us for continued growth in 2026. On Slide 4, you can see some of the financial highlights of 2025. We closed on a significant acquisition, drove record revenue of $655 million for the full year and continue to expand the firm's net interest margin. Coupled with our demonstrated expense management discipline through the closing and integration of our sizable acquisition, we drove double-digit EPS growth, all while investing in the talent, technology and new financial centers and products to support our future growth prospects. One of the high points of the year was the acquisition and successful integration of Penns Woods, bringing us into the ranks of the top 100 banks in the U.S. by assets. As well as adding 20 financial centers to our existing Pennsylvania footprint, we welcome new team members and thousands of new customers to Northwest. I'm proud of the team for a successful execution of a seamless integration at scale while maintaining our distinct Northwest culture and driving a strong core performance across the bank. We continue to transform our consumer bank, moving from branch consolidation to expansion, opening our first new financial center since 2018 in the Indianapolis, Indiana MSA, featuring our new design focused on customer hospitality. We're building out our presence in our Columbus headquarters market with new financial centers now under development and due to open later this year in key locations across the city. We've already added several new team members with strong local and business community ties to focus on building momentum in advance of opening our doors. We remain focused on excellence as an outstanding full-service neighborhood bank providing a highly personalized service. I'm proud to share that we have just been recognized by Newsweek for the third consecutive year as one of America's best regional banks. We continue to strengthen and diversify our commercial banking business with C&I momentum of 26% year-over-year average loan growth. In 2025, we introduced a new franchise finance vertical, rounding out our nationwide business verticals, each with experienced and well-connected industry leaders, giving us a strong point of distinction in the specialty finance areas. We also materially grew our SBA lending activity in 2025, earning a spot among the top 50 originators in the U.S. And at the year-end, we closed on a significant funding for our Columbus-based business as we grow our SBA business both locally and nationally. Our bank is relying on outstanding talent for its success. Over the past 18 months, we've made significant investments in executive and regional leadership, hiring accomplished executives across consumer and commercial banking, wealth management, legal and finance from numerous other respected financial institutions. We have a highly experienced leadership team in place that's equipped to drive ongoing transformation and growth across our business. In 2025, we delivered on our commitment to our shareholders, returning more than half of our profits through a quarterly dividend of $0.20 per share. This is the 125th consecutive quarter in which the company has paid a cash dividend. Looking ahead, I'm confident in our trajectory. For 2026, we are providing full year guidance for another record year. Doug will provide all the details on our outlook. Finally, as we have previously discussed, we have also significantly reduced our level of classified assets. 2025 was a fast paced and productive year. We've laid the foundation for a year of organic growth in 2026 as we maintain our focus on optimizing our operations, expanding our financial center network and delivering growth across our consumer and commercial lines of business. With that, I'll turn it over to Doug to review fourth quarter results and provide more detail on our 2026 outlook. Douglas Schosser: Thank you, Lou, and good morning, everyone. As Lou indicated, we are pleased with our financial performance. We delivered a strong fourth quarter, and we successfully completed all remaining merger conversion activities on time and on budget. This is the product of all the efforts of our entire team working tirelessly to deliver these results while also ensuring that our merger and conversion activities went smoothly. I am grateful to the team for their efforts. Now let's continue on Page 5 of the earnings presentation, where I'll walk you through the highlights of Northwest financial results for the fourth quarter. As a reminder, we closed our merger on July 25. As such, this is our first full quarter of reporting as a combined entity. Given the overall size of this transaction, our fully completed conversion and opportunities as a combined organization, we don't intend to disaggregate results now or in the future. Our GAAP EPS for the quarter was $0.31 per share. And on an adjusted basis, our EPS was $0.33 per share, an improvement on the prior quarter of $0.29 per share and $0.04 per share, respectively, driven by record revenue, net interest margin improvement and expense management discipline. Net interest income grew $6.2 million or 4.6% quarter-over-quarter, with net interest margin improving to 3.69%, benefiting from higher average loan yields, increased average earning assets from the acquisition and purchase accounting accretion. Noninterest income increased by $5.5 million or 17% quarter-over-quarter, driven by an increase in bank-owned life insurance income due to higher death benefit recorded in the fourth quarter, supporting a total revenue increase of $11.8 million quarter-over-quarter or 7%. We also saw improvement in our pretax pre-provision net revenue in the fourth quarter of 2025, which increased to $66.4 million, a 92% increase from the third quarter 2025 on a GAAP basis and was $70.6 million, a 7% improvement from third quarter 2025 on an adjusted basis. And our adjusted efficiency ratio of 59.5% in the fourth quarter improved by 10 basis points quarter-over-quarter and 9 basis points year-over-year as we continue to exercise tight expense discipline. Turning to Page 6. I'll spend a moment covering our loan balances. Average loans grew $414 million quarter-over-quarter, benefiting from a full quarter impact from the acquired balance sheet and organic loan growth. More importantly, end-of-period loans grew by $66 million in the fourth quarter, ending the year at $13 billion, laying a strong foundation for 2026 continued growth. Our loan yield increased to 5.65% in the fourth quarter of 2025, growing by 2 basis points quarter-over-quarter, and our average commercial loans increased $162 million or 7.1% quarter-over-quarter and $509 million or 26% year-over-year. Moving to Page 7 and our deposit balances, which continue to be a source of strength and stability. Average total deposits grew by $475 million quarter-over-quarter, benefiting from the acquired balance sheet and organic growth. Our granular diversified deposit book has an average balance of $19,000 with customer deposits consisting of over 723,000 accounts with an average tenure of 12 years. Customer nonbrokered average deposits increased $507 million quarter-over-quarter, while brokered deposits decreased $32 million quarter-over-quarter. Our cost of deposits decreased 2 basis points to 1.53%, a product of our proactive management of the overall portfolio and benefit of late year rate cuts in 2025. 43% of our CD portfolio matures within the first quarter of 2026 at a weighted average rate of 3.60%. With new volumes at anticipated lower rates, this should drive an overall decline in CD costs. Although our overall interest rate sensitivity position remains fairly neutral, our balance sheet has become slightly more asset sensitive with the continued growth in floating rate commercial loans. Turning to net interest margin on Page 8. Net interest margin increased 4 basis points to 3.69% in the fourth quarter of 2025, with purchase accounting accretion net impact equating to 4 basis points. Turning to our securities portfolio on Page 9. We purchased $363 million of securities during the quarter, consistent with our existing portfolio risk metrics. This did not meaningfully change the portfolio's weighted average life, which remains at 4.9 years. Our new purchases were consistent with the current composition of the portfolio as we continue to strengthen an already strong source of liquidity. Our portfolio yield continues to increase as new security purchases come on at higher yields than the runoff portfolio, yields increased 29 basis points to 3.11% in the quarter. 29% of the portfolio is held to maturity to protect tangible common equity. Turning to Page 10. Our noninterest income increased $5.6 million quarter-over-quarter, driven by an increase in bank-owned life insurance income due to higher death benefit income in the quarter. Noninterest income decreased $2.3 million year-over-year, however, the prior year quarter included a gain on sale of Visa B shares and a gain on low-income housing tax credit investment that did not recur in 2025. Turning to Page 11. The overall expense, excluding merger and restructuring expenses, was higher quarter-over-quarter and year-over-year as the fourth quarter 2025 included a full quarter of the acquired Penns Woods operations. Compensation and benefits increased in the fourth quarter 2025 was driven by a full quarter of employees from the Penns Woods acquisition, combined with increased performance-based incentive compensation based on our strong financial performance in 2025. Additionally, adjusted efficiency ratio was 59.5% in the fourth quarter 2025, continuing the improvement in expense management over the last year. On Page 12, you'll see overall ACL coverage at 1.15% is down from the third quarter of 2025, driven by net charge-offs in the current period, which on an annualized basis were 40 basis points as was guided and are elevated as a result of one, $9.2 million charge-off of a student housing loan. This loan was originated more than 10 years ago, has been in workout for several years prior to it being fully resolved this quarter. As a reminder, we have no meaningful concentration in student housing in our portfolio today. Our 2025 net charge-offs of 25 basis points were at the bottom end of our full year guidance of 25 to 35 basis points. Turning to credit quality on Page 13. Our credit risk metrics are within internal expectations given the impact of the loans we acquired from the acquisition. Our total delinquency increased from 1.10% to 1.50% quarter-over-quarter, primarily as a result of mortgage loans in the 31-day month at quarter end. Our 90-day plus delinquencies declined from 0.64% to 0.51% quarter-over-quarter and NPAs decreased by $21 million quarter-over-quarter. Taking a deeper dive into the breakdown of our credit quality on Page 14, fourth quarter 2025 continued to see a decline in classified loans as a percentage of total loans and on an absolute basis, which was caused primarily by improvements within the CRE portfolio. As we discussed on earlier calls, we remain focused on reducing our classified loan balances. Turning to Page 15, we are providing our full year outlook for 2026. We expect to see loan growth in 2026 in the low to mid-single digits and deposit growth in the low single digits. We expect revenues to be in the range of $710 million to $730 million and net interest margin in the low 3.70s. We anticipate noninterest income in the range of $125 million to $130 million and noninterest expense to be in the $420 million to $430 million range. We anticipate net charge-offs of between 20 to 27 basis points, and we anticipate the tax rate to remain flat to 2025 rate at approximately 23%. As we continue to grow in 2026, we will manage the business and drive positive operating leverage. As a reminder, we said last quarter, we had not fully recognized all of the cost savings from the merger. We are on track and expected to achieve 100% of the cost savings in the first quarter of 2026, which is ahead of schedule. That is fully reflected in our outlook. Now I will turn the call over to the operator, who will open up the lines for a live Q&A session. Operator: [Operator Instructions] Your first question comes from Jeff Rulis with D.A. Davidson. Jeff Rulis: Just a follow on, Doug, I appreciate the commentary on the expenses and the cost saves. I guess looking at the full year guide, call it, the midpoint at $425 million for expenses, I guess that's $106 million a quarter, I guess, if you just average. But typical seasonality and then is Q1 maybe a little -- you start off a little heavier on that end. If you could just comment on any trend line with the expenses, that would be great. Douglas Schosser: Yes, happy to, Jeff, and thanks for the question. So a couple of things, right? So yes, you're right. Seasonally, you will typically see some increases in expenses in the first quarter for like FICA resets and some other things. But I still think our overall guide, you're right in the way you think about it, right? If I've got the low end of the guide at about $105 million a quarter, we also would see increases typically in the second quarter for merit increases. So I think you're right to say that the first quarter might be a little bit elevated, but I would expect overall it not to be at the same level as we were at in the fourth quarter. Jeff Rulis: Got you. And it seemed like is some of the performance-based in Q4 a little onetime? I know that you've got the full quarter of Penns Woods, but is there a little bit of nonrecurring kind of performance year-end stuff in that figure? Douglas Schosser: Yes. As you true up all your incentive plans and production plans and other things in the year-end, you've got a little bit of that lift in the fourth quarter as well. Correct. Jeff Rulis: Appreciate it. And one last one, just on the margin, similar kind of question. The low 30 to 3.70% range, one, does that include accretion, assuming it does? And then two, kind of the rate assumptions underlying that? Douglas Schosser: Yes. So it does include sort of normal contractual purchase accounting accretion. So there would be some slight variation to that when you've got early paydowns or payoffs. So it's one thing to note. The other thing is we do have included in our guidance 3 rate cuts internally. Now one of them was in January. We received a rate cut that we weren't expecting in December. So that effectively offsets it. So we would be thinking there's going to be 2 more rate cuts between here and the end of the year. However, we are pretty neutrally positioned, drifting slightly asset sensitive, as I said in my remarks, but generally neutral. So our NIM guidance really isn't contingent on those 2 rate cuts. We would stick to that if there were only one rate cut or no rate cuts. Operator: Your next question comes from Tim Switzer with KBW. Timothy Switzer: First one, a quick follow-up on the NIM and the purchase accounting. Can you clarify the overall net purchase accounting impact to NII this quarter? Because I think the slide deck referenced 4 basis points, but also $4 million. And my math on those don't quite add up to that. And then I guess, just to clarify, is that also a good run rate going forward? Douglas Schosser: Yes, I'm not sure on the math piece. But yes, the $4 million and the 4 basis points was effectively what we were kind of going back and recalculating all of that to. Again, I would say, generally speaking, we had pretty positive movements across the balance sheet, right? We did have a rate cut in there. So you had improvements in loan yields, small, but they were there in the margin. You had improvement or you had lower deposit costs and you also had improvements on the securities portfolio. And then you had that 4 basis points impact from purchase accounting. But again, all of those underlying metrics were driving up. Income-wise, of course, having a rate reduction in there sort of changes the income dynamic a little bit on the loan portfolio. Timothy Switzer: I get you. Okay. But is 4 basis points a good run rate for purchase accounting, obviously dependent on prepayments and things like that? Douglas Schosser: Yes, probably. I mean, we would have had -- as we went through the fourth quarter, of course, we closed our merger in July, right? So by the time we got through the end, the first 2 quarters are a little bit bumpy because you're still kind of catching up on everything. But the guidance would fully incorporate those contractual purchase accounting. So I think if you kind of go with the low 3.70s guidance that were provided, that would be inclusive both of normal performance as well as the impact of purchase accounting. Again, it does not assume materially different levels of prepayments. Timothy Switzer: Okay. Got it. And then I was looking for an update. You mentioned on the call, but on your SBA business, you mentioned about recently closing funding. Could you maybe provide a little bit more details there? And then what are your growth expectations for this business going forward? And how much of that volume will you be retaining on the balance sheet versus looking to sell? Douglas Schosser: Yes. I'll -- Lou will answer some of that, and I'll give you some of that. First of all, one of the things that we had the opportunity to do is balance sheet a bit more of that because we had some opportunistic fee income. As the BOLI proceeds come through and we have the opportunity to not have to take as many SBA gains, we certainly did that within the quarter because obviously, those are very nice yielding loans, and we like to have them on our balance sheet. And I think as we've talked about before, we do, do national originations in the SBA business. But for our in-footprint clients, we tend to want to keep them on the balance sheet. And the other thing that we'll tend to do is we'll manage a reasonable amount of growth in fee income from the SBA business as well as balance sheeting a reasonable portion of that business. I don't think we want to get into the cycle where we're booking all the gains in on that constant treadmill. So as we continue to build out the SBA vertical, we're going to do both. We're going to balance sheet, and we're going to sell for gains as we kind of migrate through the process. And then again, we are really excited about the build-out of that team and the fact that we've now reached the top 40 in SBA volume, top 40 originators by volume. Louis Torchio: Yes, Tim, this is Lou. Just a follow-up on Doug's comments and your question. We really like the flexibility that this provides for us for commercial loan growth, spread income on the balance sheet with the flexibility and the lever to generate fee income. We are just now in the early innings of scaling this business. We've invested a lot in people, a lot in the underwriting and due diligence and portfolio management around this. And our strategy really is to capitalize on quality business nationally, but also and maybe more importantly, to focus on driving customers and customer retention in the footprint in the 4 states we operate in. So we're going to layer this product, and we're looking at some other SBA products into our retail franchise. As we noted, we thought it was important to note in the call that the deal we did right here in Columbus. And so yes, we're really, really happy with the business. We'll be -- like we are with all these businesses, we'll scale them prudently. We're not in a hurry to get to the top 10. So yes, really pleased with this. And most importantly, I think I'd like to drive the message that we've built the infrastructure to do this in a prudent manner. Timothy Switzer: Yes. Got it. I mean the strategy makes a lot of sense to me. You touched on it, if I could have one quick follow-up. There's been some disruption in the SBA space with the rising credit losses over the last few years and then some of the SOP changes over the summer. Where are you finding the talent you're hiring from? And how are you going forward, making sure that you guys are as you mentioned, prudently running the business? Louis Torchio: Yes. No, great question because it's very important, right? So as you know, we've kind of remade the executive suite here over the last couple of years. And J.D. Marteau, who we formerly was GE, TD Bank and LendingClub. When he came to the firm, he had contacts that he was able to bring. So we know the management we're bringing in. We know the performance level, and we understand what their acumen is and they have a long history of success. I wouldn't certainly want to name firms, but I would tell you, like all businesses, we've gone to the best and the best of the industry and recruited from those franchise. So we're really comfortable and have experience with the team. Operator: Your next question comes from Daniel Tamayo with Raymond James. Timothy DeLacey: This is Tim DeLacey on for Danny. So I just wanted to switch over maybe to the balance sheet. You had mentioned in the release, you had targeted the securities portfolio increase in the quarter. Could you maybe share some details on maybe when the timing of when the securities were purchased during the quarter and then kind of describe maybe your appetite to grow the security book relative to the asset base going forward? Douglas Schosser: Yes. So we looked at the opportunity. So again, I think we were -- keep growing our securities book a little bit because we were slightly underweighted if you sort of compare us to sort of peer banks and other things. We did take advantage of that a little bit earlier in the quarter, but not all of it. So basically mid- to late October and then there was a bit more done in November, mid- to late November. And we'll continue to look at advantages for how do we sort of support that portfolio going forward. It's a very nice store of liquidity for us. And also, as we've got an outlook for declining rates, we'll also do things like try to prepurchase some of the securities that we see maturing within the quarter earlier in the quarter versus late to try to pick up a little bit of yield benefit there as well. So really, I would just say it's generally prudently managing the investment portfolio and growing it slightly just to keep it sort of in line with peers. I think we're targeting around 17% of loans or assets into that bucket. Timothy DeLacey: Okay. Great. And then maybe just one follow-up. CRE down this quarter. You guys obviously have the capacity to grow the portfolio going forward here. But in that low to mid-single-digit guidance for loan growth in 2026, how should we be thinking about CRE as a contributor to the loan growth this year? Douglas Schosser: Yes. So you're right. We do have some opportunities there given the percentage of capital that we have related to our CRE book. It takes a while to turn that flow around, but we're definitely in the CRE business, and we continue to look for opportunities to sort of support that particular in our market. So again, it's not one of the businesses that we're aggressively growing nationally. But in our footprint, when there's good developers and operators, and we have opportunities to sort of lend to those we would. Again, we also have some nonperforming assets that we -- or some criticized and classified assets that we talked about that are some real estate developers. So you're also seeing a little bit of that pressure on that overall line item. And again, we hope that, that continues to abate as we get through next year. So again, we're looking forward to turning that CRE business around to get it to more flat to slight growth, and that's an opportunity that we have coming up in the next year or 2. Operator: Your next question comes from Kyle Gierman with Hovde Group. Kyle Gierman: I'm on for Dave Bishop. Yes. So loan growth was strong this quarter. I was wondering if you could provide some color on what segments and geographic areas are leading the way and how the pipeline is looking into the new year? Douglas Schosser: Yes. So the pipeline is looking very good. So we've had a nice improvement in the portfolio actually throughout last year, and it continues into the first quarter. And I think I would say it's a broad-based level of growth. So we continue to see kind of growth in our national verticals. Where we're going to focus a little bit more is sort of in our 4-state footprint and in some of our businesses that we think we can continue to attract talent and develop some growth opportunities in market. But again, I would say it's generally broad-based. There are some other things that might translate into some good business opportunities into '26, like some of the tax changes that went through last term, including the expensing of equipment is good for our equipment finance business, the full expensing that you get on the tax benefit. So again, everywhere that there's some opportunities, and we like the credit profile and we like the returns that we're getting on those loans, we've got people who are out there and ready to do the business. Kyle Gierman: Awesome. And maybe a follow-up on that. Could you touch on the payoff and prepayment trends you are seeing in the quarter? Douglas Schosser: Yes. I mean, again, we've been focusing on the criticized classified assets and continue to manage that down. So our -- that was a pretty significant source of our paydowns. And then again, with interest rates falling, there's going to be other clients that are going to look to refinance existing loans. Obviously, we try to participate in those credits as well, but there's always a bit of a give and take in a rate environment that's changing. So I would just say there was nothing in particular that we'd point out on the paydown side, just sort of normal business flows. I will say that -- coming off of the year that we had focusing on the merger, now we're kind of back to business and running the bank more completely without having that distraction. So that will also be helpful. Operator: Your next question comes from Matthew Breese with Stephens Inc. Matthew Breese: Just a few for me. The first thing, quick, what was the exact amount of the BOLI death benefit? I was assuming about $6.5 million. Douglas Schosser: Yes. I think that is a pretty good assumption because it was about $6.5 million. Matthew Breese: Okay. And then, Doug, you had talked a little bit about CD costs and upcoming maturities. I think you said 43% maturing in the first quarter. As you're seeing the CD book kind of reprice mature, what is the blended new cost of CDs, including some of the higher cost promotional stuff? I'm just trying to get a sense for where CD costs could go near term. Douglas Schosser: Yes. I think we're seeing probably about a 10 basis point opportunity. Again, it's all going to be based on competitive pressures at the time. But you're seeing that kind of an opportunity that evolves. We also have got -- so we're not -- we've got other savings products as well, and we're attracting new money at times when we have some of those promotional rates, all of which is helpful. But I would say if you're kind of thinking about that 10 to 15 basis point opportunity on kind of the reprice with the markets coming down, that's probably fair. Matthew Breese: Got it. And then the rest of the book, obviously, you have a lot of lower cost categories. Just given the environment, we're hearing a lot more about competitive conditions. The core deposit book, how much more room is there to lower costs? Douglas Schosser: Yes. I mean, again, you're right. I think we're seeing that as well, and we're very focused on sort of managing kind of both the overall size of the deposit book to support growth as well as the overall cost of the book. And obviously, no one knows kind of where the rate counts -- rate hikes and cycles are going to go. But I would tell you that I think what we're seeing is you're just seeing a little bit of a longer period of time between change in rates at the Fed and then sort of the reaction sort of the banks in general. So I think we're kind of following that trend. So I don't -- I'm not concerned that there's not an opportunity there, but that opportunity might just lag rate reductions by a little bit longer than it had in the past. So call it, 30, 45 days before you're going to see sort of those rate reductions. Matthew Breese: Got it. Okay. And then just last one is on M&A. Following the last deal, curious your appetite to participate in whole bank M&A and whether or not there's active or ongoing or an increase in conversations? Louis Torchio: Yes. This is Lou. I'll take that. I think we've signaled in the past, and it remains true that we stay focused now on the successful accretion and driving organic growth in '26 as a result of our acquisition. Certainly, we're open to conversations, nothing imminent for us. We're really focused on making sure we execute the '26 plan and that we get the results that are correlated with the acquisition. We think it's going to be very additive. We like our jump-off point. And we want to string together several quarters of strong results before we would entertain anything like that. Again, notwithstanding given the regulatory environment and maybe some opportunistic deals as we get further along in this year and look into '27. We'll keep our options open. However, our goal is to find something that fits culturally that drives earnings and value for our shareholders and that fits into our geographic footprint. So we're not interested really in going out of market at this point. Operator: [Operator Instructions] Your next question comes from Manuel Navas with Piper Sandler. Manuel Navas: Can we swing back to the NIM for a moment? Could you just talk about -- the guide is pretty strong. I'm just wondering what are the drivers and progression of the NIM across the year. I hear you on the CD book repricing being a little bit more neutral. Securities yields are benefiting and loan yields are benefiting. Just kind of where does that kind of [ set ] the path across the year? Douglas Schosser: Yes. I mean we're not giving into kind of all that guide, but I think it's safe to assume that we would have a slightly improving margin as you get some of the benefit of those rate cuts, which I think most people are projecting those to be later in the year, right? So that 3.70% mid or low 3.70s is pretty consistent with where we were at 3.69% for the quarter. And I think we're working to hold on to that. The trade-off, obviously, is we also want to have asset growth. So to the extent that there's competition out there, we're not going to price ourselves out of that competition, but we're not anticipating a significant downward pressure either. So I think we're going to work to maintain that low 3.70s margin. And again, to the extent that it's going to have any sort of slope to it, it's going to be a little bit later in the year because you would expect to have some slightly lower funding costs that would benefit us. Manuel Navas: I appreciate that. Another progression question. The net charge-off range is pretty solid. Kind of what are some assumptions on that progression? Or can you not get into that a bit? Douglas Schosser: I mean, yes, I think that we have -- so obviously, in the fourth quarter, and we talked about the guide last quarter, right, that $13 million, that was largely focused on -- we had one significant credit that we knew we were working out, and we thought that there was going to be some loss content there. So now I think we're back into a much more normalized flow. So again, there may be a small peak or valley in one quarter given a credit or 2 that happens, and we're at a relatively overall low level. So you can get little spikes. But we're not anticipating it to be anything super material. So hopefully, we'll have that be a pretty steady charge-off rate throughout the year. And that guide is guides for this year, also harken back. We've kind of set our long-term guide is always that 25% to 35%. So we're still anticipating being at the lower end of that kind of overall guide. Manuel Navas: That's great commentary. Switching back to loan growth for a moment. Can you talk about the mix? You spoke a little bit to CRE having some headwinds, but some building potential there. But can you just talk about the different segments and where you see the most growth? I'm guessing C&I has the biggest drivers, but just kind of speak across the loan book for this year with that low single-digit to mid-single-digit guide. Douglas Schosser: Yes. You'll probably get a little bit of feedback both from Lou and I on this topic, right? I think we see some opportunities kind of across the book. So whether it be in indirect or even to the extent that we can start to think about the mortgage portfolio, how we slow some of that runoff, when we look at certainly what's going on in CRE and then when we see our national vertical. So we like the way we're positioned to do business across all of them, and we'll be looking to kind of just support that overall asset growth that we're targeting that low to mid-single-digit level. So again, I don't know that we would say it's going to continue to be solely focused just on commercial, but certainly, we continue to have opportunity to grow commercial. And again, we've kind of talked about our overall mix. We're not targeting any specific thing. I think we're about 45% commercial, 55% consumer. We like that. We like it anywhere kind of in that 50%, 5% plus or minus on either side. So I think we like the shape of -- we like the way things are shaping up and having an inverted yield curve also is nice. So we have the opportunity to kind of blend out a little bit on the longer end of that curve and pick up some yield that way as well. But Lou? Louis Torchio: I would concur with Doug, right? So we're getting to the point of equilibrium where we're getting a lot of balance in the book. If you remember a couple of years ago, we were heavy consumer with a large focus in mortgage and long on the curve. As we continue to work that down, remix the sheet, we're nearing a 50-50. And we kind of like that both from an interest rate risk and a credit risk standpoint. We are very diversified for a firm our size in that I think that helps with the risk profile. We're not particularly overweighted in any one business. We have a lot of different levers. We think that this year, consumer, both mortgage, home equity, our indirect will be strong. And so driving -- I think we're driving growth in our budget across all those sectors. We really like the position we're in. We like the flexibility that we have. And I think it's -- we're unique in that we do have these commercial national verticals. As Doug pointed out, we have a renewed emphasis on in market, business banking, lower middle market. We have what's recognized in the 4 states as a very, very strong consumer franchise. So -- we like the diversification, and we like the ability to be able to pivot, and we are focused on growth in '26 organically on the heels of a pretty significant acquisition that would also drive top line revenue. Operator: There are no further questions at this time. I'll now turn the call back over to Lou Torchio, President and Chief Executive Officer, for closing remarks. Louis Torchio: Thank you. On behalf of the entire leadership team and the Board of Directors, thank you for joining our call this morning. I'm excited at our prospects in 2026 as we build out our consumer franchise in Columbus, Ohio, deepen relationships in our existing core markets and continue to build market share in our commercial lines of business. I look forward to speaking to you on our first quarter call in the spring. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Welcome to the Atlas Copco Q4 2025 Report Presentation. [Operator Instructions] Now I will hand the conference over to CFO, Peter Kinnart. Please go ahead. Peter Kinnart: Thank you, operator, and a very warm welcome to all of you attending this quarterly earnings call for the fourth quarter 2025. Before I hand over to Vagner to start the actual presentation, I will already now, as usual, remind you that when the Q&A session starts to just ask one question at a time. Please keep disciplined, so everybody has an opportunity to ask their most important question once we get through the first queue. Of course, you can line up again for a second question afterwards, and we'll be happy to answer that. But that being said, no further ado, I will hand over to Vagner Rego to guide us through the presentation. Vagner Rego: Thank you, Peter, and welcome to this conference call. So first, we had in the first picture, a wafer, just to remind you that we are exposed to the CapEx that is relevant for the wafer production. Then if you go to the first slide with a summary of the fourth quarter of 2025, first, we had a good organic order growth, driven by industrial compressors that went somewhat up. But not only, I think, also Gas and Process compressors, also had delivered a very good quarter, and solid growth as well in vacuum equipment, I would say, including semi equipment. On the other hand, we had weaker demand for industrial assembly and vision solution followed by weaker demand on power and flow equipment, where we will go a little bit more in details later on. Once again, it was very good to see that our service divisions continue to deliver a very good result and we are quite happy about that. Revenues on the other hand was unchanged, but we have a quite high level in 2024 as well. I think the level was not bad and followed by a lower operating profit, mainly driven by negative currency effect where Peter will come back with more details, followed by negative effect coming from the tariffs and also from acquisitions. In the quarter as well, due to the low demand in industrial assembly system that is connected to the automotive business, we also decided to have -- to further adapt the organization of Industrial Technique, and we have booked a provision to make sure we keep at a good profit level. Cash flow were solid, and we continue to work on our acquisition pipeline. We have acquired 8 companies in Q4. So when it looks to the financials, I think we can see for the group, 4% organic growth that we are happy, driven by 2 divisions. Once again, organically, it was unchanged in revenue. When it comes to profit margin, we delivered 20.5% in terms of adjusted profit margin. And we have booked this provision of SEK 261 million to adapt the organization in Industrial Technique. So basic earnings per share, SEK 1.36, and strong cash flow, still good return on capital employed. If we then look to the summary of the year, and I would not spend too much time here, but we had overall a mixed demand with unchanged basically in terms of orders received and revenues. It was quite similar with some segments improving, some segments going down, but it was a flat year with quite a lot of challenges and headwinds in the profitability, I would say, and the good thing our strategy in our service divisions continue to deliver good profit and good growth that we are quite happy. And we closed the year with 29 acquisitions. And once again, Peter will come back with more details about our ordinary and extra ordinary dividend proposal. So it -- once again, if we go to the full year financials, like I mentioned, already, it was unchanged, more -- 1% organic growth in orders, 1% organic decline. But of course, we had the acquisitions that came. On top of the organic growth, quite a lot of currency headwind in our results. And with the bottom line of 20.3%, if you adjust for the restructuring costs that we have done mainly in Industrial Technique and Vacuum Technique, the profitability, the adjusted operating margin was 20.7%, still solid cash flow and return on capital employed. If we then continue with our results working -- looking more geographically around the world, what has happened. If I started with Asia, we had, in the quarter, 13% growth. That was a quite good development, mainly in Compressor Technique and Vacuum Technique. I would say that was driven this -- driving this result. So we end up the quarter with 13%. When it comes to Europe, I think we were quite positive. Happy to see 10% growth in Europe. Basically, all the divisions had positive growth. I think the only exception was Industrial Technique that was flat. So all in all, considering the situation of automotive, I think we were happy with what we saw in Europe, but it's also fair to say the comparison base was lower, but very good to see. In North America, we see 8% growth. And there, the acquisition of NTE has quite a big impact. If you exclude that, still positive growth of 3%. We see a little bit more challenging environment in South America with a flat development in Q4 and also challenging in Africa, Middle East, but it's also fair to say, especially on the Middle East, 2024 was a great year. So I think the level is good, but the comparison base is quite challenging. Then if we go to the next slide on the sales bridge, then you see the currency headwind that we have had in Q4 amounting 11%. So that was continued headwind coming from currency. I think the structural changes that are mainly acquisition had a quite good development in orders and revenues. Of course, that will later on generate an impact in the profitability as well. But I think the level of the acquisitions are quite good. I mean we have done some acquisitions like NTE that's quite sizable. Then that means that we had an organic growth of 4% and unchanged organically in revenues. And we end up the year with 2% on acquisitions and a total currency headwind of 6%. If we then go to the orders received per BA, you see that very nice to see Compressor Technique developing with plus 7% organic growth. Very good to see Vacuum Technique now plus 13% organic growth, with good contribution from many divisions within Vacuum Technique. Power Technique, a little bit more challenging, but I will come back later when I talk about Power Technique. And Industrial Technique, minus 1%. Considering the environment, I think it was also a good achievement, although we don't have organic growth that we'd like to, but considering the overall environment, I think it was a good achievement in terms of orders received. Now going more into details of the business areas. We can see Compressor Technique with 7% organic growth, driven by industrial compressors that were up. And there, we see a little bit more on larger compressors than only smaller compressors in terms of growth, but both with good development. Strong Gas and Process compressors, but again, it's also fair to say Q4 2024 was also a challenging quarter. So for Gas and Process, so they had a low comparison. The service, like I mentioned, continued to grow. We continue to grow with a good profitability. We're quite happy with the development of service in all business areas. Revenue continued to increase, 3% organic growth. We have a good order book in Compressor Technique that will allow us to continue to deliver good revenue or organic revenue growth, so considering the order book. Profitability was in a good level, 24.3%, still a good level if you consider there was impact coming from acquisition, sales mix and the trade tariffs. So I think we are quite happy with the development of Compressor Technique. And also, we continue to innovate delivering new products. Here is just an example of a nitrogen system that is dedicated for laser cutting applications. So completely tailored for this type of application. So if we then move to Vacuum Technique, we saw good order growth of 13%, notable growth for semi equipment. And there, I think it's also fair to say that the comparison was quite low in Q4 2024. So -- and then we saw -- that's why we mentioned notable growth, but it was a low comparison. But anyhow, it's good to see the environment and it's good to see growth in semi equipment. Solid growth as well in industrial and scientific vacuum, and growth in the service. Basically, I think it was a good development in all the divisions of Vacuum Technique. We still have the challenge with the order book. So revenues were 3% down. I think we still have to overcome that challenge. And operating margin was at 19.2%, so negatively affected by currency and dilution from acquisitions. So they also continue to develop the new products and a new compact product for the semiconductor this vertical booster that are dedicated for semiconductor was also released. In the Capital Markets Day, you also saw some other innovation, and here, we continue to come with innovation in Vacuum Technique. When it comes to Industrial Technique, then we saw order decline of 1%, basically driven by automotive because when we look to the general industry, we had a good development, also is where we focus to find some new growth and I think still quite a lot of transformation that can be done in the general industry, and that's where we focus. Service orders essentially unchanged and revenues, they also have challenges with the order book and the revenues were -- went down 3% organically. The adjusted profitability was 19.8%. We want to highlight here the underlying profitability because the profit was -- the profitability was 15.9%, of course, affected by the SEK 261 million in provision for the restructuring cost. We still continue to invest in innovation even in a tough environment that we have now, we continue to release, and we continue to combine the solutions we have with the vision technology that we have also in the portfolio. So I think also here, continue very nice innovation. So if we then move to Power Technique, we had an order drop of 6%. And I think it's also fair to say that we had a little bit more than normal cancellations because we had an order book that was a bit too old with old prices, and we decided to take actions on those orders, either the customer would have to take those machines or we will not carry on the orders with old prices. So it was a little bit proactive from our side when it comes to this, let's say, slightly higher than normal orders, but still would be negative but not as much as 6%. Service business continued to grow, and we saw some challenges in the quarter in our rental business that all we know also that drove the revenue down 4%, and the operating profit was at 16%, affected by currency, but also by lower utilization of our rental fleet. And I think that's the level of profitability that we are not happy with. Definitely, we'll take some actions to drive the profitability back from the levels we want to have. Anyhow, they continue to innovate. Now you know we have invested in several pump assets, more connect -- this one is more connected to dewatering. So we have a new product that can be used now by our distributors but also by our own rental companies because with the acquisition of NTE, we also have now a rental company in U.S., rental company in Australia, rental company in Brazil, dedicated for pumps, and we are also supporting them with our own products. So if we then move to the next slide, you see then the profitability, the [ EBITA ] at 21.4% in the quarter and the profit of, if you don't adjust for the restructuring cost, 19.8%. But then perhaps this time now to pass to you, Peter, that you continue to explain our profit. Peter Kinnart: Yes. Thank you, Vagner. Net financial items, slightly negative, a little bit higher than last year, mostly because of somewhat higher financial exchange rate difference and lower interest income in the company. But we also expect it would be probably on a similar level going forward in the next quarter. Then the income tax expense, which is on the low side, I would say, if we take the effective tax rate of 20.5%, that's definitely a low number. We are benefiting from all the activities we do around our innovation and the tax relief that we can get there. But we also had quite a couple of positive one-offs throughout the fourth quarter. So that is why we have this low effective tax rate. Then going forward, when we think over the next quarter, then this low effective tax rate is not maintainable because these one-offs that we benefited from will not repeat themselves, and therefore, we expect the tax rate for the first quarter to be at around 22.5% that is currently our best estimate. If I move then on to Slide #14, where we can dig a little bit deeper into the profit bridge. There's quite a few comments here to be made, how we get from 21.8% to 19.8%. There's a minor impact from the share-based LTI programs, as you can see. We had items affecting comparability of SEK 220 million in the bridge. It's a combination of quite many things. Vagner already mentioned the restructuring costs this quarter of SEK 261 million in Industrial Technique business area. And basically, the difference between those SEK 261 million and the SEK 220 million are a list of a number of items that we corrected for last year leading up to the SEK 220 million and diluting the margin obviously somewhat. Also the acquisition dilute the margin in a similar way as the items affecting comparability. We are in the first year of the acquisition here. And of course, there's a lot of integration costs, while the synergies are not fully maturing yet. And that is the reason why we see that lower profitability on the revenue within the acquisitions. Then I guess one item that is requiring the most explanation here is then the currency effect, which has been quite negative, both on the top line as well as on the bottom line. And in fact, if I summarize it fairly simply, I would say we have translation effects, transaction effects, and we have the revaluations of the balance sheet items. And the first 2 items, translation and transaction effect in terms of margin basically compensate each other. One is slightly positive from a margin point of view, the other one is slightly negative from a margin point of view, and they basically end up to 0. So you could say that the entire difference that we see here is caused by the revaluation of the balance sheet items. And there, I would like to remind you that last year, in the same quarter, we had a huge revaluation positive impact in the income statement, which was mostly linked to Vacuum Technique at the time, also partly to Compressor Technique, but mostly to Vacuum Technique and led at the time to a very positive currency effect, which, of course, now in the bridge creates the opposite effect because we will -- we have not repeated the same positive currency revaluation in the balance sheet items. And that is also why you see later on in the next page, the very high currency impact on Vacuum Technique specifically. Then when we then look at the organic development here, I think despite a negative development of the top line, we are actually seeing a positive development on the bottom line. And of course, that is more explained if I go to the next slide, 36 (sic) [ 15 ], if I take it business area by business area as there are quite a number of different positive aspects that add up to this number. So if we take it business area by business area, then we can start with Compressor Technique. Acquisitions dilutive across all the business areas, in fact, somewhat more, somewhat less depending on the specific business area, but basically all dilutive, generating positive profitability, but not as much as we are used to within the respective business areas, so dilutive effect across the 4 business areas. The currency impact for Compressor Technique is even though negative in absolute terms, in relative terms, is quite mild. And then we see a margin organically that is quite in line, slightly higher, but only marginally higher than what we are used to in Q4 2024. And that leads us to the 24.3% result of Compressor Technique, which I think we continue to consider as a good and healthy level for Compressor Technique to perform. So here, you could say despite also tariff impact and despite acquisitions, we maintain a good level there. On the Vacuum Technique side, the main detractor by far is the currency, which has a huge impact due to the fact that we had this huge positive last year, which we don't repeat this year. In fact, revaluations across all business areas, but also on the group as a total is actually quite limited this quarter, basically not a value to be mentioned in the bigger scheme of things. It was mostly the effect of last year that basically created this negative currency effect in the bridge. Otherwise, also the acquisitions were dilutive. We also didn't have the items affecting comparability this year that we had last year, which was a one-off that we benefited from at the time. The positive news I would like to add on Vacuum Technique is the strong development of the margin also here, negative development on the top line. We just heard from Vagner how the organic growth Vacuum Technique on the revenues has developed. But operating profit, on the other hand, is positive. And this is thanks to basically the effect that materializes from all the efforts in the business area to restructure, to reorganize, to cut costs in order to adjust the size of the suit to the size of the body, and that's how we end up with the 19.2% here. On Industrial Technique, 19.4% to 15.9%. Obviously, the restructuring cost is a big item. Vagner mentioned SEK 261 million this year. Last year, in the same quarter, we also did a round of restructuring for about SEK 134 million, so the net is SEK 127 million, having a dilutive effect on the margin this year still. Acquisitions were, in this case, not adding too much from a dilution point of view, but the currency also there had a bigger impact. Although in this case, not so much due to the revaluation items, a bit more related to the transaction effect. But in the end, a bit negative on the margin. And then finally, I would say, from the bottom line perspective also here, a negative development of the top line, given the difficult climate in the industry, but no negative impact on the bottom line. So that is also positive that we see that the negative impact doesn't immediately pull down the margin. And of course, with the restructuring we are doing now, we expect to continue to create savings that will support the organic development of the business area. And then last in the row, Power Technique. Here, we dropped the margin from 17.8% to 16.0%, as Vagner already implied, not the level that we are absolutely pleased with. Acquisitions have a moderate dilutive effect here. The currency is also a bit negative, but also organically, we are not seeing a positive development. And here, it's mostly the utilization of the rental fleet as well as continued investments in A&M that we are doing within the business area. We are thinking of, for example, building up the customer centers for the industrial flow business. We're also thinking about having dedicated salespeople for the portable power and flow business, for example, and also continued investments that we started up in upgrading our ERP platforms across the different divisions that are creating quite a bit of cost investments that are necessary for the future, but with the current business climate, of course, a bit in conflict with the top line development. When we then look at the foreign exchange development going forward, I would say that we are not at the end of the negative development of the currencies. Both on the top line as well as on the bottom line, we foresee still a quite negative development and estimate that, on the bottom line, we would see an effect of at least around SEK 1 billion negative impact from currencies in the first quarter 2026. Then I would move to Slide #16 to briefly comment on the balance sheet. In fact, not so much to comment. On the one hand, of course, we've seen currency effects pulling down many of the values, but at the same time, we also see some organic improvements such as in the inventories, for example, which will also be noticeable in the cash flow. And we also see the increase of the rental equipment and the intangible assets, which is both, in fact, mostly linked to the acquisitions we recently added. NTE was already mentioned, that, of course, increased the fleet as well as the intangible assets. I think on the balance -- on the liability side and equity side, there is not so much to mention, I think, to save time, let's say. If we then move on to the cash flow development, we think that the SEK 6.8 billion cash flow that we generated throughout the last quarter of 2025 remains solid, but of course, as you can see at a lower level than last year. The main reason for this is, I would say, two things. On the one hand, the change in working capital, which actually is still positive with SEK 650 million, but last year was even much more positive with SEK 2.3 billion. And the second item that, of course, influences the cash flow negatively here is then the lower operating cash surplus, which goes hand-in-hand, I would say, with the operating profit development that we have seen. And those are the 2 main items that basically pulled down the cash flow compared to last year. And then finally, maybe just to point out that for the year, we concluded with SEK 26.8 billion, SEK 11.6 billion, let's say, SEK 12 billion of which was used to finance our acquisitions, and 2/3 of those were actually taking place in the last quarter with SEK 8 billion. So with that, I conclude my comments on the financial statements and give back to Vagner to comment on the near-term outlook. Vagner Rego: Thank you, Peter. As you know, the near-term outlook is not a guidance for the orders received. It's just how we see the sequential development of our customer activity level. But then, we still continue to have a mixed picture. If I qualified a little bit more this mixed picture, on the positive side, we see a bit more vivid and active semiconductor market when we speak to our customers. And that does not mean that we will see orders coming in Q1, but there are more interactions ongoing with our customers. We also know that this is hard for us to predict because it's a key account business, decisions can take quite fast. So in talking about quite large amounts. So it's difficult to predict if this -- we will see some reaction in the Q1 orders received. But there are more activities, let's say, I wouldn't say more activity, but perhaps more interactions with our customers. So on the [ less ] positive side, we still see challenges in automotive, especially in Industrial Technique. And that's the reason why we also have decided to further adjust the organization. So there it's a more challenging environment. And then when we look to the Industrial segment, and we talk about industrial pumps, industrial compressors, general industry for Industrial Technique, I think we still see hesitance that is still a challenging environment, full of uncertainties. We have seen how the year has started and how many development so far, and we are still in January. So -- and that's why -- with this mixed picture, that's why if we combine all this, we believe that the overall demand for the group remains at the current level. So moving back to you, Peter, then. Peter Kinnart: Yes, I will just round off this presentation by informing you about the proposal that the Board has made to bring to the Annual General Meeting of Shareholders. And the intention is that a proposal will be made to offer ordinary dividend of SEK 3 per share, topped up by an additional distribution to the shareholders of SEK 2 per share, adding up to a total of SEK 5, and that SEK 5 will be paid in two equal installments, one in the course of April and one later in the year in October. So I think with that, we are at the end of the presentation. And before giving the floor to all of you asking your questions, I just want to remind you, please stick to one person -- one question at a time so everybody has an opportunity to raise their questions. Thank you. Operator: [Operator Instructions] The next question comes from Alex Jones from BofA. Alexander Jones: Maybe I can follow up on Vacuum Technique. And it would be really helpful if you could expand a little bit on the comments you made with regards to the outlook, especially thinking about Q4, how much of that acceleration in semis orders was easy comps, given you said you're not necessarily expecting that acceleration in conversations to feed through in Q1? And that acceleration in conversations, is there any difference between different geographies, thinking about China compared to the rest of Asia compared to the Americas? That would be very helpful. Vagner Rego: Yes. So definitely, we see -- if we look to Q4, it was indeed lower comps. I think Q4 2024, it was not a great year in terms of -- great quarter in terms of orders received for Vacuum. But anyhow, there is always a little bit of seasonality, but I think we are happy with the development of the orders in the semiconductor, although we had low comps. But going forward, we see a bit more interaction with our customers. It doesn't mean that we -- like I said, we will see the orders in Q1, but we get more questions, when we say just to qualify a little bit when say more interactions, more vivid and active let's say, activity. What we mean, we get now more questions, are you prepared to increase volumes? And I think that's more what we hear these type of discussions. And again -- and we haven't seen. We cannot say that the orders will come in Q1, but there are more discussions on that line. But that is more -- the majority of the production of chips are coming from Asia. That means there are a lot of interactions in that region overall. Operator: The next question comes from John Kim from Deutsche Bank. John-B Kim: Following up on Alex' question, can you give us a little bit of color on the Q4 order intake as to whether this is going into newer facilities? Or is it refreshing or expanding production at existing fabs for your semiconductor clients? Vagner Rego: I think it's always a combination of both. But depending on the players, I think they don't need to build new fabs. They have different strategies. Some they don't need to build new fabs. They have a space where they can populate with more equipment. I would say, we have seen more that and there are also players that are building new fabs to populate later. So I think there is both, some that was built in the past and now are populating -- are being populated and there are semi players where they have -- they can rearrange the current facility to increase production and then we got some good orders in Q4. Operator: The next question comes from Rory Smith from Oxcap. Rory Smith: It's Rory from Oxcap. It's just on the order intake in Compressor Technique. I think you called out significant increase in Gas and Process from several different customer segments. Really keen to just know what those segments were in a bit more detail, if that's possible. Vagner Rego: Yes. There are several market segments that performed very well. Sometimes we get a little bit more orders from LNG, for instance, because the nature of the business when they decided to take orders -- to place orders, you talk about 10 ships or 20 ships, which was not the case. We got a couple of orders for LNG. But we also had orders for gas processing equipment. I think we still see quite a lot of opportunity around gas processing, fuel gas boosters that goes together with gas turbines. If you want to generate -- if you want to have a gas-fired power plant, you have the turbine and the turbine needs fewer gas booster. We got some orders from that. Also, air separation units was also okay and a little bit for chemical and petrochemical. It was quite balanced, I would say, this quarter more than previous quarters, I would say. Rory Smith: Could I just squeeze in a quick follow-up then on that? What percentage was Gas and Process of the Q4 orders versus industrial in Q4 in Compressor Technique? Vagner Rego: I think we don't disclose that figure on divisional level. Over time, it has been around 10% of the Compressor Technique business area. Operator: The next question comes from Klas Bergelind from Citi. Klas Bergelind: So I just had a question on the larger industrial compressor orders. They are up year-over-year against an easy comp, but some debate today around that they're down quarter-on-quarter. But isn't that just seasonality, i.e., down fourth over third, at least according to my model. You don't see any underlying weakness, right, Vagner, on the larger side in compressors. I think you said last quarter, in October, that orders started to come back in Europe, but that China was still weak. I'm just keen to understand the quarter-on-quarter underlying trends on the larger side? Vagner Rego: I think it's still challenging in China, I would say, giving a little bit more color. I think we were positive about Europe and happy, to be honest. And we saw a little bit less growth in North America, but still positive development if that can help you a little bit more. Operator: The next question comes from Sebastian Kuenne from RBC Capital. Sebastian Kuenne: Regarding compressor business again, could you tell us a little bit about the market and pricing situation in the U.S., specifically for the compressors that you have to import from Belgium? And given that you have local competition like Ingersoll, who can maybe outbid you on pricing, maybe you can give a bit more color on the situation there. Vagner Rego: Thank you for the question. Yes, indeed, I think we do have the tariffs. But it's fair to say not everything that we sell in the U.S. is important. We also have local production. I don't disclose the number of how much is local, but there is quite a good portion. We are increasing the content of local production. That will come step by step. But it's fair to say that the main driver is price, and we are increasing our list price. And it's a balance act because we also want to keep or even increase our market share. So I think that is the balance we do now while we increase list price of different product lines, we also keep fighting to increase our market, not even to maintain, but to increase our market share. We do have the impact like Peter had already mentioned, but I'm quite happy with the development, to be honest, on the market share. Not all the product lines are doing well, but some are even increasing the market share. That was quite encouraging to see under such a tough situation we can further increase. And when it comes to competition, difficult for me to talk about any competitor, but many of them also have a lot of important items as well. Operator: The next question comes from Max Yates from Morgan Stanley. Max Yates: Just my question was on your exposure within the vacuum business. Obviously, over the past few years, you've kind of expanded in China, you've built up a facility in the U.S. And I guess essentially, my question is, when we look last year, your business kind of underperformed wafer fab equipment spending. And I guess what I'd like to understand is, given we're seeing kind of disproportionate price increases across memory, maybe some of the customers like Intel and maybe their CapEx is growing slower than the overall kind of pie. So just trying to really understand kind of any nuances in your exposure? And any reason when you look today at your kind of key accounts and your exposures to them as to why you would outperform or underperform wafer fab equipment spending as we go into 2026 in your vacuum business? Vagner Rego: Yes. I think we have explained in the Capital Markets Day. Perhaps it's good to go back to that meeting where we said that the WFE now have different components and the components that is correlated to advanced packaging is growing quite fast because of AI. And that creates a bit of imbalance between if you want to compare the vacuum result with WFE. On top of that, when you go to lower nodes, you have some different process steps that are not exposed to vacuum. I think then that definitely creates a little bit of imbalance. I think when it comes to the CapEx that is important for us, all the CapEx utilized for the production of wafer, I think that is the CapEx that we should consider. I think it's not always available, but that is the one that can define if we are performing well or not. And we feel very comfortable with our performance or with our product portfolio today and going forward. Going back again to the Capital Markets Day, we have shown a new EUV system that we have released beginning of 2025. I think we're very well positioned there. We also have shown a new platform for the semi market that we call Ganymede that we are introducing step by step that is quite relevant for us. I think that is the most important because that will allow us to stay competitive in these markets, even delivering more value for our customers. I think that is the most important, in my opinion. Operator: The next question comes from Daniela Costa from Goldman Sachs. Daniela Costa: I wanted to ask you a little bit to talk through sort of the restructuring and how you view that going forward? I believe at the CMD, you've mentioned that the actions were mostly done and the benefits would sort of come. So do you expect the headwinds on margin and on cash that we've had in '25 from restructuring to maybe more normalized or be significantly lower going forward? Where do you stand in that process? Vagner Rego: I think, Daniela, we will continue to monitor the situation. I think it's difficult to say. If we feel the need that we need to adapt here and there, I think we will do. We're still harvesting -- I think Peter when he was presenting the bridge, I think he also mentioned that we already harvest that Q4 was a good example in ITBA and in Industrial Technique and Vacuum Technique where they did benefit. But we still need to do a little bit more in Industrial Technique because of the outlook. And again, we will continue to monitor. Of course, these restructuring costs that we have just booked in Q4, we have benefited slightly in Q4. So -- and that will come step by step in 2026. Operator: The next question comes from Vlad Sergievskii from Barclays. Vladimir Sergievskiy: Could you provide outlook for your compressor business for Q1 or near term similar to what you have done for Vacuum and for Industrial Technique just directionally following a healthy 7% growth last quarter, of course? Vagner Rego: I think what we mentioned, Vlad, is that the demand will stay -- the activity level will stay flat. I think that is valid for Compressor Technique as well that is exposed to several industries. I mean, I think it's -- you see that the market still has some uncertainty. Globally, there might be positives here and there. But if I look to China, the demand is still challenging. You don't have triggers from the consumer demand. Some pockets of growth here and there, but the underlying demand is not as strong as it used to be. So I think it's the -- that's why I think you should consider what we have said that the activity level will remain the same. Operator: The next question comes from Andreas Koski from BNP Paribas. Andreas Koski: Could you give us an idea of what impact the tariffs had on the margin in the quarter? And if you still expect to be able to cover that by pricing, rerouting, et cetera, in 2026? Peter Kinnart: Yes. Thank you, Andreas, for your question. When we look at the current quarter, I think last time, at the end of Q3, we said that the third quarter only had a partial impact from the changes in the tariffs like 232, et cetera, so that we haven't seen the full impact yet. While at the same time, we were, of course, implementing a number of mitigating actions. And I would say that over Q4, the impact of the tariffs was basically similar as what we saw in Q3. And so that even though the impact in absolute terms was maybe higher, considering it was a full quarter, but on the other hand, the mitigating actions also partly took effect. That being said, we also admit, let's say, that competitive situation in the market is, of course, there. Demand is not always as vibrant in some areas. And as a result, of course, everybody fights for the orders, us included. And like Vagner already indicated as well, we are not willing to let go our market share. So I would say, in a nutshell, the result is that we are not fully able at this point in time to compensate for the tariffs, that the effect was similar as what we had seen in Q3 from a margin point of view. But that we expect to continue to work hard to mitigate through price increases, through logistic flows or assembly in the U.S., for example, other type of activities. And that this combination of all these activities over the next several quarters should ultimately lead to being able to compensate for the tariffs. But at this point in time, we are not fully able to do so. Andreas Koski: But it's only a 1/10 of a percentage point or so that the impact is. It's not.... Peter Kinnart: Well, I don't give an exact number because only measuring it is already quite a challenge to see all the different aspects of it. But I mean it's definitely less than 1% on the margin. Operator: The next question comes from Phil Buller from JPMorgan. Jeremy Caspar: Phil had to jump on to the other line. It's Jeremy from JP. On the topic of capital returns, it's good to see the special dividend when operating cash was a little bit lower year-on-year. I'm wondering, is there anything we should or should not infer from this? I mean, on M&A, maybe the pipeline is a bit lower in 2026 and maybe you should see capital surplus? Or is it just a reflection of growing confidence on end markets improving, i.e., cash should be better this year? Peter Kinnart: No, I don't think anybody needs to read too much into this. I think it's not the first time that we have this kind of extraordinary or additional distribution, even though we did it in a kind of a different shape or form in the past, but now this is in this way. It doesn't have any impact with regard to our acquisition pipeline or whether we have or have not any good projects in the pipeline. I think when it comes to acquisitions, the key is always, is this the right fit for the company for the growth of the future to create value for the shareholders. And I think even with the additional capital distribution, I think we still have quite sufficient firepower to acquire both small, but also bigger targets should we feel that they are the right fit for the group. Operator: The next question comes from Anders Idborg from ABG Sundal Collier. Anders Idborg: Just a question on the Vacuum margin. The way I interpret you, Peter, is that the 19.2% that you have now, that's a pretty clean margin and representative of the current basically interest -- sorry, currency rates, et cetera. How should we think about the drop through when volumes start to come through as they probably do in 2026, given the footprint optimizations that we've done? That's the question, yes. Peter Kinnart: Yes. Thank you, Anders, for your question. As always, very difficult to give a very precise answer to this. What we have said when we discussed the different restructuring measures that we have taken with the business area was that we were targeting mostly indirect functions, try to limit as much as possible the impact -- try to prune a little bit, let's say, the management structure to become more efficient. And that over time, should, of course, when volume comes back, generate leverage from a margin point of view. Of course, once the volume goes up, we do expect that we will need to increase maybe some variable costs in line with the volume increase. I mean that's only normal. But how much exactly the leverage effect will be is hard to say at this point in time. It will depend a lot on what kind of volume growth we might be able to harvest. But that is definitely the idea with the actions we have taken to create leverage on the margin once the volume kicks in again. Operator: The next question comes from Rizk Maidi from Jefferies. Rizk Maidi: I just wanted to double-click on the North American order growth. I think you said it was 8%, but only plus 3% ex acquisition. It doesn't feel that it's a high number given the amount of pricing that you need to put through there. Just perhaps if you could just double-click on this, especially on Compressor and Industrial Technique. Are you guys not pushing pricing as much? Or are the volumes quite weak in the region? Vagner Rego: Thank you for the question, Rizk. If you take there are different colors, of course, we have been performing very well in compressors. I mean that is the component of price indeed. We saw there, perhaps, I think, to give you a little bit more color, the Gas and Process business was more flattish in North America that might help you, while Industrial Compressors in general was positive. So in Industrial Technique, there, we have a little bit more headwinds in Q4, but I must say as well that 2025, North America was a great year for Industrial Technique. I mean we had quite a lot of [ project ]. It was good development. And Q4 was weaker, definitely there. And I mentioned about portable that we had some cancellations was mostly related to North America. So some orders that we -- all the orders from large rental companies that were in our books for some time, and they were not taking the equipment, we decided to cancel these orders because the price was a bit behind what we would like to. So -- and I think when you combine that, you have the 3% growth. Operator: The next question comes from John Kim from Deutsche Bank. John-B Kim: Sorry, my question was asked. Vagner Rego: Okay. Thank you, John. And we have one last question. Operator: The next question comes from Sebastian Kuenne from RBC Capital. Sebastian Kuenne: Just on Power Technique. I think you mentioned earlier that you're not happy with the rental rates and the uptake on orders in North America. Did I hear you correctly that you mentioned that you may need to have further adjustments there for capacity? Or did I understand that wrong and we discussed that earlier? Vagner Rego: Yes. But maybe to give you a little bit more color. I think the main problem is in rental. I think Peter already mentioned. The rental utilization was a little bit lower than what we would like to. And we had lower activity level in Europe and Asia for the rental business, and that's where we will concentrate our efforts. But it's not only about restructuring, it's also about activities, finding new customers because we had some traditional customers that -- where the demand is not there today, and we have to repurpose the fleet and do some sales activity to bend the trends. Sebastian Kuenne: So higher operating cost for some time to find new customers? Vagner Rego: Yes. I think when it comes to Power Technique, if we feel the need to adjust, we will adjust, I think. But we will concentrate the efforts on the rental business for the time being. Peter Kinnart: Okay. Thank you, Sebastian for that last question. The time is unfortunately up. But of course, if you have any further follow-up questions, our IR department will be very glad to assist you in providing any further clarifications. With that, I would like to thank you all for attending the call and wish you a great rest of the day. Thank you very much. Bye-bye.
Operator: Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Bank Earnings Conference Call Fourth Quarter. [Operator Instructions] It is now my pleasure to turn the call over to Patrick Ryan, President and CEO. You may begin. Patrick Ryan: Thank you. I'd like to welcome everyone today to First Bank's Fourth Quarter 2025 Earnings Call. I'm joined by Andrew Hibshman, our CFO, Darleen Gillespie, our Chief Retail Banking Officer; and Peter Cahill, our Chief Lending Officer. Before we begin, however, Andrew will read the safe harbor statement. Andrew Hibshman: The following discussion may contain forward-looking statements concerning the financial condition, results of operations and business of First Bank. We caution that such statements are subject to a number of uncertainties and actual results could differ materially, and therefore, you should not place undue reliance on any forward-looking statements we make. We may not update any forward-looking statements we make today for future events or developments. Information about risks and uncertainties are described under Item 1A Risk Factors in our annual report on Form 10-K for the year ended December 31, 2024, filed with the FDIC. Pat, back to you. Patrick Ryan: Thank you, Andrew. 2025 overall in Q4, in particular, did not play out exactly as we expected, but the overall results were solid, nonetheless. For us, the margin drives overall profitability. And in that respect, 2025 was a very good year. Our net interest margin of 3.7% in the fourth quarter was 20 basis higher than in the fourth quarter of last year. For the full year, our NIM was 3.69% compared to 3.57% for the full year 2024. The strong margin expansion helped drive overall profitability higher as our fourth quarter return on average assets was 1.21% compared to 1.10% in the fourth quarter of 2024. Similarly, the return on tangible common equity also improved during the year, reaching 12.58% in the fourth quarter of 2025 compared to 11.82% in the fourth quarter of 2024. Despite these strong overall results, we were not happy with the performance of our small business loan products. Given the higher yield on those loans, we did expect credit cost to be higher than our other loan products, but the overall level of delinquency and charge-offs exceeded what we believe to be accessible levels. During the course of the year, we made several changes to credit parameters and how we discuss and sell the product. We expect these changes will lead to overall better performance in 2026 and beyond, and we will continue to monitor closely to make sure the changes are having the impact we believe they should. We did see some modest improvement in noninterest income during the year as our total fee income increased by almost $2 million compared to the prior year. Gains from SBA loan sales were higher in 2025. Further enhancements to technology and staff towards the end of the year in 2025 should help drive continued improvement for the SBA team in the coming year. Fee income from residential mortgage sales remained muted given continued slowness in that market. Overall, noninterest expense was managed effectively as the onetime benefit from the sale of an OREO asset helped to offset some severance and other nonrecurring expenses during the year. Our noninterest expense to average asset ratio was 1.97% for the full year 2025 compared to 2.01% for the full year 2024. Our goal will be to continue to move that ratio lower as we believe improved profitability from our newer business units and improved operating leverage will allow us to drive even stronger efficiency. Regarding credit quality, the story is mixed. The challenges in small business have been documented, but we expect to see those costs stabilize over the next few quarters given the changes we've implemented. Performance in our core CRE and Community Banking division continues to be strong. In fact, credit statistics in those areas actually improved throughout the year as the overall risk rating on the CRE portfolio improved modestly and delinquency at the end of the year stood at a very low 0.02%. As a result of these positive developments in our largest portfolios, all loans rated past watch, special mention and substandard declined from 4.86% of total loans at the end of '24 to 4.20% of total loans at the end of '25. Despite these positive developments across the board, we did see an increase in the substandard loan category because of the downgrade of 1 specific $23 million C&I loan that was moved to substandard towards the end of the year. While that overall business has a number of locations that are performing well, the decline in sales and profitability makes that a situation we will be monitoring closely. As we look ahead to 2026, we see reasons for optimism. Our pipelines remain active, and we believe we'll be able to achieve our $200 million net loan growth goal for 2026. We expect growth in asset-based lending, community banking and a return to modest growth in commercial real estate to help drive that growth in 2026. Deposit growth continues to be an area of focus. We have great teams in New Jersey and Pennsylvania working across various customer segments to help us add new relationship-based customers and drive growth. Furthermore, we expect continued expense management and operating leverage can help drive improved earnings. In summary, our primary goals for 2026 include closing the gap with our cost of funds relative to our peers, moving modestly higher with noninterest income generation and driving further reductions in our noninterest expense to average asset ratio. At this time, I'd like to turn it over to Andrew to discuss the financial details of Q4 and full year. Go ahead, Andrew. Andrew Hibshman: Thanks, Pat. For the 3 months ended December 31, 2025, we recorded net income of $12.3 million or $0.49 per diluted share, which translates to a 1.21% return on average assets. We saw another solid quarter of loan production. However, elevated payoffs more than offset the increase. Payoffs were $135 million for the fourth quarter, which was nearly as much as the total for the first 3 quarters of the year combined. As a result, total loans declined about $81 million from the end of the third quarter. We are happy to report that despite the elevated payoffs, loans were up $149 million or approximately 5% over the last 12 months. with C&I leading the way. On the deposit side, we took advantage of the decreased funding requirements related to the decline in loans and allowed certain higher cost balances to roll off during the fourth quarter. Total deposit balances were down $21 million during the quarter as we continued to prioritize profitable relationships. While total deposits were down, primarily driven by a $27.1 million decline in brokered deposits, we did see nice new customer acquisitions, especially at some of our newer branch locations. Net interest income increased $633,000 compared to the third quarter, primarily due to net interest margin expansion. Our net interest margin grew 3 basis points to 3.74% in the fourth quarter. It benefited from the decrease in interest-bearing deposit costs, which outpaced the decline in earning asset yields. It also reflects lower costs related to the subordinated debt refinance we executed over the summer. Recall that we had a double carry of sub debt for 2 months in the third quarter that resulted in about $486,000 in additional interest for that quarter. Last quarter, we said that we expected the immediate impact of Fed rate cuts to be slightly negative to the net interest margin as it takes longer to move deposit costs lower compared to the immediate impact of rates moving lower on our variable rate assets. The decline in loans in the fourth quarter shifted the balance sheet and our funding needs, ultimately driving an improvement instead. Looking ahead, we continue to manage a well-balanced asset and liability position which should result in continued strong net interest income generation. We continue to expect declines in our acquisition accounting accretion over the next several quarters. However, we expect our margin to remain relatively stable as we continue efforts to push deposit costs lower and replace the runoff of lower-yielding assets with higher-yielding loans. Our asset quality metrics at December 31, 2025, reflect some continued deterioration in the bank's small business portfolio. NPAs to total assets increased to 46 basis points compared to 36 basis points at September 30. The increase reflects growth in nonperforming loans of $4.8 million. Note that the OREO asset we sold during the quarter had a carrying value of 0, so there is no reduction in NPAs related to that sale. Our allowance for credit losses to total loans increased to 1.38% at December 31 from 1.25% at September 30. This increase primarily relates to fourth quarter charge-offs and an elevated level of specific reserves in our small business portfolio. Despite the $23 million C&I loan that moved to substandard that Pat mentioned, overall criticized loans increased only $9.4 million from September 30, 2025, as we experienced a number of payoffs and paydowns of classified loans during the quarter and had a few upgrades related to businesses with improving financial results. We recorded $1.7 million in net charge-offs during the fourth quarter, in line with net charge-offs of $1.7 million during the linked quarter with net recoveries of $155,000 in the fourth quarter of 2024. Charge-offs during 2025 were almost exclusively in our small business portfolio. Noninterest income totaled $2.3 million in the fourth quarter of 2025 compared to $2.4 million in the third quarter. The decrease of $138,000 mainly reflected lower gains on recovery of acquired loans, but this was partially offset by higher loan swap fees and gains on sale loans during the fourth quarter of 2025. Noninterest expenses were $17.1 million for the fourth quarter compared to $19.7 million in Q3. The decline was primarily driven by a $1.9 million gain on the sale of an OREO asset. This Florida-based property was acquired through the Grand Bank acquisition in 2019 and was held at no carrying value. The gain was booked as a contra expense. Outside of this nonrecurring item, salaries and benefits expense decreased by $400,000 compared to the third quarter due to lower bonus expenses, as the increased credit costs in Q4 drove a decline in our year-end bonus accruals. Other smaller declines across other expense lines compared to the linked quarter reflect our focus on expense management in 2025. We've been successful in managing expenses even as we've incurred some ongoing costs related to our efforts to optimize our branch network. We expect branch network optimization activity to slow in 2026. Tax expenses totaled $4.3 million for the fourth quarter with an effective tax rate of 25.7%. This compares to 23.4% for Q3. For the full year 2025, our effective tax rate was 23.8%. Our fourth quarter tax rate included some year-end adjustments primarily related to state tax allocations. We anticipate our future effective rate will be approximately 24% to 25%. Our efficiency ratio improved to 49.46% and remained below 60% for the 26th consecutive quarter. We also continued to expand tangible book value per share, which grew more than 12% annualized during the quarter to $15.81. We're pleased with our earnings momentum and our progress in executing our strategy to evolve into a middle-market commercial bank. We've demonstrated we don't need big balance sheet growth to produce growth and profitability. Our capital ratios remain strong, and we're pleased to provide our shareholders with a 50% increase in our quarterly cash dividend. For the first half of the quarter of the fourth quarter, we did not have a regulatory approved share repurchase plan. And with our improved stock price during the quarter, we did not execute any share repurchases during Q4. Going forward, we aim to continue driving shareholder value through a combination of core earnings, while still making ongoing investment in our franchise and technology, a stable cash dividend and share buybacks as applicable over time. At this time, I'll turn it over to Darleen Gillespie, our Chief Retail Banking Officer for her remarks. Darleen? Darleen Gillespie: Thanks, Andrew, and good morning, everyone. As mentioned, we were able to drive favorable shifts in our deposit portfolio during fourth quarter of 2025. The decline in total deposits were largely attributed to our decision to reduce higher-cost brokered deposits in light of a lower loan funding needs. You can see in our ending balances that we reduced time deposits by $38 million or 18% annualized during the quarter. We also let other higher costs and nonrelationship deposits run off, which you can see in our ending balances for money market and savings, which declined by $23.5 million or an annualized 8% during fourth quarter of 2025. Despite the attrition, we are pleased with these outcomes, the benefit from the decrease in interest-bearing deposit costs had a positive impact on our net interest margin. And even so -- even more so with our success in growing relationship-based interest-bearing demand deposits, we ended the quarter with growth of $47 million in that portfolio or 33% annualized compared to September 30. And that is a testament to the outstanding execution of our relationship bankers across our footprint. I'll also note that the $6 million linked quarter decline in noninterest-bearing deposits reflects seasonal fluctuations in business customer deposits related to things such as year-end bonuses. We have been successful onboarding noninterest-bearing deposits as we grew the portfolio by $53 million year-to-date in 2025. In addition to deposit activity, we've been equally busy in 2025, executing on our branch strategy. We opened 3 branches, closed 2 and relocated another branch, netting just 1 additional branch, but gaining stronger alignment of our branch footprint with customer demand and growth opportunities and enhancing profitability of existing locations. We ran targeted promotions at our new and relocated branches and saw great engagement, retention and the ability to onboard new customers. We see opportunity to bring these promotional rates down in line with market rates throughout 2026, while maintaining key deposit and loan relationships. I'd also note that we saw strong retention among customers affected by our branch consolidations in both relationships and balances. As Andrew mentioned, we see branch network activity slowing in 2026. We will continue to be opportunistic where it makes sense to enhance the efficiency of our network the convenience for our customers and our potential exposure to new clients in existing or adjacent markets. But right now, our focus is on optimizing the pricing and profitability of our deposit portfolio. We continue to prove successful in lowering our deposit rates while maintaining key customer relationships. As Pat mentioned, our goal is to bring our deposit costs closer to our peer bank. This is part of our evolution into a middle-market commercial bank as we move beyond our years of rapid growth. We no longer need to grow for the sake of growth, which necessitated funding that growth with expensive deposits. In 2026, we'll continue to focus on optimizing our deposit portfolio, as I mentioned, by continued to -- continuing to lower deposit costs while simultaneously deepening and adding high-quality relationships where we can serve the breadth of the customers' financial needs. Additionally, our relationship bankers are focused on onboarding noninterest-bearing deposits and cross-selling to clients who have interest-only deposits with us. We expect this will aid in bringing our overall deposit costs down and support a strong net interest margin in 2026. At this time, I'll turn it over to Peter Cahill, our Chief Lending Officer, for his remarks. Peter? Peter Cahill: Thanks, Darleen. As Pat and Andrew described, while not a good quarter from the standpoint of overall loan growth, we did finish the year up $149 million or almost 5% compared to the end of 2024. If you recall, we started the year very quickly, but we knew from speaking with clients that we had payoffs coming from either asset sales or refinancing and for that reason, held our overall estimate for the year than what was originally budgeted. As our press release states, average loan growth for the entire year was $267 million, which I believe is a good indicator of a busy year. We know that the strong loan growth we had in the first half put some pressure on funding sources, and I think we naturally became more selective in business development. When we dig into the numbers, we see that of the $429 million of new loans funded during the year, only 20% of that amount was funded in the fourth quarter. New loans continue to be centered on C&I and owner-occupied real estate. For the year, this category made up 62% of new loans with investor real estate loans comprising 22%. On the flip side, the loan payoffs, we believe were coming hit us pretty hard. The $135 million in payoffs in Q4, as referenced by Andrew, made up 47% of all payoffs for the year. Looking back, it was the largest amount of loan payoffs we've ever had in a single quarter. 6 of our 10 largest payoffs for the year took place in Q4, all but one were investor real estate loans and 3 of the investor real estate loans were construction loans that were paid off of long-term financing down elsewhere. Our goal continues to be moderate growth in investor real estate and managing more of that business in our investor real estate team. We look closely at the ratio of investor real estate loans to total capital. We have been as high as 430% of capital after the Malvern Bank acquisition, but got to 390% at March 31 of this year, 370% at September 30 and finished the year at 346% due in part to the loan payoffs previously described. Going forward, we're comfortable staying around a range of 350% to 375% capital. The lending pipeline at the end of the year stood at $284 million of probable fundings, almost exactly the same as we had at the end of Q3. If one breaks down the components of the pipeline at year-end, C&I loans made up 61% of the overall pipeline compared to 36% for investor real estate. Overall, I continue to be satisfied with where the new business pipeline stands. On the topic of asset quality, we mentioned some softness in the small business portfolio last quarter and Pat and Andrew both talked about the Q4 impact. I'll only add that we've reorganized how we manage that business. We've turned over some staff in that area, slowed production and we're giving a lot of attention to the relationships we have on our books presently. Delinquencies across all business lines are very manageable at year-end and were virtually nonexistent other than what was from the small business portfolio. In summary, while the payoffs we experienced resulted in a down quarter as far as loan growth goals, as I mentioned earlier, average loan growth for the year was strong. Our plan is to continue to grow in all segments, those being the New Jersey and Pennsylvania regions, SBA, consumer, private equity, asset-based lending and exceed what we accomplished in 2025. That concludes my remarks about lending, so I'll turn things back down to Pat Ryan. Patrick Ryan: Thank you, Peter. At this point, we'd like to open it up for the Q&A portion of the call. Operator: [Operator Instructions] And our first question comes from the line of Justin Crowley with Piper Sandler. Justin Crowley: Good morning, everyone. I was wondering if you could start out just on some further discussion on loan growth and the outlook there. I know the payoffs can be tough to predict and you had foreshadowed some of that earlier in the year. But just wondering how you think those could perhaps trend through the year as lower rates continue to work their way through the system and especially if we continue to get more cuts, just maybe -- just what you continue to hear from customers on that end of things? Patrick Ryan: Yes, Justin, obviously, it's something we're keeping a close eye on. I'll give you kind of some high-level thoughts of mine and then let Peter give you a little more clarity based on what's actually in the pipeline. But we're looking closely not just at the amount of payoffs, but what's behind them. And we didn't see any necessary, call it, disturbing trends in the sense that we weren't keeping the business that we wanted to keep or that private credit or other nonbank lenders were stealing our customers. We did have one large payoff that went CMBS because they were able to get non-recourse, which something we weren't prepared to do. But that's sort of par for the course, forgive the term, to manage the portfolio with the rate and structure and term that we like. And in situations where other financing sources are willing to do things we're not willing to do, we obviously live with the payoffs. But I think if you look back over 12, 16, 20-quarter period, I mean, these windows of what look like abnormally high payoffs, given that they come within a 90-day window, almost always snap back with strong growth, whether it's the next quarter or the quarter after. And as we've talked about in the past, our ability to kind of deliver on that historically, $175 million, $200 million in net loan growth has been pretty consistent. And so we're not -- we're not raising any alarm bells. We think it was a little bit of an anomaly. It is interesting talking to other bankers out in the market. It sounds like there were a number of banks at least we know in this market that similarly experienced unusually high payoff activity. But again, at this point, not anything that we'd attribute to macro conditions as much as perhaps more just timing and coincidence. But Peter, maybe if you can jump in and just give a little color on where the pipeline stands and what you're seeing for kind of the first half of 26% for new production. Peter Cahill: Yes. Thanks, Pat. Justin, I would -- the pipeline is where it was a quarter ago. I think that's a fairly positive sign. Everything we're hearing, I mean, we -- for the last 6 to 9 months after jumping way out ahead of plan early on in the year, we kind of were a little bit more restrictive as to what we would do or what deals we -- how hard we negotiate for a piece of business. But I'm hearing from whether it's real estate lenders in the Philadelphia market that there's plenty of business there to C&I type lenders in our regional/community bank space. We opened up new branches in Summit, in Monmouth, in Central to Northern New Jersey. But these are kind of new markets that locally we're out making ourselves known in and the feedback there is good as well. So Florida is another one where we've been there a year or 2 now coming out of the Malvern acquisition, staffed that up a bit with a couple of folks, and they're doing well. So it's kind of like all areas are producing good activity. No one more than others, really, but I don't see any reason to be overly concerned about being able to drive the growth we're forecasting. Justin Crowley: Okay. Awesome. I appreciate all the detail there. I guess just on the credit side, you talked through a lot of what you've seen on the small business side. I was wondering if you could talk a little bit more about the C&I credit that got downgraded. I'm not sure if there's any further detail you could share there in terms of things like industry and whether it was your credit alone or if it was perhaps participation? Just anything there? Patrick Ryan: Yes. Not a whole lot we can add, Justin, other than what we've already provided. It's a multi-location consumer-based business that has seen some downward trends. And while they still have a number of locations that we believe they believe are performing very well. They have some others that aren't. And so that's kind of driving a decline in the performance. And just given the cash flow-based nature of the loan and the size of the loan, we -- with the downgrade of substandard, we wanted to mentioned it on the call. But other than something we're keeping a close eye on, there's not a whole lot more we can share at this point. Justin Crowley: Okay. Got it. Understood. And then just on expenses. Obviously, some noise there this quarter with OREO gain that flowed through. And then overall, a lot of work that's been done on efficiency initiatives. I was just wondering if you could -- and I know you gave the expense to assets target, but I was wondering if you could provide thoughts on run rate from here on the expense base and just how you're thinking about costs for the duration of the year? Patrick Ryan: Yes. So high level, we're not talking about massive cuts, right? I think we're operating pretty lean and I think we're appropriately staffed. I think what we're really looking for is keeping a tight lid on expense growth as we move throughout this year and next year. And so limited expense growth, coupled with revenue growth should help drive that revenue down. But Andrew, I don't know if there's anything specific you wanted to provide around quarterly expense run rate or anything. I'm not sure we usually provide specific guidance there. But maybe you can give a sense for kind of what the core number was in Q4 and what -- is that a good basis for the future? Andrew Hibshman: Yes. So I'd just add that I think the third quarter was a pretty standard quarter with not a lot of noise. So that was -- that's a decent kind of starting point. Obviously, as you head into a new year, there are some things that drive costs higher in terms of kind of standard inflationary-type adjustments to salaries and some of our other costs there. But as I mentioned, I think the fourth quarter had the OREO gain, which was unusual. And then our bonus expenses were abnormally a little low in the fourth quarter because we had to make some adjustments to our bonus numbers based on kind of the final year-end results. So again, if you look at kind of third quarter and then kind of strip out the couple of noise there in terms of bonus, lower bonus expense in the OREO, you get a decent run rate. And I do think we have some good plans to offset some of those inflationary type adjustments with some other cost-saving initiatives. So we're hoping to maintain a fairly stable and maybe slightly increasing expense number, but I do think we should be able to hold the line pretty well as we head into 2026. Justin Crowley: Okay. I appreciate that. And then maybe just one last one. As far as the buyback, no activity in the quarter. So was wondering if you could remind us where that stands as far as capital deployment and just the appetite going forward? Patrick Ryan: I mean in terms of appetite, I don't think our views have changed, right? We had a timing issue just because these buybacks in New Jersey get approved on a kind of rolling 1-year basis. And so every year, you got to reapply and then it just -- the process can sometimes take time. So we were sort of without a plan for a while, which I think was a driver of the lack of activity. And then it stays on our -- in our toolkit. It's something we look at. We obviously pay attention to the price relative to book value when we're thinking about where to buy back. But yes, I think it's something we continue to look at. And Andrew, maybe you can just provide some information around the plan that got approved in terms of dollar amount or shares. Andrew Hibshman: Yes. So I think we had it in the release, we did get a new plan approved. We got regulatory approval, I think, about in the middle of November. So we have the full allotment of what was approved. It's up to 1.2 million shares up to a total dollar amount of $20 million, and we have -- through the fourth quarter -- or through the fourth quarter, we had not executed any buybacks. We do have an active plan in place and available depending on pricing, as Pat mentioned. Operator: [Operator Instructions] And your next question is from Dave Bishop with Hovde Group. David Bishop: I'm curious, I noted that -- I saw the narrative regarding the softness in the micro small business credit portfolio there. Though just from a numbers perspective, didn't seem to really show up maybe there's a little bit of an increase in nonaccruals, charge-offs. Just curious maybe if you can maybe give us some more details what's driving that cautiousness and softness or the 20 basis points in terms of charge-offs, is that sort of well above your expectations here when you first got into it? And does that imply you're going to sort of look that to get... Patrick Ryan: Yes. I think of it -- and again, these are high-level numbers, Dave, not specific. But right now, the average yield on the portfolio is probably around 9%. And I think what we were seeing in terms of annualized charge-off numbers were elevated 3% or higher. And so I think we'd want that portfolio to perform more in the kind of 1% to 2% annualized given the yield. So getting up at 3% or higher depending on the quarter and the annualization that just was a level that we didn't think was conducive to the long-term profitability of the segment. And so we made some changes. We reduced the overall loan amount, the availability relative size of the business, changed how we managed it. As Peter mentioned, revised the team structure a bit and really went back to basics around relationship-based selling. And I think to me, the performance is partly, as I mentioned, to be expected, right, these are smaller businesses. They have less wiggle room if they lose a big customer or they face some negative trends. And I think across the board you've seen small businesses have struggled a little bit this year. And then I think, quite frankly, we had some issues with folks that weren't selling it the right way, weren't bringing in the right types of customers and we had to fix that problem, too. And so we continue to think that if sold correctly, it can be a good product for us. Again, it's going to be -- continue to be relatively small compared to our other business units and portfolios. But it was more a function of just wanting to tighten it up a little bit. And we'll see, like you said, at 20 basis points overall, it's not overly punitive, but we look at it more within the segment itself, and we want it to be stand-alone profitable, and we think there's some work that's needed there to reduce credit cost to get it to the return on equity thresholds that we have. So... David Bishop: Got it. Yes. I figured there had to be a lot more going on behind the scenes that probably comes through across the macro level. So I appreciate that detail. And then I noted in the narrative too, a pretty good bump in the prepaid fees this quarter with the higher volume. Was that just symptomatic of just getting a wash with the prepayments? Or were these loans that maybe had earlier in their prepayment penalty phase? And did that sort of surprise you as well? Patrick Ryan: Yes. Listen, I think it was a couple of larger CRE loans that had prepayment structures built into them. And in one case, in particular, the borrower found a structure they preferred, specifically around the nonrecourse that was available in the CMBS world. And so they thought it was to their benefit to refi and move in that direction despite the prepayment fee. And so we collected the fee on the way out. We don't get prepayment fees all the time, right? If it's a construction loan, and we were offering permanent financing and then it moves on, we generally get a small fee. But if we were just planning on doing the construction, knowing that it would get taken out elsewhere for permanent, we wouldn't necessarily collect the fee. But any time you see heightened prepayment activity, especially within CRE, where we tend to have those prepayment fee structures, you're generally going to see elevated income within the quarter, again, just to help offset the lost income going forward. But I don't know, Peter, anything in particular you'd point out as you look at the prepayment fee income that we got during the quarter? Peter Cahill: No, I think you hit on most all of the topics. I mean, we do occasionally on the construction side, get kind of an exit fee on the way out. Every deal is a little different. Every deal is negotiable. And it's a combination of really all the things Pat described. David Bishop: Got it. And then maybe just curious, Peter, Pat, maybe what you're seeing in terms of new loan origination yields, if there was much movement there on a quarter-to-quarter basis? Patrick Ryan: Yes. Listen, I think we expect spreads to tighten a little bit, given the payoff activity kind of across the industry. I think folks are going to want to look to replace loans and that will probably lead to a little bit of tighter pricing. But Peter, if you want to jump in, in terms of what you're seeing specifically from the team. Peter Cahill: Yes, we're still trying to get anywhere from 200 to 300 basis points over treasuries or FHLB. So we're still north of 6%. And I think we've done a pretty good job there as far as the yield on loans as they get booked. I don't know, Andrew, I think if I recall some of the monthly presentations on new loans, they get -- we look at kind of the average interest rate, and they've been up in the high 6s. So it's a combination of all types of loans. But yes, we're still hanging in there at a spread of 250 basis points, I'll call it, as the target, whether it's treasuries or FHLB, there might be a 25, 30 basis point difference there, but that 250 number is kind of a good target for us. Patrick Ryan: Yes. And obviously, Dave, the spread depends on the credit, right? We'll tighten up the spread on a deal that we think is super strong and obviously look to stretch it a little bit if it doesn't meet kind of the A++ criteria. And so it's a mix. But I think our folks are doing a good job getting reasonable yields on the loans coming in. David Bishop: Got it. One final question back to credit. Last quarter, there was a lot of other about NDFIs and such, and we talked about the private banking and ABL, mostly portfolio lending. Are you seeing any sort of credit cracks emerging there at all in terms of those commercial segments? Patrick Ryan: Yes. I mean we looked at -- one of the reasons we did the deeper dive and provided a little extra data was to kind of say, "All right, if sub-standards are up, is this a one-off credit issue? Or is it more systemic? And what we had seen across all the portfolios is actually an improvement, obviously, outside of the one downgrade we talked about." But it does seem and feel like that's a bit of an isolated situation versus an indicator of broader softness within C&I, in particular. And like we mentioned in the call, that the CRE performance has been amazing. So we're not seeing challenges emerge there yet. Obviously, you always knock on wood and keep a close eye on where things are headed. But based on what we're seeing within the portfolio today, we're not seeing across the board indicators of emerging credit issues systemically, if you will. Operator: And with no further questions in queue, I will now hand the call back to Patrick Ryan for closing remarks. Patrick Ryan: Okay. Thank you very much. We appreciate your time today, and we look forward to regrouping with everybody when we put out the first quarter results. Thanks, everyone. Operator: This concludes today's conference call. Thank you for joining us. You may now disconnect.
Operator: Good day, everyone. Welcome to the conference call covering NBT's Bancorp's Fourth Quarter and Full Year 2025 Financial Results. This call is being recorded and has been made accessible to the public in accordance with SEC Regulation FD. Corresponding presentation slides can be found on the company's website at nbtbancorp.com. Before the call begins, NBT's management would like to remind listeners that, as noted on Slide 2, today's presentation may contain forward-looking statements as defined by the Securities and Exchange Commission. Actual results may differ from those projected. In addition, certain non-GAAP measures will be discussed. Reconciliations for these numbers are contained within the appendix of today's presentation. [Operator Instructions] As a reminder, this call is being recorded. I will now turn the call over to NBT Bancorp President and CEO, Scott Kingsley for opening remarks. Mr. Kingsley, please begin. Scott Kingsley: Thank you, Sania. Good morning, and thank you for joining us for this earnings call covering NBT Bancorp's Fourth Quarter and Full Year 2025 results. With me today are Annette Burns, NBT's Chief Financial Officer; Joe Stagliano, President of NBT Bank; and Joe Ondesko, our Treasurer. Our operating performance for the fourth quarter continued to reflect the positive attributes of productive fixed rate asset repricing trends the diversification of our revenue streams, prudent balance sheet growth and the additive impact of our merger with Evans Bancorp completed in the second quarter. Operating return on assets was 1.37% for the second consecutive quarter with a return on tangible equity of 17.02%. These metrics demonstrate continued improvement over the prior year quarters and importantly, reflect the generation of positive operating leverage. Our tangible book value per share of $26.54 at year-end was 11% higher than a year ago. The continued remix of earning assets, diligent management of funding costs and the addition of the Evans balance sheet resulted in a 36 basis point improvement in net interest margin year-over-year. Growth in noninterest income continues to be a highlight with each of our nonbanking businesses achieving record results in both revenue and earnings generation for 2025. In the third quarter, we were pleased to announce to shareholders a year-over-year improvement of 8.8% to our dividend, marking our 13th consecutive year of annual increases. This is reflective of our strong capital position and our generation of consistent and improving operating earnings. Our capital utilization priorities focus on supporting NBT's organic growth strategies, as well as improving our dividend each year. In addition, our strong capital levels continue to allow us to evaluate a variety of M&A opportunities. Finally, returning capital to shareholders through opportunistic share repurchases is also a component of our capital planning. And as such, we repurchased 250,000 of our own shares in the fourth quarter. Our transition and integration activities over the past 8 months with the team members who joined us from Evans Bank have been highly successful and have reaffirmed our belief that we have added a customer and community-focused group of talented professionals to our ranks. We remain excited about our opportunities in the Western region of New York. Activities have continued to progress across Upstate New York semiconductor chip corridor in the fourth quarter, including the official groundbreaking of Micron's planned complex outside of Syracuse. Site development and construction of the first fabrication facility is expected to commence immediately with completed targeted in 2030. I will now turn the meeting over to Annette to review our fourth quarter results with you in detail. Annette? Annette Burns: Thank you, Scott, and good morning. Turning to the results overview page of our earnings presentation. For the fourth quarter, we reported net income of $55.5 million or $1.06 per diluted common share. On a core operating basis, which excludes acquisition-related expenses and securities gains, our operating earnings were $1.05 per share, consistent with the prior quarter. Revenue generation remained favorable and consistent with the prior quarter and grew 25% from the fourth quarter of the prior year, driven by improvements in both net interest income and noninterest income, including the impact of the Evans merger. The next page shows trends in outstanding loans. Including acquired loans from Evans, total loans were up $1.63 billion or 16.3% for the year. During 2025, commercial production remained strong, but we did experience a higher level of commercial real estate payoffs. We have captured quality C&I opportunities across our markets, which have provided growth in core deposits, consistent with our focus on holistic relationships. Our total loan portfolio of $11.6 billion remains very well diversified and is comprised of 56% commercial relationships and 44% consumer loans. On Page 6, total deposits were up $2 billion from December 2024, including deposits from Evans. We experienced a favorable change in our mix of deposits out of higher cost time deposits and into checking, savings and money market products. 58% or $7.8 billion of our deposit portfolio consists of no and low-cost checking and savings accounts at a cost of 80 basis points. The next slide highlights the detailed changes in our net interest income and margin. Our net interest margin for the fourth quarter decreased 1 basis point to 3.65% compared with the prior quarter, as lower earning asset yields were largely offset by a reduction in funding costs. In addition, a higher level of lower-yielding short-term interest-bearing balances in the fourth quarter reduced NIM by 1 basis point compared to the third quarter. Net interest income for the fourth quarter was $135.4 million, an increase of $1 million above the prior quarter and $29 million above the fourth quarter of 2024. The increase in net interest income from the prior quarter was driven by the decrease in interest expense more than offsetting the decrease in interest income, as the decline in short-term interest rates impacted both earning asset yields and funding costs. As a reminder, approximately $3 billion of earning assets repriced almost immediately with changes in the federal funds rate, while approximately $6 billion of our deposits, principally money market and CD accounts remain price-sensitive. The opportunity for further upward movement and earning asset yields will depend on the shape of the yield curve and how we reinvest loan and investment portfolio cash flows. The trends in noninterest income are outlined on Page 8. Excluding securities gains, our fee income was $49.6 million, a decrease of $1.8 million compared to the seasonally high third quarter and increased 17.4% from the fourth quarter of 2024. Our combined revenues from the retirement plan services, wealth management and insurance services exceeded $30 million in quarterly revenues. Consistent with historical trends, the fourth quarter is typically our lowest quarter in revenue generation for these businesses, while the third quarter is seasonally higher. Noninterest income represented 27% of total revenues in the fourth quarter and reflects the strength of our diversified revenue base. Total operating expenses, excluding acquisition expenses, were $112 million for the quarter, a 1.5% increase from the prior quarter, including higher technology, year-end charitable contribution and marketing costs. The effective tax rate for the fourth quarter was lower than the prior quarter at 20.3%, primarily due to the finalization of the assessment of the deductibility of merger-related expenses and the associated impact on the full year effective tax rate of 23%. The Slide 10 provides an overview of key asset quality metrics. Provision expense for the 3 months ended December 31, 2025, was $3.8 million compared to $3.1 million for the third quarter of 2025. The increase in the provision for loan losses was primarily due to a slightly higher level of net charge-offs in the fourth quarter of 2025. Reserves were 1.19% of total loans and covered 2.5x the level of nonperforming loans. In closing, the current level of net interest income and fee-based revenues have produced solid results with meaningful positive operating leverage, supported by disciplined balance sheet management as we've navigated three federal funds rate cuts in late in 2025. Asset quality remains stable. And with our strong capital position, we are well positioned to pursue growth opportunities across all our markets. Thank you for your continued support. At this time, we welcome any questions you may have. Operator: [Operator Instructions] Our first question will be coming from Feddie Strickland of Hovde Group. Feddie Strickland: Just -- and you mentioned in your opening comments, higher CRE payoffs for part of the slower loan growth. I mean, do you expect any larger payoffs on the commercial side in the next couple of quarters? And then broadly, how does that factor in to overall loan growth keeping in mind the run-off portfolios? Scott Kingsley: Thanks, Feddie. And yes, we have officially hurdled the 100-inch snow mark in Central New York. So I appreciate the sentiments on that. So your question is a good one. So in 2025, we probably had $150 million to $175 million of unscheduled commercial real estate payoffs. And where do they go? Agency money and in certain of our markets, private equity or private funding, maybe the private funding more closely aligned with some of the more larger urban areas, Southern Hudson Valley and maybe some things in New England, closer to Boston, but meaningful. So I think we think that, that's an outsized number, but we're planning for -- that could be a risk for our growth attributes going forward this year as well, understanding that there's other people out there just looking for yield. And as rates have started to come down a little bit more, I think some of our sponsors are getting offers from agency, structures and other places that are too good to turn down. Feddie Strickland: Got you. And along those same lines, I mean, can you just update us on what you're seeing in terms of loan pipelines, opportunity in terms of tight geography I'm particularly curious about Rochester and Buffalo since you've mentioned them in your opening comments. Scott Kingsley: Yes. Thank you. So across the franchise, from Buffalo to Portland, Maine from Louisbourg, Pennsylvania to Burlington, demand is good. Pipelines are strong, stronger than they were at this point last year. And we feel pretty good about the opportunities we're getting to see. We have a -- as you know, we tend to focus on things that are more holistic from a relationship standpoint. So CRE-only outcomes for us are not as attractive as something where there's real estate involved, but we get a full operating relationship with the sponsor or through C&I relationships. So no reason appears to have a real gap in demand. I think certainly given the cost of building compared to maybe early or mid-2024, there's not as many projects underway on the multifamily housing side, which is where we tend to have a concentration. But those that are out there are good opportunities. I think the pipeline is good in Western New York in Rochester and Buffalo, I think the team is really energized. We've added a couple of really talented people to the group. And I think on a going-forward basis, we're pretty bullish on opportunities we'll see in Western New York. Feddie Strickland: And I guess just to drill down on that. I mean, is kind of the mid- to lower single-digit growth rate a good number for '26? Scott Kingsley: I think it is. And reminding people that we still continue to have our just south of $800 million, older loan portfolio that's in runoff. And we use last year as a marker for that that's moving downwards about $100 million a year. So we're seeing good activity around C&I, and we're seeing good opportunities on the CRE side in most of our marketplaces. And again, we can exercise selectivity as to which ones we put our best foot forward for. And in fairness, starting in the fourth quarter, we saw better consumer lending activity, especially on the mortgage side. So upbeat that customers potentially who were thinking about moving for the last 2 or 3 years, can deal with a low 6% mortgage rate and given the dynamic of what most people have as equity in their home decide to do something else. Operator: And our next question will be coming from Mark Fitzgibbon of Piper Sandler. Mark Fitzgibbon: First question I had, it looked like, Scott, you had boosted your reserve against the solar book this quarter by a decent amount. I was curious if anything had fundamentally changed there? Annette Burns: No fundamental change there. I think we were trying to kind of rightsize our coverage allowance, given that it is a runoff portfolio. So really, what you saw this quarter is kind of recalibration of that coverage ratio, but no trends or negative concerns as it relates to that book. Mark Fitzgibbon: Okay. And then secondly, I was curious how, if at all, the tensions between the U.S. and Canada is impacting sort of the economy in the northernmost markets of your footprint? Scott Kingsley: Yes, a really good question. And I think I may have said this before, Mark, but we love the Canadians. We grew up with those people. And we have a lot of -- our customers have a lot of business that are cross-border, whether that's out in Western New York and Buffalo or whether that's up in Northern New York closer to Plattsburgh, it's a real issue. I think that the Canadian customers are just frustrated, whether that means they come into the Adirondack for seasonal housing or just straight commerce. I think the unpredictability of where we've been with tariff rates and what things were going to be accessible to that point. And I think, if I was kind of going through the underlying comments, what I have heard from people that I've talked to, is a sense of can we trust you still? And so I think that's caused hesitation and future investments. or an existing investment moving forward. So problematic for us because those are not the highest areas of long-term growth anyways. So it's really important to have that connection to the Canadian base for some of our customers to do the things they want to do. Mark Fitzgibbon: Okay. Great. And then I guess changing gears a little bit. As you think about M&A, I'm curious, are the hurdle rates of return that you're looking for higher today than in the past, given that the market really hasn't been at -- enamored of many acquisitions in recent quarters and obviously, your own frustration with your stock price post-Evans. Scott Kingsley: So a couple of things on bundler, but thank you for that. And yes, we think that -- if think about it, a combination of the Evans transaction and us improving our net interest margin, 35 or almost 40 basis points last year, has shifted the plateau of our earnings capacity from somewhere close to $0.80 a quarter to $1. And we think that's pretty noticeable. Worked hard to get to that point. But at the same point in time, the construct around people worried about either the execution risk associated with M&A or the dilution of your attention to other strategic objectives. Not an issue for us. The Evans transaction went as good as we could have hoped for. Their folks are really engaged. We've had to put them through some changes to some of our systems, but they've really been good at bringing that alive. And I think that from a practical standpoint, they're looking forward going forward. Your question on hurdle rate is a good one. We're a $16 billion bank now. So it's not so much what transaction is large enough for us to be interested in is that do we put our folks, our organization through an M&A opportunity that can't at least generate or 5% accretion? So if we're running kind of off a base of $4 a share, does something have to be north of $0.20 a share for us to really take a hard run at that. Now you can look at a bunch of different things, and you can accomplish that in a bunch of different ways. But for us, it's generally been a modest extension of the franchise geographically or really productive fill-in opportunity where our concentration hasn't been as high as we'd like it to be. So still having lots of conversations. There's a lot of high-quality, like-minded smaller community banks across our seven states. So the opportunities are there. And that's how we kind of think about it from a capital deployment mark. Operator: And our next question will be coming from Thomas Reed of Raymond James. Thomas Reed: This is Thomas on for Steve. Just wanted to start off, maybe as you guys are looking -- or as you look to deepen your presence in select markets to support growth, can you talk about maybe any planned hiring initiatives that you may have and whether those investments are already reflected in that expense guidance? Scott Kingsley: Yes. And I might even ask Joe to help me a little bit on this one. So I think we believe that all of our geographies are investable today. So I'll just use an example. We've added a couple of really high-quality folks to the team up in Maine. We have a really nice base of customers in Maine, but we never fully extended our reach from the standpoint of full holistic banking, and we're doing more of that. So the folks that we brought on board have C&I backgrounds. We've committed to a branch site off the wharf in Portland, our first true retail branch site, and we're about to make a commitment for another one up there. Joe? Joseph Stagliano: Yes. Sure, Scott. Branch site, just off the wharf, we call it Bayside. It's a marginal way. We've also signed a letter of intent down in Scarborough. So building out our main presence are really important to us. And why is that? We have good quality bankers up there and adding good quality bankers to the team, which Scott just alluded to. Now over in Western New York, the same thing, really good quality hires across all parts of the bank. Including insurance and mortgage. Scott mentioned our mortgage results the last quarter. So we're seeing some really nice pipelines across our entire footprint. So where are our focus areas? Definitely, New England, Maine, we mentioned, but also New Hampshire, the Greater Manchester market, a really important market for us, where we're looking for some growth opportunities with some new branches, as well as in Rochester, already looking at sites in Rochester. We have a lot of intent that we've signed in the city and planning on moving a financial center there in downtown Rochester, as well as across other parts of the Western region. So still in targets, as well as some of our newer markets. We're excited about the prospects that they're going to bring to us. Operator: [Operator Instructions] Our next question comes from David Konrad of KBW. David Konrad: Just had a question on the NIM outlook next year, it feels like maybe stability might be the key phrase. I'm not sure. But, the great news is your deposit costs are down to 2%. The bad news is your deposit costs are down to 2%. It might be challenging to reprice. And your commercial book, now the portfolio seems to be pretty close to new originations. So maybe talk about the NIM outlook over the next few quarters? Annette Burns: Sure. I'll start on that one. So you're right. We have our net interest margin 3.65% is a very strong NIM. We can really throw off some nice core earnings with a NIM like that. We are neutrally positioned, so we've been actively managing through federal funds rate cuts over the last few months. So when we think about our margin expansion, it's probably in that 2 or 3 basis points a quarter. Some of the factors that will influence our ability to reprice our book if you think about the lending side, probably our largest opportunity is in the residential mortgage book where we probably have somewhere in the 125 to 130 basis points of room there. Our other books are probably pretty close to market rates at this point. Another area where there's some opportunity is in our investment securities book, still have some repricing opportunity there, probably throws somewhere around $25 million in cash flows a month. You're spot on. We have very low funding costs. We talked about having right around $6 billion in deposits that we can actively reprice with market sensitivity. Probably the biggest opportunity there is in our CD book, probably 77% of that reprices in the next 2 quarters. So I think there is some room, but probably not to the extent that we've seen in 2025, it's probably limited to a few basis points. Net interest income improvement is probably going to be more focused on our earning asset growth and the opportunities that we have there. Scott Kingsley: Yes. And then I'll just follow up with that. A good observation, Dave, on the commercial crossover where for the quarter, new activity or new loans at a rate that was not terribly different than portfolio yields. Some of that was yield curve base during 2025. Remember that the 2- to 5-year point of the curve, kind of came down 60 to 75 basis points during the year. when you started the year and said, "Hey, listen, I still got a gap between new production and portfolio yields", some of that got taken away with just natural market activity. In a couple of our markets, we're seeing a little bit of pressure on spread. They typically are the best assets, and so needless to say, whether we're defending or seeing something new, we're very interested in those types of credits. But holding to a north of 200 or 225 spread above SOFR has been more difficult in recent months. And maybe that's just a function of market demand right now. There was a little bit of a -- a little bit of slowdown in the second half of the year. And then made the comment about our opportunity in -- on the CD book. CD duration today for everybody, not just us, is dam short, 5- to 7- to 9-month instruments and whether we start to see some elongation from us or from others on that, so people can lock in some yields as it looks like the rate structure is more moving in a direction of down, not up. And lastly, I'll remind everybody that the customer used to getting the yield for the last 3 years. So if you're a customer with significant liquidity, whether you kept it on a bank balance sheet or moved it off, you're used to getting a yield. After going 13 or 14 years with no yield, you now know what that looks like. So I think people utilize the tools that we give them from a treasury management standpoint, and they're very smart with how they do funds management. Operator: And our next question will be coming from Daniel Cardenas of Janney Montgomery Scott. Daniel Cardenas: So maybe just a quick question on competitive factors throughout your footprint on the lending side, would you say competition is fairly rational? Or are you beginning to see perhaps a pickup in pressure as people are looking for growth? Scott Kingsley: Yes. I would say a little bit as people are looking for growth, and if nothing else, a lot of defense when people have really solid customers where they're the incumbent, where they're defending. I don't think we've seen anything irrational from a structural standpoint. And those have seemed to make sense for us. I mentioned before, some of our payoffs came from agency-based funding sources where, in fairness, both structure and rate is something that are better normally for the customer than what our standards actually allow for that way. But I don't think it's pervasive and we have so many different markets to be participating in that I wouldn't make a general construct out of that just today. But I will say this, if you're a highly rated company and you're doing well and you have a history of doing well, you've been able to demand a lower spread if you're interested in new money this year. Daniel Cardenas: Good. And then on the deposits front, are there any markets that are better able to absorb a decrease in rates, as rates come down, are you going to be able to push down deposit costs in any markets better than others? Scott Kingsley: I would kind of frame it this way, and Annette, if you have something else, let me know. But we have such good market share in so many of our legacy markets that we've been able to do rational things as rates decline in those markets pretty uniformly. In some of our other markets where we don't enjoy that kind of a share, maybe we've had to keep rates a little higher for a little bit longer or we've got some concentration characteristics that haven't forced down the rates as fast as the Fed has moved. But generally speaking, the fourth quarter was pretty indicative of that. $3 billion of our assets reprice immediately upon a Fed's fund decline, and it takes us a little bit longer. There's a little lag there to get the funding cost down. Maybe we're a month or 6 weeks behind, but so far, we've been pretty diligent at getting it to that point. Daniel Cardenas: Great. And then just last question for me on the credit quality front. Any areas that you guys are perhaps tapping the brakes on? I mean, your credit metrics are good. Just wondering if maybe you're approaching any particular area with the -- a little bit more caution than maybe you were 2 or 3 quarters ago. Annette Burns: Not necessarily anything new. We have a pretty diversified book. So we pay attention to concentrations. We're probably a little less excited about hospitality or the office space, but that's not new. So I don't think we have anything that's specific emerging trend from something that we're going to shy away with continuing to just monitor as maturities come due and make sure we understand what our customers' position is and their ability to refi when that maturity happens. But also pretty well balanced as far as what our maturity, no large maturity walls or anything like that. So just navigating customers and paying attention to our industry composition, but really no emerging industry or anything we're avoiding at this point. Operator: Our next question will be coming from Matthew Breese of Stephens. Matthew Breese: I wanted to touch on charge-offs a little bit. For a while there, meaning for the years kind of proceeding COVID, charge-offs at NBTB could be anywhere from 30 to 35 basis points per quarter routinely. And with the consumer balances and wind down and coming down, should we reframe charge-off expectations here to something lower? And how would you kind of characterize normal with the makeup of the current book? Annette Burns: Yes, Matt, that's a good question. I -- back in maybe 5 or 6 years ago, our charge-off rates were probably somewhere in that 25 to 30 basis points. We had a fairly large unsecured consumer book with our LendingClub and Springstone portfolio, as well as our residential solar book, which is has much less of an impact. So those were throwing up a little bit higher charge-off rates. As those books wind down, we would expect to see more lower levels of charge-offs and kind of where we've been running at somewhere in the 20 basis points range, 15 to 20 basis points range is probably kind of more normalized as those books become smaller and smaller. Just -- I think residential solar is somewhere in the 90% to 95% charge-off rate basis point charge-off rate -- versus probably somewhere closer to 8% to 10% with that prior book. So really, I think that that's kind of where we are in 2025 is kind of probably that new normalized rate. Scott Kingsley: And I think, Matt, if you think about it, that we've done such a good job in indirect auto lending and our losses historically. Have kind of been between 20 to 35 basis points. So despite the cars being way more expensive in 2026, than the last time that Matt Breese bought a car, we've held in very well on that, and the customers have performed quite well on that side. Someone read to me the other day, a statistic that our combined mortgage losses from 2020 to 2025 were $31,000. So we continue to lead with that product. It's really, really important in our core marketplaces. And so many other opportunities present themselves once you're the core lender on the mortgage side. So I don't see us taking our focus away from that line of business either. Matthew Breese: Yes, not the greatest auto customer here. Annette, while you were discussing the reserve on solar, has the appetite to sell that book changed at all? And maybe I'm connecting the wrong dots, but one of my thoughts as you were discussing the recalibration there was whether or not you've been listening to bids or rethought kind of what the mark should be on that book? Scott Kingsley: I'll start with that one, Matt, and then have Annette jump in as well. The dilemma we have is so much of our production was sort of in the 2020 to early 2023 time frame where we experienced really productive, but substantial growth in that portfolio. And I think we all knew what the rate structures look like in the world then. So from a marketability of that portfolio, which we would move out of, if we could find something that made sense for us. But right now, it's really just a rate question. I think the assets are performing much better than most other solar portfolios in terms of loss rates and customer performance. but the rates are low. And so for us to do that, would be a substantial outcome. And much like investment portfolio restructuring, we're kind of curious. If we can't find something that's got a terminal value above zero, we don't like to do it. So I think for us, we're hanging in there, waiting for the customer to pay us back and redeploy those proceeds and other things. Matthew Breese: Understood. And then last one is just on share repurchases. This quarter's level is a bit higher than I was expecting. What are some of the catalysts or triggers for you to repurchase stock? And is what we saw this quarter something we might see in early '26? Scott Kingsley: Yes. Great question, Matt. I said this last quarter, I thought I was going to get to go my whole career, and not buy shares. But truthfully, the opportunity presented itself. And to your point, two things. Value price, because somebody pointed out earlier, we think our valuation does not fully reflect the improvements we've had from an operating earnings standpoint. And number two is capacity, right? So with our change of earnings capacity, essentially, those share repurchases that we did in the fourth quarter, a little over $10 million worth. We self-funded in the quarter and didn't change any of our capital ratios. So I think it presents an opportunity for us to follow that pattern like we did in the fourth quarter. Going into the future, and we probably have more capacity than that. But I'm saying we think we can self-fund the level that we bought in the fourth quarter every quarter. Operator: [Operator Instructions] Our next question will come from Feddie Strickland from Hovde Group. Feddie Strickland: I had a couple of quick follow-ups. First on the margin. I did notice secretion income picked up some there. Just to clarify, the margin still increased in the first quarter even if that normalizes back down. Annette Burns: So accretion, usually, there are a handful of accelerated payoffs or affecting accretion during the quarter, which are very hard to predict. We think working through some of the federal fund rate cuts that happened in December, the margin will probably be fairly stable, if not, maybe affected by a basis point or 2 barring any changes that are normalized accretion. So that's kind of how we're thinking about margin for the first quarter. Feddie Strickland: Okay. Got it. And then just on fees, I saw there was some seasonal activity-based fees in the wealth line. Do you have a sense for how much of the linked quarter growth was seasonal? Annette Burns: So probably somewhere around 300,000 to 400,000 was seasonal related on the wealth side. So just some activity-based fees. But all in all, a very strong quarter with organic growth, and our market helped a little bit with that. On fee income in general, there's probably somewhere around $1 million to $1.5 million of BOLI gains and other securities gains that are a little harder to predict the activity there. I think, BOLI, on a normal run rate basis is somewhere around $2.4 million. Scott Kingsley: Yes. And I even follow that up. And I think now that as we've gone to be a larger enterprise, the seasonality is a bit less noticeable for us. But -- kind of as a quick reminder, the insurance business tends to thrive in the first and the third quarter based on renewal time frames with a little lower activity in the second and the fourth benefits administration, the retirement plan administration business, usually solid first, second, third, with a little less activity fees in their fourth quarter. Your observation is astute. Wealth had a really, really strong year and a really strong finish to the year, and some of that was a bit seasonal, but generally speaking, we're in a really good lift off point on all of those businesses. I think the other thing, I think Annette has reminded people from time to time is that in our first quarter, we tend to have $0.04 or $0.05 of operating costs that are not usually reflected in some of the other quarters. Some of that is seasonality. It's just more expensive to plow and heat than it is to mow and air condition. So that's a basic one. But we also have higher payroll costs in the first quarter of the year and usually higher stock-based compensation expense just based on the protocol, the timing of how we grant new awards. So I think we always kind of think about this $0.04 to $0.05 carry that the first quarter has on the OpEx side that usually the other quarters don't have to work through. Operator: And I would now like to turn the call back to Scott Kingsley for his closing remarks. Scott Kingsley: In closing, I want to thank everyone on the call for participating with us today, and we appreciate your interest in NBT. Stay warm. See you next time. Operator: Thank you. Mr. Kingsley. This concludes today's program. You may now disconnect.
Operator: Welcome to the Atlas Copco Q4 2025 Report Presentation. [Operator Instructions] Now I will hand the conference over to CFO, Peter Kinnart. Please go ahead. Peter Kinnart: Thank you, operator, and a very warm welcome to all of you attending this quarterly earnings call for the fourth quarter 2025. Before I hand over to Vagner to start the actual presentation, I will already now, as usual, remind you that when the Q&A session starts to just ask one question at a time. Please keep disciplined, so everybody has an opportunity to ask their most important question once we get through the first queue. Of course, you can line up again for a second question afterwards, and we'll be happy to answer that. But that being said, no further ado, I will hand over to Vagner Rego to guide us through the presentation. Vagner Rego: Thank you, Peter, and welcome to this conference call. So first, we had in the first picture, a wafer, just to remind you that we are exposed to the CapEx that is relevant for the wafer production. Then if you go to the first slide with a summary of the fourth quarter of 2025, first, we had a good organic order growth, driven by industrial compressors that went somewhat up. But not only, I think, also Gas and Process compressors, also had delivered a very good quarter, and solid growth as well in vacuum equipment, I would say, including semi equipment. On the other hand, we had weaker demand for industrial assembly and vision solution followed by weaker demand on power and flow equipment, where we will go a little bit more in details later on. Once again, it was very good to see that our service divisions continue to deliver a very good result and we are quite happy about that. Revenues on the other hand was unchanged, but we have a quite high level in 2024 as well. I think the level was not bad and followed by a lower operating profit, mainly driven by negative currency effect where Peter will come back with more details, followed by negative effect coming from the tariffs and also from acquisitions. In the quarter as well, due to the low demand in industrial assembly system that is connected to the automotive business, we also decided to have -- to further adapt the organization of Industrial Technique, and we have booked a provision to make sure we keep at a good profit level. Cash flow were solid, and we continue to work on our acquisition pipeline. We have acquired 8 companies in Q4. So when it looks to the financials, I think we can see for the group, 4% organic growth that we are happy, driven by 2 divisions. Once again, organically, it was unchanged in revenue. When it comes to profit margin, we delivered 20.5% in terms of adjusted profit margin. And we have booked this provision of SEK 261 million to adapt the organization in Industrial Technique. So basic earnings per share, SEK 1.36, and strong cash flow, still good return on capital employed. If we then look to the summary of the year, and I would not spend too much time here, but we had overall a mixed demand with unchanged basically in terms of orders received and revenues. It was quite similar with some segments improving, some segments going down, but it was a flat year with quite a lot of challenges and headwinds in the profitability, I would say, and the good thing our strategy in our service divisions continue to deliver good profit and good growth that we are quite happy. And we closed the year with 29 acquisitions. And once again, Peter will come back with more details about our ordinary and extra ordinary dividend proposal. So it -- once again, if we go to the full year financials, like I mentioned, already, it was unchanged, more -- 1% organic growth in orders, 1% organic decline. But of course, we had the acquisitions that came. On top of the organic growth, quite a lot of currency headwind in our results. And with the bottom line of 20.3%, if you adjust for the restructuring costs that we have done mainly in Industrial Technique and Vacuum Technique, the profitability, the adjusted operating margin was 20.7%, still solid cash flow and return on capital employed. If we then continue with our results working -- looking more geographically around the world, what has happened. If I started with Asia, we had, in the quarter, 13% growth. That was a quite good development, mainly in Compressor Technique and Vacuum Technique. I would say that was driven this -- driving this result. So we end up the quarter with 13%. When it comes to Europe, I think we were quite positive. Happy to see 10% growth in Europe. Basically, all the divisions had positive growth. I think the only exception was Industrial Technique that was flat. So all in all, considering the situation of automotive, I think we were happy with what we saw in Europe, but it's also fair to say the comparison base was lower, but very good to see. In North America, we see 8% growth. And there, the acquisition of NTE has quite a big impact. If you exclude that, still positive growth of 3%. We see a little bit more challenging environment in South America with a flat development in Q4 and also challenging in Africa, Middle East, but it's also fair to say, especially on the Middle East, 2024 was a great year. So I think the level is good, but the comparison base is quite challenging. Then if we go to the next slide on the sales bridge, then you see the currency headwind that we have had in Q4 amounting 11%. So that was continued headwind coming from currency. I think the structural changes that are mainly acquisition had a quite good development in orders and revenues. Of course, that will later on generate an impact in the profitability as well. But I think the level of the acquisitions are quite good. I mean we have done some acquisitions like NTE that's quite sizable. Then that means that we had an organic growth of 4% and unchanged organically in revenues. And we end up the year with 2% on acquisitions and a total currency headwind of 6%. If we then go to the orders received per BA, you see that very nice to see Compressor Technique developing with plus 7% organic growth. Very good to see Vacuum Technique now plus 13% organic growth, with good contribution from many divisions within Vacuum Technique. Power Technique, a little bit more challenging, but I will come back later when I talk about Power Technique. And Industrial Technique, minus 1%. Considering the environment, I think it was also a good achievement, although we don't have organic growth that we'd like to, but considering the overall environment, I think it was a good achievement in terms of orders received. Now going more into details of the business areas. We can see Compressor Technique with 7% organic growth, driven by industrial compressors that were up. And there, we see a little bit more on larger compressors than only smaller compressors in terms of growth, but both with good development. Strong Gas and Process compressors, but again, it's also fair to say Q4 2024 was also a challenging quarter. So for Gas and Process, so they had a low comparison. The service, like I mentioned, continued to grow. We continue to grow with a good profitability. We're quite happy with the development of service in all business areas. Revenue continued to increase, 3% organic growth. We have a good order book in Compressor Technique that will allow us to continue to deliver good revenue or organic revenue growth, so considering the order book. Profitability was in a good level, 24.3%, still a good level if you consider there was impact coming from acquisition, sales mix and the trade tariffs. So I think we are quite happy with the development of Compressor Technique. And also, we continue to innovate delivering new products. Here is just an example of a nitrogen system that is dedicated for laser cutting applications. So completely tailored for this type of application. So if we then move to Vacuum Technique, we saw good order growth of 13%, notable growth for semi equipment. And there, I think it's also fair to say that the comparison was quite low in Q4 2024. So -- and then we saw -- that's why we mentioned notable growth, but it was a low comparison. But anyhow, it's good to see the environment and it's good to see growth in semi equipment. Solid growth as well in industrial and scientific vacuum, and growth in the service. Basically, I think it was a good development in all the divisions of Vacuum Technique. We still have the challenge with the order book. So revenues were 3% down. I think we still have to overcome that challenge. And operating margin was at 19.2%, so negatively affected by currency and dilution from acquisitions. So they also continue to develop the new products and a new compact product for the semiconductor this vertical booster that are dedicated for semiconductor was also released. In the Capital Markets Day, you also saw some other innovation, and here, we continue to come with innovation in Vacuum Technique. When it comes to Industrial Technique, then we saw order decline of 1%, basically driven by automotive because when we look to the general industry, we had a good development, also is where we focus to find some new growth and I think still quite a lot of transformation that can be done in the general industry, and that's where we focus. Service orders essentially unchanged and revenues, they also have challenges with the order book and the revenues were -- went down 3% organically. The adjusted profitability was 19.8%. We want to highlight here the underlying profitability because the profit was -- the profitability was 15.9%, of course, affected by the SEK 261 million in provision for the restructuring cost. We still continue to invest in innovation even in a tough environment that we have now, we continue to release, and we continue to combine the solutions we have with the vision technology that we have also in the portfolio. So I think also here, continue very nice innovation. So if we then move to Power Technique, we had an order drop of 6%. And I think it's also fair to say that we had a little bit more than normal cancellations because we had an order book that was a bit too old with old prices, and we decided to take actions on those orders, either the customer would have to take those machines or we will not carry on the orders with old prices. So it was a little bit proactive from our side when it comes to this, let's say, slightly higher than normal orders, but still would be negative but not as much as 6%. Service business continued to grow, and we saw some challenges in the quarter in our rental business that all we know also that drove the revenue down 4%, and the operating profit was at 16%, affected by currency, but also by lower utilization of our rental fleet. And I think that's the level of profitability that we are not happy with. Definitely, we'll take some actions to drive the profitability back from the levels we want to have. Anyhow, they continue to innovate. Now you know we have invested in several pump assets, more connect -- this one is more connected to dewatering. So we have a new product that can be used now by our distributors but also by our own rental companies because with the acquisition of NTE, we also have now a rental company in U.S., rental company in Australia, rental company in Brazil, dedicated for pumps, and we are also supporting them with our own products. So if we then move to the next slide, you see then the profitability, the [ EBITA ] at 21.4% in the quarter and the profit of, if you don't adjust for the restructuring cost, 19.8%. But then perhaps this time now to pass to you, Peter, that you continue to explain our profit. Peter Kinnart: Yes. Thank you, Vagner. Net financial items, slightly negative, a little bit higher than last year, mostly because of somewhat higher financial exchange rate difference and lower interest income in the company. But we also expect it would be probably on a similar level going forward in the next quarter. Then the income tax expense, which is on the low side, I would say, if we take the effective tax rate of 20.5%, that's definitely a low number. We are benefiting from all the activities we do around our innovation and the tax relief that we can get there. But we also had quite a couple of positive one-offs throughout the fourth quarter. So that is why we have this low effective tax rate. Then going forward, when we think over the next quarter, then this low effective tax rate is not maintainable because these one-offs that we benefited from will not repeat themselves, and therefore, we expect the tax rate for the first quarter to be at around 22.5% that is currently our best estimate. If I move then on to Slide #14, where we can dig a little bit deeper into the profit bridge. There's quite a few comments here to be made, how we get from 21.8% to 19.8%. There's a minor impact from the share-based LTI programs, as you can see. We had items affecting comparability of SEK 220 million in the bridge. It's a combination of quite many things. Vagner already mentioned the restructuring costs this quarter of SEK 261 million in Industrial Technique business area. And basically, the difference between those SEK 261 million and the SEK 220 million are a list of a number of items that we corrected for last year leading up to the SEK 220 million and diluting the margin obviously somewhat. Also the acquisition dilute the margin in a similar way as the items affecting comparability. We are in the first year of the acquisition here. And of course, there's a lot of integration costs, while the synergies are not fully maturing yet. And that is the reason why we see that lower profitability on the revenue within the acquisitions. Then I guess one item that is requiring the most explanation here is then the currency effect, which has been quite negative, both on the top line as well as on the bottom line. And in fact, if I summarize it fairly simply, I would say we have translation effects, transaction effects, and we have the revaluations of the balance sheet items. And the first 2 items, translation and transaction effect in terms of margin basically compensate each other. One is slightly positive from a margin point of view, the other one is slightly negative from a margin point of view, and they basically end up to 0. So you could say that the entire difference that we see here is caused by the revaluation of the balance sheet items. And there, I would like to remind you that last year, in the same quarter, we had a huge revaluation positive impact in the income statement, which was mostly linked to Vacuum Technique at the time, also partly to Compressor Technique, but mostly to Vacuum Technique and led at the time to a very positive currency effect, which, of course, now in the bridge creates the opposite effect because we will -- we have not repeated the same positive currency revaluation in the balance sheet items. And that is also why you see later on in the next page, the very high currency impact on Vacuum Technique specifically. Then when we then look at the organic development here, I think despite a negative development of the top line, we are actually seeing a positive development on the bottom line. And of course, that is more explained if I go to the next slide, 36 (sic) [ 15 ], if I take it business area by business area as there are quite a number of different positive aspects that add up to this number. So if we take it business area by business area, then we can start with Compressor Technique. Acquisitions dilutive across all the business areas, in fact, somewhat more, somewhat less depending on the specific business area, but basically all dilutive, generating positive profitability, but not as much as we are used to within the respective business areas, so dilutive effect across the 4 business areas. The currency impact for Compressor Technique is even though negative in absolute terms, in relative terms, is quite mild. And then we see a margin organically that is quite in line, slightly higher, but only marginally higher than what we are used to in Q4 2024. And that leads us to the 24.3% result of Compressor Technique, which I think we continue to consider as a good and healthy level for Compressor Technique to perform. So here, you could say despite also tariff impact and despite acquisitions, we maintain a good level there. On the Vacuum Technique side, the main detractor by far is the currency, which has a huge impact due to the fact that we had this huge positive last year, which we don't repeat this year. In fact, revaluations across all business areas, but also on the group as a total is actually quite limited this quarter, basically not a value to be mentioned in the bigger scheme of things. It was mostly the effect of last year that basically created this negative currency effect in the bridge. Otherwise, also the acquisitions were dilutive. We also didn't have the items affecting comparability this year that we had last year, which was a one-off that we benefited from at the time. The positive news I would like to add on Vacuum Technique is the strong development of the margin also here, negative development on the top line. We just heard from Vagner how the organic growth Vacuum Technique on the revenues has developed. But operating profit, on the other hand, is positive. And this is thanks to basically the effect that materializes from all the efforts in the business area to restructure, to reorganize, to cut costs in order to adjust the size of the suit to the size of the body, and that's how we end up with the 19.2% here. On Industrial Technique, 19.4% to 15.9%. Obviously, the restructuring cost is a big item. Vagner mentioned SEK 261 million this year. Last year, in the same quarter, we also did a round of restructuring for about SEK 134 million, so the net is SEK 127 million, having a dilutive effect on the margin this year still. Acquisitions were, in this case, not adding too much from a dilution point of view, but the currency also there had a bigger impact. Although in this case, not so much due to the revaluation items, a bit more related to the transaction effect. But in the end, a bit negative on the margin. And then finally, I would say, from the bottom line perspective also here, a negative development of the top line, given the difficult climate in the industry, but no negative impact on the bottom line. So that is also positive that we see that the negative impact doesn't immediately pull down the margin. And of course, with the restructuring we are doing now, we expect to continue to create savings that will support the organic development of the business area. And then last in the row, Power Technique. Here, we dropped the margin from 17.8% to 16.0%, as Vagner already implied, not the level that we are absolutely pleased with. Acquisitions have a moderate dilutive effect here. The currency is also a bit negative, but also organically, we are not seeing a positive development. And here, it's mostly the utilization of the rental fleet as well as continued investments in A&M that we are doing within the business area. We are thinking of, for example, building up the customer centers for the industrial flow business. We're also thinking about having dedicated salespeople for the portable power and flow business, for example, and also continued investments that we started up in upgrading our ERP platforms across the different divisions that are creating quite a bit of cost investments that are necessary for the future, but with the current business climate, of course, a bit in conflict with the top line development. When we then look at the foreign exchange development going forward, I would say that we are not at the end of the negative development of the currencies. Both on the top line as well as on the bottom line, we foresee still a quite negative development and estimate that, on the bottom line, we would see an effect of at least around SEK 1 billion negative impact from currencies in the first quarter 2026. Then I would move to Slide #16 to briefly comment on the balance sheet. In fact, not so much to comment. On the one hand, of course, we've seen currency effects pulling down many of the values, but at the same time, we also see some organic improvements such as in the inventories, for example, which will also be noticeable in the cash flow. And we also see the increase of the rental equipment and the intangible assets, which is both, in fact, mostly linked to the acquisitions we recently added. NTE was already mentioned, that, of course, increased the fleet as well as the intangible assets. I think on the balance -- on the liability side and equity side, there is not so much to mention, I think, to save time, let's say. If we then move on to the cash flow development, we think that the SEK 6.8 billion cash flow that we generated throughout the last quarter of 2025 remains solid, but of course, as you can see at a lower level than last year. The main reason for this is, I would say, two things. On the one hand, the change in working capital, which actually is still positive with SEK 650 million, but last year was even much more positive with SEK 2.3 billion. And the second item that, of course, influences the cash flow negatively here is then the lower operating cash surplus, which goes hand-in-hand, I would say, with the operating profit development that we have seen. And those are the 2 main items that basically pulled down the cash flow compared to last year. And then finally, maybe just to point out that for the year, we concluded with SEK 26.8 billion, SEK 11.6 billion, let's say, SEK 12 billion of which was used to finance our acquisitions, and 2/3 of those were actually taking place in the last quarter with SEK 8 billion. So with that, I conclude my comments on the financial statements and give back to Vagner to comment on the near-term outlook. Vagner Rego: Thank you, Peter. As you know, the near-term outlook is not a guidance for the orders received. It's just how we see the sequential development of our customer activity level. But then, we still continue to have a mixed picture. If I qualified a little bit more this mixed picture, on the positive side, we see a bit more vivid and active semiconductor market when we speak to our customers. And that does not mean that we will see orders coming in Q1, but there are more interactions ongoing with our customers. We also know that this is hard for us to predict because it's a key account business, decisions can take quite fast. So in talking about quite large amounts. So it's difficult to predict if this -- we will see some reaction in the Q1 orders received. But there are more activities, let's say, I wouldn't say more activity, but perhaps more interactions with our customers. So on the [ less ] positive side, we still see challenges in automotive, especially in Industrial Technique. And that's the reason why we also have decided to further adjust the organization. So there it's a more challenging environment. And then when we look to the Industrial segment, and we talk about industrial pumps, industrial compressors, general industry for Industrial Technique, I think we still see hesitance that is still a challenging environment, full of uncertainties. We have seen how the year has started and how many development so far, and we are still in January. So -- and that's why -- with this mixed picture, that's why if we combine all this, we believe that the overall demand for the group remains at the current level. So moving back to you, Peter, then. Peter Kinnart: Yes, I will just round off this presentation by informing you about the proposal that the Board has made to bring to the Annual General Meeting of Shareholders. And the intention is that a proposal will be made to offer ordinary dividend of SEK 3 per share, topped up by an additional distribution to the shareholders of SEK 2 per share, adding up to a total of SEK 5, and that SEK 5 will be paid in two equal installments, one in the course of April and one later in the year in October. So I think with that, we are at the end of the presentation. And before giving the floor to all of you asking your questions, I just want to remind you, please stick to one person -- one question at a time so everybody has an opportunity to raise their questions. Thank you. Operator: [Operator Instructions] The next question comes from Alex Jones from BofA. Alexander Jones: Maybe I can follow up on Vacuum Technique. And it would be really helpful if you could expand a little bit on the comments you made with regards to the outlook, especially thinking about Q4, how much of that acceleration in semis orders was easy comps, given you said you're not necessarily expecting that acceleration in conversations to feed through in Q1? And that acceleration in conversations, is there any difference between different geographies, thinking about China compared to the rest of Asia compared to the Americas? That would be very helpful. Vagner Rego: Yes. So definitely, we see -- if we look to Q4, it was indeed lower comps. I think Q4 2024, it was not a great year in terms of -- great quarter in terms of orders received for Vacuum. But anyhow, there is always a little bit of seasonality, but I think we are happy with the development of the orders in the semiconductor, although we had low comps. But going forward, we see a bit more interaction with our customers. It doesn't mean that we -- like I said, we will see the orders in Q1, but we get more questions, when we say just to qualify a little bit when say more interactions, more vivid and active let's say, activity. What we mean, we get now more questions, are you prepared to increase volumes? And I think that's more what we hear these type of discussions. And again -- and we haven't seen. We cannot say that the orders will come in Q1, but there are more discussions on that line. But that is more -- the majority of the production of chips are coming from Asia. That means there are a lot of interactions in that region overall. Operator: The next question comes from John Kim from Deutsche Bank. John-B Kim: Following up on Alex' question, can you give us a little bit of color on the Q4 order intake as to whether this is going into newer facilities? Or is it refreshing or expanding production at existing fabs for your semiconductor clients? Vagner Rego: I think it's always a combination of both. But depending on the players, I think they don't need to build new fabs. They have different strategies. Some they don't need to build new fabs. They have a space where they can populate with more equipment. I would say, we have seen more that and there are also players that are building new fabs to populate later. So I think there is both, some that was built in the past and now are populating -- are being populated and there are semi players where they have -- they can rearrange the current facility to increase production and then we got some good orders in Q4. Operator: The next question comes from Rory Smith from Oxcap. Rory Smith: It's Rory from Oxcap. It's just on the order intake in Compressor Technique. I think you called out significant increase in Gas and Process from several different customer segments. Really keen to just know what those segments were in a bit more detail, if that's possible. Vagner Rego: Yes. There are several market segments that performed very well. Sometimes we get a little bit more orders from LNG, for instance, because the nature of the business when they decided to take orders -- to place orders, you talk about 10 ships or 20 ships, which was not the case. We got a couple of orders for LNG. But we also had orders for gas processing equipment. I think we still see quite a lot of opportunity around gas processing, fuel gas boosters that goes together with gas turbines. If you want to generate -- if you want to have a gas-fired power plant, you have the turbine and the turbine needs fewer gas booster. We got some orders from that. Also, air separation units was also okay and a little bit for chemical and petrochemical. It was quite balanced, I would say, this quarter more than previous quarters, I would say. Rory Smith: Could I just squeeze in a quick follow-up then on that? What percentage was Gas and Process of the Q4 orders versus industrial in Q4 in Compressor Technique? Vagner Rego: I think we don't disclose that figure on divisional level. Over time, it has been around 10% of the Compressor Technique business area. Operator: The next question comes from Klas Bergelind from Citi. Klas Bergelind: So I just had a question on the larger industrial compressor orders. They are up year-over-year against an easy comp, but some debate today around that they're down quarter-on-quarter. But isn't that just seasonality, i.e., down fourth over third, at least according to my model. You don't see any underlying weakness, right, Vagner, on the larger side in compressors. I think you said last quarter, in October, that orders started to come back in Europe, but that China was still weak. I'm just keen to understand the quarter-on-quarter underlying trends on the larger side? Vagner Rego: I think it's still challenging in China, I would say, giving a little bit more color. I think we were positive about Europe and happy, to be honest. And we saw a little bit less growth in North America, but still positive development if that can help you a little bit more. Operator: The next question comes from Sebastian Kuenne from RBC Capital. Sebastian Kuenne: Regarding compressor business again, could you tell us a little bit about the market and pricing situation in the U.S., specifically for the compressors that you have to import from Belgium? And given that you have local competition like Ingersoll, who can maybe outbid you on pricing, maybe you can give a bit more color on the situation there. Vagner Rego: Thank you for the question. Yes, indeed, I think we do have the tariffs. But it's fair to say not everything that we sell in the U.S. is important. We also have local production. I don't disclose the number of how much is local, but there is quite a good portion. We are increasing the content of local production. That will come step by step. But it's fair to say that the main driver is price, and we are increasing our list price. And it's a balance act because we also want to keep or even increase our market share. So I think that is the balance we do now while we increase list price of different product lines, we also keep fighting to increase our market, not even to maintain, but to increase our market share. We do have the impact like Peter had already mentioned, but I'm quite happy with the development, to be honest, on the market share. Not all the product lines are doing well, but some are even increasing the market share. That was quite encouraging to see under such a tough situation we can further increase. And when it comes to competition, difficult for me to talk about any competitor, but many of them also have a lot of important items as well. Operator: The next question comes from Max Yates from Morgan Stanley. Max Yates: Just my question was on your exposure within the vacuum business. Obviously, over the past few years, you've kind of expanded in China, you've built up a facility in the U.S. And I guess essentially, my question is, when we look last year, your business kind of underperformed wafer fab equipment spending. And I guess what I'd like to understand is, given we're seeing kind of disproportionate price increases across memory, maybe some of the customers like Intel and maybe their CapEx is growing slower than the overall kind of pie. So just trying to really understand kind of any nuances in your exposure? And any reason when you look today at your kind of key accounts and your exposures to them as to why you would outperform or underperform wafer fab equipment spending as we go into 2026 in your vacuum business? Vagner Rego: Yes. I think we have explained in the Capital Markets Day. Perhaps it's good to go back to that meeting where we said that the WFE now have different components and the components that is correlated to advanced packaging is growing quite fast because of AI. And that creates a bit of imbalance between if you want to compare the vacuum result with WFE. On top of that, when you go to lower nodes, you have some different process steps that are not exposed to vacuum. I think then that definitely creates a little bit of imbalance. I think when it comes to the CapEx that is important for us, all the CapEx utilized for the production of wafer, I think that is the CapEx that we should consider. I think it's not always available, but that is the one that can define if we are performing well or not. And we feel very comfortable with our performance or with our product portfolio today and going forward. Going back again to the Capital Markets Day, we have shown a new EUV system that we have released beginning of 2025. I think we're very well positioned there. We also have shown a new platform for the semi market that we call Ganymede that we are introducing step by step that is quite relevant for us. I think that is the most important because that will allow us to stay competitive in these markets, even delivering more value for our customers. I think that is the most important, in my opinion. Operator: The next question comes from Daniela Costa from Goldman Sachs. Daniela Costa: I wanted to ask you a little bit to talk through sort of the restructuring and how you view that going forward? I believe at the CMD, you've mentioned that the actions were mostly done and the benefits would sort of come. So do you expect the headwinds on margin and on cash that we've had in '25 from restructuring to maybe more normalized or be significantly lower going forward? Where do you stand in that process? Vagner Rego: I think, Daniela, we will continue to monitor the situation. I think it's difficult to say. If we feel the need that we need to adapt here and there, I think we will do. We're still harvesting -- I think Peter when he was presenting the bridge, I think he also mentioned that we already harvest that Q4 was a good example in ITBA and in Industrial Technique and Vacuum Technique where they did benefit. But we still need to do a little bit more in Industrial Technique because of the outlook. And again, we will continue to monitor. Of course, these restructuring costs that we have just booked in Q4, we have benefited slightly in Q4. So -- and that will come step by step in 2026. Operator: The next question comes from Vlad Sergievskii from Barclays. Vladimir Sergievskiy: Could you provide outlook for your compressor business for Q1 or near term similar to what you have done for Vacuum and for Industrial Technique just directionally following a healthy 7% growth last quarter, of course? Vagner Rego: I think what we mentioned, Vlad, is that the demand will stay -- the activity level will stay flat. I think that is valid for Compressor Technique as well that is exposed to several industries. I mean, I think it's -- you see that the market still has some uncertainty. Globally, there might be positives here and there. But if I look to China, the demand is still challenging. You don't have triggers from the consumer demand. Some pockets of growth here and there, but the underlying demand is not as strong as it used to be. So I think it's the -- that's why I think you should consider what we have said that the activity level will remain the same. Operator: The next question comes from Andreas Koski from BNP Paribas. Andreas Koski: Could you give us an idea of what impact the tariffs had on the margin in the quarter? And if you still expect to be able to cover that by pricing, rerouting, et cetera, in 2026? Peter Kinnart: Yes. Thank you, Andreas, for your question. When we look at the current quarter, I think last time, at the end of Q3, we said that the third quarter only had a partial impact from the changes in the tariffs like 232, et cetera, so that we haven't seen the full impact yet. While at the same time, we were, of course, implementing a number of mitigating actions. And I would say that over Q4, the impact of the tariffs was basically similar as what we saw in Q3. And so that even though the impact in absolute terms was maybe higher, considering it was a full quarter, but on the other hand, the mitigating actions also partly took effect. That being said, we also admit, let's say, that competitive situation in the market is, of course, there. Demand is not always as vibrant in some areas. And as a result, of course, everybody fights for the orders, us included. And like Vagner already indicated as well, we are not willing to let go our market share. So I would say, in a nutshell, the result is that we are not fully able at this point in time to compensate for the tariffs, that the effect was similar as what we had seen in Q3 from a margin point of view. But that we expect to continue to work hard to mitigate through price increases, through logistic flows or assembly in the U.S., for example, other type of activities. And that this combination of all these activities over the next several quarters should ultimately lead to being able to compensate for the tariffs. But at this point in time, we are not fully able to do so. Andreas Koski: But it's only a 1/10 of a percentage point or so that the impact is. It's not.... Peter Kinnart: Well, I don't give an exact number because only measuring it is already quite a challenge to see all the different aspects of it. But I mean it's definitely less than 1% on the margin. Operator: The next question comes from Phil Buller from JPMorgan. Jeremy Caspar: Phil had to jump on to the other line. It's Jeremy from JP. On the topic of capital returns, it's good to see the special dividend when operating cash was a little bit lower year-on-year. I'm wondering, is there anything we should or should not infer from this? I mean, on M&A, maybe the pipeline is a bit lower in 2026 and maybe you should see capital surplus? Or is it just a reflection of growing confidence on end markets improving, i.e., cash should be better this year? Peter Kinnart: No, I don't think anybody needs to read too much into this. I think it's not the first time that we have this kind of extraordinary or additional distribution, even though we did it in a kind of a different shape or form in the past, but now this is in this way. It doesn't have any impact with regard to our acquisition pipeline or whether we have or have not any good projects in the pipeline. I think when it comes to acquisitions, the key is always, is this the right fit for the company for the growth of the future to create value for the shareholders. And I think even with the additional capital distribution, I think we still have quite sufficient firepower to acquire both small, but also bigger targets should we feel that they are the right fit for the group. Operator: The next question comes from Anders Idborg from ABG Sundal Collier. Anders Idborg: Just a question on the Vacuum margin. The way I interpret you, Peter, is that the 19.2% that you have now, that's a pretty clean margin and representative of the current basically interest -- sorry, currency rates, et cetera. How should we think about the drop through when volumes start to come through as they probably do in 2026, given the footprint optimizations that we've done? That's the question, yes. Peter Kinnart: Yes. Thank you, Anders, for your question. As always, very difficult to give a very precise answer to this. What we have said when we discussed the different restructuring measures that we have taken with the business area was that we were targeting mostly indirect functions, try to limit as much as possible the impact -- try to prune a little bit, let's say, the management structure to become more efficient. And that over time, should, of course, when volume comes back, generate leverage from a margin point of view. Of course, once the volume goes up, we do expect that we will need to increase maybe some variable costs in line with the volume increase. I mean that's only normal. But how much exactly the leverage effect will be is hard to say at this point in time. It will depend a lot on what kind of volume growth we might be able to harvest. But that is definitely the idea with the actions we have taken to create leverage on the margin once the volume kicks in again. Operator: The next question comes from Rizk Maidi from Jefferies. Rizk Maidi: I just wanted to double-click on the North American order growth. I think you said it was 8%, but only plus 3% ex acquisition. It doesn't feel that it's a high number given the amount of pricing that you need to put through there. Just perhaps if you could just double-click on this, especially on Compressor and Industrial Technique. Are you guys not pushing pricing as much? Or are the volumes quite weak in the region? Vagner Rego: Thank you for the question, Rizk. If you take there are different colors, of course, we have been performing very well in compressors. I mean that is the component of price indeed. We saw there, perhaps, I think, to give you a little bit more color, the Gas and Process business was more flattish in North America that might help you, while Industrial Compressors in general was positive. So in Industrial Technique, there, we have a little bit more headwinds in Q4, but I must say as well that 2025, North America was a great year for Industrial Technique. I mean we had quite a lot of [ project ]. It was good development. And Q4 was weaker, definitely there. And I mentioned about portable that we had some cancellations was mostly related to North America. So some orders that we -- all the orders from large rental companies that were in our books for some time, and they were not taking the equipment, we decided to cancel these orders because the price was a bit behind what we would like to. So -- and I think when you combine that, you have the 3% growth. Operator: The next question comes from John Kim from Deutsche Bank. John-B Kim: Sorry, my question was asked. Vagner Rego: Okay. Thank you, John. And we have one last question. Operator: The next question comes from Sebastian Kuenne from RBC Capital. Sebastian Kuenne: Just on Power Technique. I think you mentioned earlier that you're not happy with the rental rates and the uptake on orders in North America. Did I hear you correctly that you mentioned that you may need to have further adjustments there for capacity? Or did I understand that wrong and we discussed that earlier? Vagner Rego: Yes. But maybe to give you a little bit more color. I think the main problem is in rental. I think Peter already mentioned. The rental utilization was a little bit lower than what we would like to. And we had lower activity level in Europe and Asia for the rental business, and that's where we will concentrate our efforts. But it's not only about restructuring, it's also about activities, finding new customers because we had some traditional customers that -- where the demand is not there today, and we have to repurpose the fleet and do some sales activity to bend the trends. Sebastian Kuenne: So higher operating cost for some time to find new customers? Vagner Rego: Yes. I think when it comes to Power Technique, if we feel the need to adjust, we will adjust, I think. But we will concentrate the efforts on the rental business for the time being. Peter Kinnart: Okay. Thank you, Sebastian for that last question. The time is unfortunately up. But of course, if you have any further follow-up questions, our IR department will be very glad to assist you in providing any further clarifications. With that, I would like to thank you all for attending the call and wish you a great rest of the day. Thank you very much. Bye-bye.
Operator: Good day, and welcome to the Community Bank System, Inc. Fourth Quarter 2025 Earnings Conference Call. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. There will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch-tone phone. To withdraw your question, please press star and then 2. Please note that this event is being recorded and discussion may contain forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates, and projections about the industry, markets, and economic environment in which the company operates. These statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed. Refer to the company's SEC filing, including the risk factor section, for more details. Discussion may also include references to certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company's earnings release. I would now like to turn the conference over to Dimitar Karaivanov, President and CEO. Please go ahead. Dimitar Karaivanov: Thank you, Dave. Good morning, everyone. Thank you for joining our Q4 and full year 2025 earnings call. My summary of the quarter is that I am very pleased with the revenue strength across all of our businesses, the liquidity and credit quality of our balance sheet, and that we also have more than the usual noise in our expense base. Mariah will provide you the details with some high-level reconciliations to prior quarter expenses. But overall, I would say that most of the delta is driven by items that are tied to actual earnings performance plus recent transactions and consolidations. Overall, 16% operating earnings growth in 2025 while making the largest organic growth investments that our company has ever made and actively deploying capital in high-return businesses is something I am very happy with. I am most happy about the progress we continue to make in our brand, reputation, talent, capabilities, presence, and the market share gains they are accruing as a result of it. One recent data point in our banking business: During the fourth quarter, we were selected as a 2025 company of the year in banking by the Buffalo Business First. Looking at a bit more details in the businesses, the largest percentage improvement in pretax income compared to the third quarter was visible in our employee benefit services business, which grew pretax income by 10% quarter over quarter. As discussed previously, we spent most of 2025 revamping our growth strategy in the trust fund administration side of the business and expect to start seeing the fruits of that in 2026. Mariah Loss: While full-year performance was in the low single digits, Dimitar Karaivanov: Q4 marked a year-over-year improvement of 8% in revenue, and 13% in pretax income as this momentum is beginning to take shape. We expect that 2026 growth will revert back to mid to high single digits. Now our banking business, in 2025, we benefited from both mid-single-digit asset growth and expanding margin which drove very meaningful operating income growth of 22% on a full-year basis. I would note that our 5% loan growth compares favorably to the industry and local peers and came in spite of very elevated paydowns of over $300 million in the commercial business. We have continued to add talent and customers from recent disruptions around our footprint and in our expanded footprint. Insurance services had a strong year as well with top-line growth of 8% and operating income growth of 42%. We expect mid-single-digit growth going into 2026. In wealth management services, revenues as expected were impacted by some realignment of producers which also as expected resulted in positive margin and operating pretax income with growth of 15%. We expect mid-single-digit growth in 2026 as we account for the full run rate of these changes. In aggregate, we had a very strong year in banking, insurance, and wealth. All of those businesses were ahead of industry metrics and peers in their bottom line improvement. Given that banking accounted for the majority of the very significant investments we are making, I am very pleased with the bottom line result there of 22% growth. We were less successful in our employee benefit services in 2025, due to both some revenue challenges and planned investment in the fund administration side. Mariah Loss: With that in mind, Dimitar Karaivanov: the trends there as mentioned are positive, and I expect meaningful improvement in 2026. I would also call out the impact of New York state income taxes. As our tax rate is now almost 2% higher than eighteen months ago. That is real money, but we will keep working through those headwinds as well. For 2026, one of our main areas of focus is expense management, and beginning to harness more fully the investments and focus we have in AI and automation. As a quick statistic on that, due to our focus on automation, we have saved over two hundred thousand hours over the past three years. And that has allowed us to keep our headcount roughly flat while growing the overall business meaningfully. We now need to see it fully in the bottom line. Now let's talk about returns. The pretax tangible returns for the quarter were 61% for employee benefit services, 39% for wealth management services, 26% for banking and corporate, and 8% for insurance services. The return in insurance services is impacted by the increase in allocated capital, due to our investment in LEAP, and seasonally lower revenues in Q4. Similar to last quarter, we continue to aggressively pursue opportunities to deploy capital at high tangible returns. Durable, growing subscription-like revenues remain our main focus and point of excitement. Our recently announced transaction with ClearPoint is a great example of that. We are excited about both the quality and durability of the trust revenue that it will provide and also the multitude of opportunities for us to deploy both expanded wealth management and banking products to the customer base. Mariah Loss: Lastly, I would note that in spite of the meaningful inorganic growth Dimitar Karaivanov: our share count is flat for the year. To reinforce our feelings, as shareholders, we love our company and its prospects. And want to own more not less of it. We are also not too excited about trading shares in our high-quality diversified income streams for lower quality ones unless there are significant offsetting benefits. With that, I will pass it on to Mariah for more details. Mariah Loss: Thank you, Dimitar, and good morning all. As Dimitar noted, the company's fourth quarter and full-year performance was robust in all four of our businesses. Including acquisition expenses, GAAP earnings per share of $1.03 increased $0.09 or 9.6% from the fourth quarter of the prior year and decreased 1¢ or 1% from linked third quarter results due to $0.04 per share of expenses associated with the Santander branch acquisition. Operating earnings per share and operating pretax pre-provision net revenue per share for record quarterly and annual results for the company. Operating earnings per share were $1.12 in the fourth quarter, as compared to one point one year prior and $1.09 in the linked third quarter. Fourth quarter operating PPNR per share of $1.58 increased $0.18 from one year prior and increased 2¢ on a linked quarter basis. These record operating results were driven by a new quarterly high for total operating revenues of $215.6 million in the fourth quarter. Mariah Loss: Operating revenues increased $8.7 million or 4.2% from the linked third quarter and increased $19.5 million or 10% from one year prior Mariah Loss: driven by record net interest income in our banking business. The company's net interest income was $133.4 million in the fourth quarter. This represents a $5.3 million or 4.1% increase over the linked third quarter and a $13.5 million or 11.2% improvement over 2024 and marks the seventh consecutive quarter of net interest income expansion. The company's fully tax-equivalent net interest margin increased six basis points from 3.33% in the linked third quarter to 3.39% in the fourth quarter, driven by lower funding costs. During the quarter, the company's cost funds were 1.27%, a decrease of six basis points from the prior quarter driven by lower deposit costs and a lower average overnight borrowing balance due in part to the funding inflows from the Santander branch acquisition. Operating noninterest revenues increased $6.1 million or 8% compared to the prior year's fourth quarter increased $3.5 million or 4.4% from the linked third quarter, reflective of increases in overall banking and non-banking financial service revenues and included the one-time impact of a $1 million income distribution from a limited partnership investment. Operating noninterest revenues represented 38% of total operating revenues during the fourth quarter, a metric that continuously emphasizes diversification of our businesses. The company recorded a $5 million provision for credit losses during the fourth quarter. This compares to $6.2 million in the prior year's fourth quarter and $5.6 million in the linked third quarter. During the fourth quarter, the company recorded $138.5 million in total noninterest expenses, This represents an increase of $10.2 million or 8% from the quarter. Excluding the impact of a $2.1 million quarter-over-quarter increase in acquisition expenses due to the Santander branch acquisition, noninterest expenses increased $8.1 million or 6.4% from last quarter. $5.4 million of the increase from the linked quarter was from salaries and employee benefits, which was impacted by an increase in performance-tied incentive compensation including a $1 million true-up of long-term incentive program-related expense, an $800,000 true-up of annual management incentive plan expense, along with a $600,000 incentive accrual tied to revenue and bottom-line performance in the CRE finance and advisory business line. Operating expenses associated with the seven branches acquired from Santander totaled $1 million during the fourth quarter, while expenses associated with the Banque de Novo branch expansions increased $600,000 between linked quarters as additional branches were opened for business. The increase in other expenses was impacted by previously announced branch consolidation activities. Specifically, $800,000 of net property-related write-downs recognized during the quarter along with $600,000 of charitable contribution expenses that were accelerated prior to 2026 tax law changes. Excluding the above-mentioned expenses, write-downs, charitable contributions, and performance-related incentive accruals, Q4 noninterest expenses were $131.9 million, an increase of $4.3 million or 3.4%. Mariah Loss: Quarter over quarter. Mariah Loss: Ending loans increased $199.5 million or 1.9% during the fourth quarter and increased $517.4 million or 5% from one year prior. Primarily due to organic growth in the overall business and consumer lending portfolios. The loan growth also increased approximately $32 million of acquired loans associated with the Santander branch acquisition. The company continues to invest in its in our loan growth opportunities and expects continued expansion into the under-tapped markets within our Northeast footprint. The company's total ending deposits increased $945.4 million or 7% from one year prior, an increase of $330.2 million or 2.3% from the end of the linked third quarter. The growth in total deposits during 2025 was comprised of growth in all of the company's regions. The increase in total deposits between both periods was primarily driven by the $543.7 million of deposits assumed from the Santander branch acquisition. Moving on to asset quality. The nonperforming loans and net charge-off ratios were consistent with the linked third quarter, while the loans thirty to eighty-nine days delinquent increased 10 basis points from last quarter, aligned with typical seasonal trends. The company's allowance for credit losses was $87.9 million or 80 basis points of total loans outstanding at the end of the fourth quarter, an increase of $3 million during the quarter. The increases were primarily attributed to reserve building in the business lending portfolio, reflecting the growth in size and volume trends recently originated commercial loans. The allowance for credit losses at the end of 2025 represented over six times the company's net charge-offs during the year. We are pleased with the fourth quarter and full-year results. All of which reinforce our commitment to scale as a diversified financial services Mariah Loss: company. Mariah Loss: During 2025, the company made significant progress on our 15 new branches across our footprint. Additionally, during the fourth quarter, we successfully integrated seven former Santander branches in the Lehigh Valley market, which accelerates our retail strategy in a market we anticipate significant growth. Furthermore, we were excited to recently announce an agreement to acquire ClearPoint Federal Bank and Trust, a national leader in a niche trust administration market. This acquisition significantly expands the revenue and offering of our wealth management business is expected to close in 2026. Looking forward, we believe the company's diversified revenue profile, strong liquidity, and historically good asset quality provide a solid foundation for continued earnings growth. More specifically, for 2026, we expect 3.5% to 6% growth in loan balances, 2% to 3% growth in deposit balances, 8% to 12% growth in net interest income, four to 8% growth in noninterest revenues, a provision for credit losses in the range of $20 million to $25 million. Core noninterest expenses are expected to be in the range of $535 million to $550 million or an increase of approximately four to 7% from 2025 including approximately $8 to $9 million of incremental associated with the branch of Sequoia from Santander which includes the nonoperating amortization of intangible. These figures do not include the impact of pending or future acquisitions. Additionally, we anticipate an effective tax rate between 23% to 24%. Finally, as a reminder for the first quarter, noninterest expenses typically trend higher compared to fourth quarter levels due to merit increase higher FICA and payroll taxes, and seasonal snow removal costs. That concludes my prepared earnings comments. But I do want to say one more thing. It was a catch. Mariah Loss: Go, Bills. Mariah Loss: And with that, Dimitar and I will now take questions. Dave, I will now turn it back to you to open the line. Operator: Thank you. We will now begin the question and answer session. Dimitar Karaivanov: To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, would like to withdraw your question, please press star and then 2. Our first question comes from Steve Moss with Raymond James. Please go ahead. Steve Moss: Morning, Dimitar. Morning, Mariah. Dimitar Karaivanov: Maybe just starting on with loan pricing here. I hear you guys in terms of loan growth opportunities. Just curious I know pricing got a little more competitive here over the last three to four months. Just kind of curious what you guys are seeing and kind of what you guys think will be the drivers of growth in 2026. Mariah Loss: Yeah. So for the fourth quarter, Steve, Dimitar Karaivanov: originations were in the low sixes. Mariah Loss: And Dimitar Karaivanov: think the curve has not really moved much. So far in this quarter. So we are probably kind of in that range. Mariah Loss: All all Dimitar Karaivanov: all all we call, clearly, the trend is lower. So I think at some point this year, we will be below six. Could be the end of this quarter, could be next quarter. Who knows? But, yeah, the trend is clearly the lower on that. Fortunately for us, we have a lot of fixed asset repricing continue. So if you look at kind of that low sixes compared to the current yields that we have on the loan portfolio. There is still a decent amount of gap for us to benefit from. Steve Moss: Okay. Appreciate that. And then in terms of Dimitar Karaivanov: the noninterest income guide, I think, is what it was. Mariah, I missed I missed your comment there. Was that four to 8% growth for 2026? Mariah Loss: Eight to 12% growth for NII. Is that what you asked, Steve? Dimitar Karaivanov: Non NII. I am sorry. Mariah Loss: Oh, sorry. Sorry. Sorry. Mariah Loss: 48. Yes. 48%. Yeah. Steve Moss: Sorry. Yep. Okay. Great. I just want to do it. It is perfect. Yep. Oh, no worries. And and then in terms of the employee services Dimitar Karaivanov: employee benefit services business, you know, obviously, a healthy step up And Dimitar, I hear you in your comments in terms of the investment and some accelerating here. Just kind of curious, I think you said mid to high single-digit growth. Mariah Loss: Babies, is there just a little bit of, like, Dimitar Karaivanov: one-time stuff in nature in the fourth quarter or seasonality that we should think of? I I realize some of there is Mariah Loss: asset values, acquisitions and stuff. Dimitar Karaivanov: Just kind of thinking about the the cadence of that trajectory a little bit. Mariah Loss: Yeah. So Dimitar Karaivanov: in in in the employee benefits services, if you kind of split it up, and kind of look at what happened in 2025, in the retirement side of the business, we actually grew high single digits. So that was a very productive outcome on the retirement side. In the institutional trust side, we were basically flat year over year. And a little bit down on pretax because of the investment on the expense side. So as you think about 2026, if you split up the two businesses, retirement is at higher asset values this year so far than last year. So we will continue to see some some pick up there. It is probably going to taper down if asset values do not continue to increase. Just on an average basis, it is going to taper down over the year. So that is going to impact that growth trajectory and on the institutional Mariah Loss: trust side, Dimitar Karaivanov: we feel like we have really kind of turned the corner there on the revenue side, and we are sitting at the highest assets we we have had in that business as well. So between that and the I think we got more than 20 fund launches coming here in the first and second quarter. We are going to have an acceleration on that side of the house to get us back to that mid to high single digits. So I think in the aggregate basis, we were sitting here of course, depending on market conditions, Mariah Loss: would be mid to high single digits for the overall Dimitar Karaivanov: line of business. And you are right on the seasonality. There is more in the fourth quarter in that business. So you are going to see like, you expect in 2026, the fourth quarter, OLSQL to be the higher mark. For 2026. Steve Moss: Okay. Great. I appreciate all that color, and I will step back in the queue here. Dimitar Karaivanov: And the next question comes from David Conrad with KBW. Please go ahead. David Conrad: Yeah. Hey. Good morning. Dimitar Karaivanov: Just taking stuff a a big picture here. I mean, you put up I think, roughly about 38% of your revenues as fee income. You know, you have a, you know, peer leading 22.7 ROTCE. It looks like based on your guide, that ratio might hold back a little bit, but just kind of thinking about, you know, over the next three to five years, where do you think the fee ratio to revenues could go to? And you know, the implications of that to your ROTC Mariah Loss: Yeah. Great question. Dimitar Karaivanov: David, and one that we certainly hear a lot and we ask ourselves a lot as well. And I will start it this way. We love all of our four businesses. And we we are experiencing right now in the banking business, which is the largest, we are experiencing tailwinds on the margin side, which we have not had historically. So even as the other businesses are doing really well themselves, it is it is hard to overrun the bank given that you have margin expansion and asset growth at the same time. Now that is not going to be forever. You know, the the margin expansion party, I think, is going to slow down here this year and and and and beyond. So that is going to temper down some of that growth rates on the bank side. The same time, we continue to also invest heavily in inorganic and organic opportunities on the fee income side. So the the short of it is I I do not know where it is going to settle. We want to we want to have more of all of them, more of all of our core businesses. I think OL SQL, we understand where tangible returns are the highest. So if we have a dollar of capital to invest, it is going to go to the highest tangible return we can find. And that is why you have seen us, you know, not only invest in the banking business, but in the insurance business, in the benefits business, in the in the wealth business now with ClearPoint, Just as a reference point, we we complete probably somewhere between eight and twelve acquisitions every year. Most of them you do not see because they are in the fee income businesses. So they are kind of small singles and doubles that over time add up. And I think we will have more opportunities to to continue to do that and maybe take some larger swings along the way as well. Okay. Thank you. Appreciate it. The next question comes from Matthew Breese with Stephens Inc. Please go ahead. Matthew Breese: Hey, good morning. Morning, Dimitar. Morning, Mariah. Dimitar Karaivanov: Dimitar, the the ClearPoint transaction you know, and and its its market share in and I think you described it as the the death care industry. I do not know much about that. I do not know if I know any of the banks that are in that arena. You maybe just introduce us to what that industry is and and what you expect to do with their with their book there? It looks to be about $8 million in in fee income. You know, maybe set the table for us on that. Mariah Loss: Sure, Matt. Thank thank you for the question. So what Dimitar Karaivanov: ClearPoint does and kind of the the background of the industry more kind of at large, is that there is the cost of, death care know, basically people planning for the funerals and, you know, the their time in the cemeteries and taking care of of of the expenses that come with that. The cost for those services has increased over time pretty meaningfully. And as a result, there are multiple ways that people save for those events, in in those life events. Depending on the state, it could be trust, it could be insurance, or it could be deposits. Like in New York State. So there are pre-needs, you know, deposit accounts, which we already have, and I am sure about our players in New York state have as well. So that business, as you can imagine, you know, if there is one thing that is certain is that none of us are going to be around forever. So there is there is a and and the population is aging. So that is a you know, tailwind, if you will, in in in the space. There is a a few larger players. ClearPoint is one of the leading ones. There are some other banks, large regional banks that are in the space as well. And then there is a lot of kind of smaller entities around it. So, one, we like the Mariah Loss: the the Dimitar Karaivanov: like the space. We like the niche. We love business where we can compete nationwide with a differentiated Mariah Loss: offering. Dimitar Karaivanov: In a space that is not easy to penetrate. It is fairly complicated. It is state by state rules. It is nationwide. So we we have a clear right to win here. With with ClearPoint. So we love that. And then secondly, the the customer base here is is basically the funeral homes and cemeteries and and larger aggregators in in the space. And, right now, ClearPoint does predominantly the recordkeeping side of of those trust relationships. They are increasingly growing into the asset management side of of those relationships as well. For the monies in the trust. We think that we bring on day one a tremendous platform through our Nottingham advisors business with eight CFAs and three CFPs and close to $10 billion of assets. And nationwide reputation. So think there is exciting opportunities there. We also know that on the purely on the banking side, we have some products that fit very neatly with with the space as well. So we have a dedicated escrow product, which one of it is actually services and, you know, demos to clients is in the funeral space. So that is that is a pretty nice ability of on day one to provide additional offering We also through the SBA can certainly provide a lot of SBA type financing some of those funeral homes as well. So there is there is a there is a lot of multiple ways for us to to make a lot more money to than what they do today on their own. Matthew Breese: Very helpful. Excited to see what you can do that with that business despite, you know, Dimitar Karaivanov: the obvious morbidity. On expenses, you know, there is a lot of moving parts there, but I just wanted to get a sense for where the starting point is. In in 1Q 2026. Is it fair to use kind of the upper end of the $550 range in the first part of the year and maybe moving towards the middle? As the year progresses? Mariah Loss: Hi. Yes. Yes. That is that is fair. As as we mentioned in the prepared remarks, Q1 tends to lean a little bit heavier. And and as you heard us talk through Q4, you know, primarily comprised of de novo, Santander, bonus accrual, We also had a a rebate in Q3 for our medical expenses that did not carry over Q4, so you saw a little bit noise there too. You know, outside of these, items, what we are looking forward to most, I think, in 2026 is seeing that the fruits of our investments, you know, come to light with, you know, people systems and and other infrastructure that that we have talked about, you know, throughout '25, and, we are confident that we will see, you know, the returns as you can see from '25, but also, you know, pulling through even more in '26. So, yeah, I will look I will I will beam beam ahead. We are we are excited. Matthew Breese: And then the last one is just on the NIM. Dimitar Karaivanov: Sure. You know, it feels like there is there is still some structural upside to the NIM. I was hoping you could comment on that. And then I I believe if I have my notes right, you start to see a bit more of the securities book reprice towards the end of the year. So might we see Yeah. You know, some acceleration in NIM expansion if that occurs? Mariah Loss: Yep. So so first, you know, for for Q4, we are happy with that expansion of six basis points. That was, you know, primarily attributed to, you know, loan growth deposit growth, ongoing repricing efforts that were really diligent with at this company, also lower overnight borrowing balance, which helps which helped there. Know, for Q1, you know, we are guiding two to four fifths for NIM. Just expecting a little bit of pressure on the loan side, as Dimitar noted earlier, And you know, looking to see that some of the realization of of the late cuts in '25 coming through in Q1 as well. To your point about the securities rebalancing at the end of the year that that we have talked through that, and and that is happening. So we do expect expansion Do not necessarily want to guide out too far, but, certainly, that is you know, a tailwind for us. And it does begin at the end end of this year. Yeah. Matthew Breese: Amirai, did you just did you Dimitar Karaivanov: describe two to four basis points of NIM expansion in one q? Or or Expansion. Mariah Loss: Yes. Mariah Loss: For Q1. Got it. Yes. Dimitar Karaivanov: Alright. Appreciate it. I will leave it there. Thank you. And the next question comes from Manuel Navas with Piper Sandler. Please go ahead. Manuel Navas: Hey. Thanks. Dimitar Karaivanov: Following up on that securities book repricing repricing, what is assumed in the NII guide? Is that the securities are reinvested put into loan growth, pay off something? What what is kind of assumed currently with those maturities? Yeah. So good morning, Manuel. The because the timing of the security is really is in the fourth quarter, and late in the fourth quarter, It does not really impact the guide for the year. And I think by then, we will see what the balance sheet looks like. We certainly our plan number one and foremost is to deploy those into loans. And we believe we have got tremendous momentum in terms of talent and presence and opportunities in the market to do that. And kind of looking forward beyond '26, we have '27 where we have another $600 million of securities maturing. Those are kind of spread out a little bit more evenly for 2027. Manuel Navas: We are going to evaluate those as the time comes. Dimitar Karaivanov: Generally, we want to be lending, not buying securities. So if we are not able to deploy them immediately into phone growth, what is likely to happen is they are going to offset some of our longer-term borrowings, which also mature roughly on on the similar timeline '27. So but again, with it is pretty early to be talking about '27 for '26. There is not a lot of impact in the guide from securities. Manuel Navas: Does the Dimitar Karaivanov: deposit growth guide include some remixing How much of it is from new branches? Just thinking that it could have been higher if the de novos are working sooner. But maybe if they are not all online yet. He just kind of talked about de novo progress and that deposit guide? Sure. Absolutely. So on the de novo side, as we we mentioned, we opened 15 this year. The vast majority of of the openings occurred in the late third quarter, fourth quarter. So those are very young branches, if you want to call it that way. We ended the year with roughly $100 million of of footings across the various branches that we have opened. Think the goal for us for this year is to double that. Which I think is is possible. So, again, these these are going to become more productive as they mature Usually takes kind of eighteen to twenty-four months before you can kind of really see some of the momentum. With that said, we are very pleased with where we are. The the customer base, not just retail, but commercial has really stepped up and contributed. And the deposits that we currently have in the De Novos roughly 60% are commercial deposits. So we are very pleased with the efforts from our commercial bankers and clients, and all the events and the receptivity. And so to your point, we hope that it accelerates. For us again, this is a growth strategy on the deposit side, which we expect ultimately brings over a billion dollars. Over a seven to ten-year period. And I think we are tracking pretty well towards that. Manuel Navas: I appreciate the commentary. Dimitar Karaivanov: This concludes our question and answer session. I would like to turn the conference back over to Dimitar Karaivanov for any closing remarks. Thank you, Dave, and thank you all for your interest. And as always, Mariah and I are available for any follow-up. Stay warm. Operator: The conference has now concluded. Dimitar Karaivanov: Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to the Brown & Brown, Inc. Fourth Quarter Earnings Call. Today's call is being recorded. Please note that certain information discussed during this call, including information contained in the slide presentation posted in connection with this call and including answers given in response to your questions, may relate to future results and events or otherwise be forward-looking in nature. Such statements reflect our current views with respect to future events, including those related to the company's anticipated financial results for the fourth quarter and are intended to fall within the safe harbor provisions of the securities laws. Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired, or referenced in any forward-looking statements made as a result of a number of factors. Such factors include the company's determination as it finalizes its financial results for the first quarter that its financial results differ from the current preliminary unaudited numbers set forth in the press release issued yesterday, other factors that the company may not have currently identified or quantified and those risks and uncertainties identified from time to time in the company's reports filed with the Securities and Exchange Commission. Additional discussion of these and other factors affecting the company's business and prospects as well as additional information regarding forward-looking statements is contained in the slide presentation posted in connection with this call and in the company's filings with the Securities and Exchange Commission. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, there are certain non-GAAP financial measures used in this conference call. A reconciliation of any non-GAAP financial measures to the most comparable GAAP financial measure can be found in the company's earnings press release or in the investor presentation for this call on the company's website at bbrown.com by clicking on Investor Relations and then Calendar of Events. With that said, I will now turn the call over to Powell Brown, President and Chief Executive Officer. You may now begin. J. Powell Brown: Thank you, Tanya. Good morning, everyone, and welcome to our fourth quarter earnings call. Before we get into the results, I wanted to share that we lost a key member of our leadership team, an incredible individual and great friend. Last week, Rob Mathis, our Chief Legal Officer, passed away. Our thoughts and prayers go out to Rob's family. We'll miss his friendship, his leadership and his wit. Now let's transition to our results. The fourth quarter capped off another year of strong top and bottom line financial performance. For the full year, we grew our revenue by 23% through a combination of M&A, organic revenue growth and strong growth in our contingent commissions. We expanded our margins materially and grew our cash flow from operations by nearly 24%. This strong performance was in spite of softening CAT property rates and economies returning to more normal growth levels. Our performance was driven by our culture, teammates, diversification and disciplined leadership. In addition, to the good financial results, we also completed the largest acquisition in our history, welcoming over 5,000 incredible teammates in Accession. We're very pleased with the integration efforts to date, and we'll touch on that more later. Lastly, we invested in talent and technology to help us deliver even better solutions for our customers. Indeed, it was a very eventful year that we're very proud of. Before we get started, we wanted to share some comments related to Brown & Brown and also involve our industry in general. First and foremost, we believe in competition. That's what makes great companies, great leaders and great individuals. We also believe in integrity, honesty, loyalty and trust. However, when a start-up U.S. broker conducts what appears to be a highly coordinated plan to lift entire teams from its competitors, taking information and customers in the process, it must be addressed. As of today, approximately 275 of our former teammates have joined this start-up, taking with them customers currently representing known annual revenues of $23 million. As we've done in the past, we will defend our rights in court and already have obtained an injunction. We stand behind our values and we'll continue to stay customer-focused with the goal of achieving the best possible outcomes for our customers and our trading partners. Now back to our results. I'll provide some high-level comments regarding our performance along with updates on the insurance market and the M&A landscape. Then Andy will discuss our financial performance in more detail. Lastly, I'll wrap up with some closing and forward-looking thoughts before we open it up to Q&A. On Slide 4. For the fourth quarter, we delivered revenues of $1.6 billion, growing 35.7% in total with organic revenue decreasing 2.8%, driven substantially by flood claims processing revenue we recognized in the fourth quarter of last year. Our adjusted EBITDAC margin remained flat at 32.9% and our adjusted earnings per share grew over 8% to $0.93. Both are very strong considering last year's flood claims processing revenue. On the M&A front, we remained active and completed 6 acquisitions with estimated annual revenue of $29 million. On Slide 5. For the full year of '25, we delivered revenues of $5.9 billion, growing 23% in total and 2.8% organically. Our adjusted EBITDAC margin was approximately 36%, increasing 70 basis points. On an adjusted basis, our diluted net income per share grew over 10% to $4.26, and we generated nearly $1.5 billion of cash from operations. Lastly, we had a record year for M&A, adding approximately $1.8 billion of annual revenue from 43 acquisitions with the largest being Accession. I'm on Slide 6. From an economic standpoint, growth was relatively consistent compared to the last few quarters. We view this stability as positive. Our customers for the most part continue to hire at a modest pace and invest in their businesses as they see steady demand for their products and services. Not all industries are equal as some companies are hiring while others are holding steady, and we're not seeing any major workforce reductions impacting our diversified customer base. In general, our customers have a cautiously optimistic outlook. From a commercial insurance pricing standpoint, rates for most lines were fairly similar to the third quarter, but we did see some moderation across some lines. Casualty and CAT property remain the outliers on both ends of the spectrum. Pricing for employee benefits increased slightly as compared to prior quarters with medical costs up 7% to 9% and pharmacy costs up over 10%. As we've mentioned in the past, we do not see any signs that this trend will slow. Our customers continue to be challenged to balance rising health care costs and the impact to their employees and their P&Ls. During strategic planning sessions with our customers, management of high-cost claimants, specialty pharmacy and population health remain the key areas of focus. Rates in the admitted P&C market moderated slightly as compared to last quarter and continue to be in the range of flat to up 5%. Workers' compensation rates remains flat to down 3%, but we're seeing a few states increasing rates. For non-CAT property, overall rates were down 5% to up 5% depending on loss experience with the blended rates relatively flat for the quarter. For casualty lines, rates increased 3% to 6% for primary layers with excess layers increasing even more. For professional liability, rates remained similar to the last couple of quarters and were down 5% to up 5%. Shifting to the E&S property market. Rate changes for the fourth quarter were similar to the third quarter and were generally down 15% to 30%. We did see some incremental drop off at the end of the year, but not as much as we did in June. With the availability of capital and lower insured storm losses, if you have a -- you have a lot of firms looking to put capital to work. Therefore, the pricing environment and approach by carriers did not surprise us. From a customer perspective, they continue to manage their total insurance spend, both commercial as well as employee benefits. As a result, we're seeing some customers leverage, the lower rates enabling them to decrease their deductibles or increase their limits. In some cases, they're utilizing the savings to purchase incremental limits on other lines or they're just capturing the savings. On Slide 7. Now let's transition to the performance of our 2 segments for the fourth quarter. Retail delivered organic growth of 1.1%. As a reminder, during our third quarter earnings call, we anticipated Q4 organic growth to be negatively impacted by multiyear policies written in the fourth quarter of '24. In addition, we had certain onetime adjustments to incentive commissions that were larger than anticipated. Lastly, we had certain project work that was delayed into 2026. In total, these items negatively impacted organic growth by 100 to 150 basis points. For the full year, our team delivered 2.8% organic revenue growth, a good performance given the headwinds we have discussed related to incentive commissions and multiyear policies. We feel good about our capabilities and how our team is positioned, and therefore, we're expecting improved organic performance in 2026. For the quarter, organic revenue for Specialty Distribution segment decreased by 7.8%. As we discussed, the decline was primarily impacted by $28 million of flood claims processing revenue recognized in the fourth quarter of last year. In addition, the decrease in CAT property rates was slightly more than expected, and we saw some binding authority business move back into the admitted market. For the full year, we grew 2.8% organically, a good result considering a tough comparison for '24 and the continued decline in CAT property rates. Now I'll turn it over to Andy to give you more details about our financial results. R. Watts: Thank you, Powell. Good morning, everyone. Before we get into the financial details, I want to talk about the impact on our earnings related to the acquisition of Accession. For the quarter, Accession's total revenue was approximately $405 million. This is below the guidance of $430 million to $450 million. As a result of refining our revenue recognition estimates by quarter, revenue, margins and adjusted earnings per share were impacted for the quarter. However, these revisions do not change our annual expectations for the business. From an adjusted earnings per share perspective, the impact of lower revenues versus our guidance was approximately $0.05 for the quarter. As it relates to the margin for the quarter, due to the phasing of revenue and profit, Accession's results decreased our margins by approximately 200 basis points for the total company. Transitioning now to our consolidated results. As a reminder, when we refer to EBITDAC, EBITDAC margin, income before income taxes or diluted net income per share, we are referring to those measures on an adjusted basis. The reconciliations of our GAAP to non-GAAP financial measures can be found either in the appendix of this presentation or in the press release we issued yesterday. Now let's get into more detail regarding our financial performance for the quarter and the year. On a consolidated basis, we delivered total revenues of $1.607 billion, growing 35.7% as compared to the fourth quarter 2024. Contingent commissions grew by an impressive $37 million, with $21 million coming from Accession. The underlying increase was driven by minimal storm claim activity and higher underwriting profitability. Income before income taxes increased by 23.1% and EBITDAC grew by 35.6%. Our EBITDAC margin was 32.9%, remaining flat versus the fourth quarter of the prior year. This was a good result considering the negative 200 basis point impact of Accession mentioned earlier and the prior year floods claim -- flood claim processing revenue. The strong underlying margin expansion was driven by significantly higher contingent commissions and lower claims within our captives, both due to the quiet storm season along with our continued disciplined management of our expenses. Our effective tax rate for the quarter was 21%, a decrease over the prior year rate of 24.9%. The lower tax rate was driven by the benefit from our international operations and certain end of the year adjustments. Diluted net income per share increased 8.1% to $0.93. Our weighted average shares outstanding increased by approximately 55 million to 339 million, primarily due to shares issued in connection with the acquisition of Accession. Lastly, our dividends paid per share increased by 10% as compared to the fourth quarter of 2024. We're moving over to Slide #9. The Retail segment grew total revenues by 44.4%. This growth was driven primarily by acquisition activity over the past year. Our EBITDAC margin decreased by 120 basis points to 26.6%, resulting from the quarterly phasing of revenue and profit associated with Accession. The Accession impact more than offset good underlying margin expansion driven by the leveraging of our expense base and certain onetime items. We're on Slide #10. Specialty Distribution grew total revenues by 27% driven by the acquisition of Accession and a substantial increase in contingent commissions. The higher contingents were driven by acquisition activity, certain end of the year adjustments and growth due to our favorable underwriting performance. Generally, our contingent commissions will increase when there are low loss ratios and strong underwriting profitability. Traditionally, when there is a strong underwriting profitability, it has the long-term effect of decreasing rates over time. This inverse correlation for contingent commissions helps put stability in our long-term revenue growth, margins and cash flow generation as contingents are a core part of our business model. Our EBITDAC margin decreased by 60 basis points to 41.3% due to the lower flood claims processing revenue and the impact of Accession having a lower overall margin as compared to our existing Specialty Distribution segment. These impacts more than offset the increase in margins driven by higher contingent commissions, lower claims in our captives and the disciplined management of our expenses. We're over on Slide #11. This slide presents our results for both years. Our EBITDAC grew by 25.6% and our margin increased 70 basis points to 35.9%. We view this as a very strong result given that coming into the year, we are anticipating margins to be flat due to lower contingent commissions, the difficult comparison to 2024 driven by the flood claims revenue and the seasonality of Accession's profitability, which negatively impacted the full year margin by approximately 80 basis points. We're very pleased with the strong underlying performance. This performance was driven by significant growth in our contingent commissions, higher profitability in our captives, increased interest income and the disciplined management of our expenses, while still investing in our teammates and capabilities. Net income before income taxes increased 21.8% and net income per share was $4.26, growing 10.9%. Overall, it was another good year of strong top and bottom line performance. We have a few other comments. From a cash perspective, we generated $1.450 billion of cash flow from operations, growing 23.5% over the prior year. This is in comparison to 23% revenue growth. Our full year ratio of cash flow from operations as a percentage of total revenues remained strong and increased to 24.6%, a reflection of our margins and disciplined working capital management. In addition, during the quarter, we paid $100 million on our revolving credit facility and bought back $100 million of shares of our common stock as we continue to deploy our capital in a balanced manner. Before we wrap up, we want to provide guidance on a few items. Now that we have a better view on the seasonality of revenues and profit for Accession, both are substantially equally weighted between the first and second half of the year. For the second half, revenue and profit are more heavily weighted towards the third quarter. Lastly, due to the high margins in the first quarter for the legacy Brown & Brown business, we anticipate Accession will have a modest negative impact on our adjusted margins in Q1. From a synergy perspective, as Powell described earlier, we're very pleased with the progress made on our integration activities over the last few months. We continue to anticipate integration efforts will be completed by the end of 2028, so we have only just begun our journey. The team has made great progress in a short period of time, and we expect EBITDA synergies of approximately $30 million to $40 million in 2026. Regarding contingents, as we mentioned, they are a core part of our business and have a recurring nature and represented over $250 million of revenue last year. They will fluctuate quarterly with changes in our organic growth and underwriting profitability, so it's better to assess them on an annual basis. For next year, we anticipate contingents for Specialty Distribution will be down approximately $15 million due to certain onetime adjustments in 2025 and ultimately subject to storm claim activity. For Specialty Distribution, we anticipate organic growth to be somewhat flat in the first quarter due to flood claims processing revenue in the first quarter of last year and continued CAT property rate decreases. As it relates to 2026 organic revenue outlook for the Retail segment, we'd anticipate modest improvement over the 2.8% we delivered in 2025. As a reminder, we think about our Retail business as a mid- to low single-digit organic growth business in a normal pricing environment and a stable economy. Our team continues to work hard to grow net new business, and we feel really good about our prospects for 2026. As it relates to organic revenue growth, depending on the materiality of revenues taken by the start-up broker, we will quantify the impact in our commentary and may adjust our organic growth calculation in order to give a better representation of our underlying performance of the business. From a margin perspective, as we look into 2026, we are projecting lower investment income due to the income generated in 2025 by the cash held for the acquisition of Accession as well as lower interest rates. This will have a downward impact on our total margins in 2026, while the underlying business is projected to achieve relatively flat margins. We view this projection as a great outcome and a reflection of the strength of our operating model, our teammates and our performance-based culture. As we've discussed in the past, our long-term adjusted EBITDAC margin target range is between 30% and 35%. As a result of our changing business mix over the years, the addition of Accession, along with our combined synergies, increased contingents, utilization of technology and our continued focus on our balanced profitable growth, which is enabled by our unique decentralized sales and service model, we are increasing our long-term margin target range to 32% to 37%. As we always have, we will continue to invest in our teammates and our businesses, which may result in the margins increasing or decreasing. But over time, the ultimate goal is to drive long-term growth and value. Lastly, from a tax perspective, we anticipate our effective tax rate will be in the range of 24% to 25% in 2026. With that, let me turn it back over to Powell for closing comments. J. Powell Brown: Thanks, Andy, and good summary of our results. As we head into 2026, we continue to believe economic growth will be relatively stable, which we view as positive. Assuming interest rates continue to decrease, in 2026, this should provide additional economic stimulus for many companies as well as individuals. As we've said in the past, we believe diversification of customers, geography and lines of coverage are very powerful as it creates stability in our revenues, margins, cash flow and earnings per share. Overall, we feel that the economies in which we operate should be generally stable, barring something unusual happening. From a pricing standpoint, we expect admitted rates to be fairly similar to what we experienced in the fourth quarter or might moderate slightly. We believe casualty rates will continue to increase, which are the largest segment of the market and that admitted property will continue to be competitively priced. For the E&S space, we anticipate pricing will be very similar to the fourth quarter, with casualty lines being the most challenging to place. Due to the lack of meaningful insured losses from hurricanes last year and the amount of available capital, we believe CAT property rates will decline modestly from the levels in the fourth quarter. On the M&A front, our pipeline looks good, and we expect to remain active in 2026. For us, it comes down to finding businesses and leaders that fit culturally and then it needs to make sense financially. From an session integration standpoint, things are coming together well, and I'm very pleased with the progress. The teams are leveraging the best of both in order to win more new business, and we're bringing offices together where it makes sense. We have a lot to get done in 2026, but I feel confident that we have the right team focused on the key value drivers. I'm extremely pleased with how the teams are collaborating together. On balance sheet and -- our balance sheet and cash flow remain very strong, which enables us to continue to delever, invest in our teams and acquire more businesses. We'll continue our disciplined approach of capital allocation, investing the capital like it's our own and striving to create long-term shareholder value. 2025 was another great year for Brown & Brown. We grew the top and bottom line significantly. We added to our capabilities, invested in innovation, data and analytics, and most importantly, added over 6,000 new teammates. While the markets might have some volatility, we believe our operating model provides stability as well as industry-leading margins and cash flow. I'm proud of how our team is focused on our customers and creating innovative solutions for them. We look forward to 2026 being another good year for our company, which will enable us to deliver solid top and bottom line results that will drive shareholder value as we continue to march towards our intermediate goal of $8 billion and beyond. With that, I'll turn it back over to Tanya to open up the lines for Q&A. Operator: [Operator Instructions] Our first question will be coming from Gregory Peters of Raymond James. Charles Peters: So I guess happy New Year to you all. I guess I only have one question. So I'd like to focus on all your comments regarding the 275 former teammates that left for the competitor and the $23 million of revenue that is going with them. I guess there's a lot of questions you can ask, but I'd like to focus just on -- have you changed your strategy about retaining your producers? And more importantly, can you talk about -- and I know you're not going to talk about ongoing litigation, but can you talk about, generally speaking, your legal defenses around your customers and your company IP? J. Powell Brown: Yes. Okay. So first off, what I want you to know is the way we pay our teammates and specifically producers is a mix between cash compensation and equity based on performance. And we believe that, that has worked really well over a period of time and continues to work well. So as it relates to, is there something unusual or different going on or we're changing something, no, that's not the case on both fronts. I think this is a highly unusual instance, just like it was with the other large broker firms that were affected. As it relates to the second part of the question... R. Watts: Legal defense. J. Powell Brown: Yes. In the industry, as you know, Greg, typically, there are -- and it might be slightly different in certain states. But generally, there are nonpiracy and nonsolicitation agreements. And those typically have a 2-year period on customers and a 2-year period on hiring teammates. It also has a component on intellectual property, which is in perpetuity. And so obviously, we can't talk about legal actions or anything that's in the legal system at the present time. But as we said in our comments earlier, there's currently some -- you can read all of it out there, let's put it that way. That's where I'd leave it. Operator: Our next question will be coming from Jimmy Bhullar of JPMorgan. Jamminder Bhullar: First, just had a question on your comments around the sort of shift of business from E&S to standard. Are you seeing that in specific lines? Or is it more prevalent? And what are your expectations for that -- for the move of exposures from the E&S market to standard over the next year or so? J. Powell Brown: So Jimmy, as you may know, there are accounts that I'm going to call them tweeners and tweeners, depending on the market cycle, either are in E&S or in standard. And typically, they look or lean a little bit more towards the E&S market. And many times, you see this in the smaller accounts. They're not small but smaller accounts, and those accounts might be up to $50,000 or more in premium. But typically, when the market starts to change in property, in particular, you see standard markets will come back in and except some of those. So again, I believe that where we saw this that we're referencing is in our binding authority business and in the Specialty Distribution. And it's too early to draw a conclusion. I don't believe 1 quarter is a trend. However, we've seen this movie before. So I do think that there may be some continued movement from E&S to admitted, particularly in the smaller binding authority business. Jamminder Bhullar: Okay. And just on your comment around... R. Watts: Jimmy, just one second before you move to the next question. Just one of the things just to keep in mind is that while accounts can, in fact, migrate from the E&S back into admitted, we continue to believe that there's going to be more insured assets though moving into the E&S space versus moving back into the admitted. So it's always kind of talked about back and forth. But if you can just look at the trend over the last 10, 15, 20 years, there's more and more moving into E&S because they want the flexibility of pricing and terms. Jamminder Bhullar: Yes. And so there's the secular component, obviously, but I think cyclically, there's just been a lot more business than normal that's moved into E&S the last several years. So maybe some of that goes back into standard, right, in the short term at least? R. Watts: Yes, it can probably somewhat. You'll see it on the fringes. Jamminder Bhullar: And then on your comment around Howden, is like they're being pretty aggressive, and other brokers have sued them as well for similar issues. Is competition picked up in general even outside of that? Or is Howden really a one-off and you're not seeing other companies being more proactive in either poaching or paying people more to add producers? J. Powell Brown: So the answer is the start-up firm is one of many that are aggressively looking to hire people. The question is how they're doing it. And so again, as I said earlier, we're all for competition. And when we hire people from other firms, we ask them to abide by the contracts, whatever those contracts are that they have. And so there's a difference in opinion with that particular start-up here in the States. And there are others. There are others in the United States that think that way as well. But that's the story. Thank you. Operator: And our next question will be coming from Rob Cox from Goldman Sachs. Robert Cox: I just wanted to ask about in the presentation, your commentary on casualty pricing. It sounds like you guys are still talking about it as, of course, seeing strong increases, but it looked like the range you provided, 3% to 6% fell a good bit from the 5% to 10% last quarter. So I just was curious to see what's driving that deceleration in casualty pricing increases and if you had any additional color to provide there? J. Powell Brown: Sure. So once again, in a market that is changing, just a broadly broad statement, I believe that you're going to continue to see more competitive pricing across the board. So what you're seeing, at least in primary business is a slight moderation of those rate increases. Remember, the biggest pressure in that area is on the excess. That has not changed because of the way the court system is -- views accidents and things like that. So I don't -- Rob, I think it's a normal course of the market. I don't think there's some structural change that's happened or some carrier has figured out how to make so much money in casualty. That's not what I'm trying to say. But I'm just giving you what we're seeing in the quarter in terms of rate impact. R. Watts: Yes. And Rob, with our commentary, don't read anything into that, that we're saying we expect casualty rates to go negative. So don't read anything into the trend or whatever. It's just kind of how the pricing was for the quarter. It can move around. Robert Cox: Okay. So as you look forward, you would think -- I don't want to put words in your mouth, but you think like relatively similar on casualty pricing going forward? J. Powell Brown: We think at least based on what we see, that would be the state or the case. I don't know if there's something we're not aware of or can't see right now. But based on what we see at the present time, yes. Robert Cox: Got you. Operator: And our next question will be coming from Tracy Benguigui of Wolfe Research. Tracy Benguigui: I appreciate hearing your comments on contingent commissions. Can you talk about which accident years are used in that formula? I'm trying to get a sense if you're still benefiting from those harder market years. R. Watts: Tracy, it's Andy here. So a number of our calculations generally because there is -- a lot of these are around property less on the casualty side. Normally, it's kind of shorter term in nature. Generally, it's over a 12-month horizon, but you might see that it could have a rolling 2- or 3-year inside the calculation. But in general, it's normally over kind of a 12-month horizon. And then what we -- in our commentary is, you'll see kind of movements around by quarter as we're doing ultimate true-ups to calculations back and forth and why we kind of look at them on a total basis in there. We suggest, again, you look at it kind of differently between Specialty Distribution versus Retail. The Retail is, honestly, it's a pretty consistent number as a percentage of revenue. SD will, in fact, move around by quarters, but it's an important part of our business. Tracy Benguigui: And then just going back to the comments about those 275 producers that were approached by a competitor. Can you just walk us through the cadence of the reduction of those $23 million of revenues? Was it mostly in employee benefits so that we could see that in the fourth quarter in '26? And is it fair to assume there was no impact this quarter? R. Watts: Yes. Tracy, on those. So it was a mix of business that was more heavily weighted towards employee benefits. So you probably see more of the impact probably early in the year. J. Powell Brown: And it's not 275 producers... R. Watts: Right. J. Powell Brown: It's 275 people. A small portion of that group were producers. R. Watts: Right. J. Powell Brown: The vast majority of them were in nonproduction roles. Operator: And our next question will be coming from Mike Zaremski of BMO. Michael Zaremski: Maybe just a question on the profit margin commentary. Andy, you said underlying margins is expected to be flattish. Just to clarify the definition of underlying, does that include contingency and exclude investment income? And it sounds like the -- which is a good flattish outcome is the result of the Accession synergies waterfalling in '26, if you think that's the right read. R. Watts: Yes. Mike. Yes, I think that's -- so what we are saying is if you isolate the impact of lower investment income next year, we would say the remainder of the business will be flat. And yes, we do view that as a really strong performance next year, considering the different puts and takes that we have and having contingents down inside of there. So that would be a really good year for us. Michael Zaremski: Okay. Great. And my follow-up might just be a quick yes or no, but because Tracy just asked for a clarification, but I just want to make sure that the $23 million of lost revs, that's -- that's all we're going to see from the lost employees for the most part. There's not -- it doesn't build up over time to a much larger number. I just wanted to -- just make sure because there's a $23 million divided by 275 employees, it's a fairly not immaterial, but small number. J. Powell Brown: So let's make sure we clarify that, Mike. Number one, that is the amount that they have taken at the present time. So what I'm saying is when something like this happens, which we haven't had before, they can impact retention going forward, some of that may be legally -- I'm not going to say prevent it, but run a foul with legal matters or whatever the case may be. But the answer is, at the present time, it is $23 million. And yes, relatively speaking, at the present time, it is a big number in a regular sense. But as it relates to the overall organization, it is a small number. And your statement is correct, but we don't know what has been said to existing customers, and that will bear itself out in the next year or so. R. Watts: Mike, that's why in our commentary, we said depending upon the materiality on a quarterly basis, we may call it out just to help give an idea of how the underlying business is performing. But this will take a number of quarters to ultimately play itself through. And again, it's not that it's all one business. Operator: And our next question will be coming from Elyse Greenspan of Wells Fargo. Elyse Greenspan: My first question was on the Retail organic. I think you guys said within the guidance, right, that there should be some modest improvement from the 2.8% that you guys saw in '25. Does that, I guess, adjust out the impact of the Howden departures? Because I think you said you may or may not adjust it out? Or does that account -- would that be leaving in the $23 million impact and you might adjust out if it's larger? R. Watts: That adjusts that out. Elyse Greenspan: Okay. Got it. And then in terms of the fourth quarter, what was the impact of the government shutdown on both Retail and Specialty Distribution? And would you expect -- are you expecting any impact in Q1 or in '26? R. Watts: Elyse. No, nothing material. Obviously, when -- especially you'll see it kind of in our flood business when you have these shutdowns. But I guess, sorry to say we're fairly adept at knowing how to manage through these since our government seems to have this as a recurring challenge at times. And so our team is really good about getting ahead of upcoming renewals, et cetera. But normally, if you have any delays, they kind of get caught up over 30, 60 days. So nothing major. Operator: And our next question will be coming from Yaron Kinar of Mizuho. Yaron Kinar: So my first question is on the Specialty Distribution organic. So I think even when we adjust for the flood revenues, organic EBITDA decreased by low single digits. You called out the greater-than-expected pressure from property CAT pricing, some binding authority business moving back to the admitted market. I assume both of those will be headwinds that remain in '26. So what offset drivers do you have that would still get the segment back up to positive organic growth in '26? R. Watts: Yaron. So I think in our commentary, we highlighted a couple of things. One, we think that the organic will be challenged in the first quarter with the flood claims that we recognized in Q1 of last year. And then with the CAT property pricing is, it will probably still be a little bit challenged in the second quarter. Then as we start looking into the back end of the year, we start getting the benefit of the organic growth of the Specialty Distribution businesses that have joined us from a session. And again, remember that -- those businesses have very, very little CAT inside of them. There's quite a bit of casualty plus other specialty lines inside. And then obviously, there's less CAT property placed in the third quarter, and then we'll see what the fourth quarter looks like. But we feel good about the business and the outlook, probably a little bit modest in the first part of the year, but then if everything continues on with trend, it will pick up some momentum in the back end of the year. Yaron Kinar: Okay. And you've given us a flavor of what kind of steady-state organic should be or has been in Retail over the years in kind of the low to mid-single-digit range. I realize that it may be a bit more challenging to offer that for Specialty Distribution. But nonetheless, I'll give it a shot. R. Watts: Sorry, you broke up at the end, Yaron. Can you repeat the end of the question, please? Yaron Kinar: Yes. I'd just like to see if there's a steady-state organic level that you'd expect from the Specialty Distribution segment, kind of the equivalent of the low to single digits you've offered for Retail. R. Watts: Yes. I think when we look at that business, because you've got the E&S component to it as well as there's still admitted inside of there, it's generally going to grow faster than retail, not all the time, and you're going to have kind of different periods. But we would normally think about that being a slightly faster-growing business than our Retail. Operator: And our next question will be coming from Mark Hughes of Truist. Mark Hughes: Yes. The procedure when you lose a teammates that going back to the Howden issue, how quickly would they change, say, the broker of record and so the business would shift immediately? I think, Powell, you had alluded to you didn't know kind of what conversations they might have had with other clients maybe positioning themselves for the renewal. But what's the usual cadence where you learn about how much has shifted over just so we can think about what that $23 million might end up being as it progresses throughout the year? J. Powell Brown: Well, Mark, there's 2 parts. So as you know, people do business with people that they like and they trust. And depending on how this story is presented, sometimes, and we've run into this already, they were said -- they were told one thing and then the customer determines that maybe it happened a little differently. And so having said that, there -- in our experience or hearing what the scenario is here, we have seen a group of accounts, which is the $23 million in question, that move right away. And we believe that those discussions occurred with them either before the departure or right around that time. We don't know exactly, and that will bear itself out. But having said that, there are other people that when presented with the scenario, they may end up thinking that they need to review their program, their placement. Sometimes they would go to an RFP, not all, but I'm saying some. And some of that may be honest and honorable and some of that may have something else embedded in it, and we just don't know. And so we think about how do you deliver better customer outcomes. And I have been hard-pressed to determine at the present time how the start-up presents better customer outcomes to those insureds. So ultimately, that will pan itself out. But we don't have a way -- it would be purely speculative, Mark, and we're not going to do that on what that number could ultimately be. But what I'm saying is we are rehiring teammates in the affective areas. We are engaging capabilities across the platform to continue or to show these customers the -- how we can bring -- have the best customer outcomes. And I'm very pleased with the engagement of our team across the entire organization. Mark Hughes: Appreciate that. And then, Powell, I think you had said you anticipate CAT property rates might decline modestly from 4Q levels. Do you think the market has pretty close to bottoming? J. Powell Brown: I don't -- I'm not going to say that, Mark, and let me tell you why. You have this really unique dynamic because you have all these issues with convective storms and fires and all this other stuff. And yet when the wind doesn't blow in Florida, as an example, you have this great pressure on rates. And as you know, it's a little bit like a pendulum and the pendulum usually swings too far one way and too far the other way. Well, the rates, quite honestly, we would all agree, probably were too high, and we don't control the pricing the carriers do. But then all of a sudden, when it becomes profitable again, and it looks really good, it brings everybody back in. So I believe that we're going to continue to have some pretty significant competition on those rates in the near to intermediate term. And I would typically say that really exists down between now and May or June, and then you get into hurricane season. So I would tend to say that I think it's still going to be quite competitive between now and then. Operator: And our next question will be coming from Josh Shanker of Bank of America. Joshua Shanker: Obviously, you were very proud and have a good view of the long-term success for your business, but someone much smarter than me said that the hard market is an elevator, and the soft market is an escalator. When you're looking at the dynamics of the market and you have a view of what the long-term growth rate of this industry is, do you believe we're entering into an extended period of suboptimal growth? J. Powell Brown: Well, I think that we are entering a more normal historically growth rate in the industry. And so I don't -- I wouldn't say it the way you just said it, Josh. I also think it's very interesting, the weight that people place on organic growth versus other important metrics like cash flow and margins. And so I have this -- and Andy and I have this healthy debate where we discuss with our team, the more and more of the changes that occur in GAAP, the further it moves away from real cash. Doesn't mean that it's wrong. I mean that's the SEC's deal and they figure it out and everybody, but -- or the generally accepted accounting principles. But what I would say is we think about it is how do we grow our business; how do we do that profitably? How do we reward those teammates, all of our teammates enable them to create wealth over a long period of time for helping us grow the business, and then how do we translate those revenues and earnings into cash, as you saw at 24.6% for the year and then use that to either buy businesses, hire more teammates, acquire our stock or something else that -- those are the 3 that come right to mind. So I believe it's -- this is exactly, Josh, what Andy and I have been saying for the last 12 months, which was more of a return to the normal growth rates historically seen in the brokerage space. R. Watts: Yes. Josh, the other thing it's -- again, it's interesting to us, I think, the way in which people write about the market. If you think about the retail space and just think about our business for a second, the large majority of what we place there is admitted markets, right? And those rates, they had to come down from where they were during kind of that '22, '23, '24 period just because of inflation and everything else. They've kind of leveled back out. They're kind of normal again. And so we don't see anything else unusual. So we don't see like this significant like softening market maybe that people are writing about. That's not what we're seeing in the rates on the admitted side actually feels fairly stable and the economy feels pretty good to us right now. Even though the headlines may potentially indicate something else, that's not actually what we see. The place where you see more of the volatility is over in the E&S space. But it seems nobody talks about casualty continues to just keep going up, though. And casualty is a really large part of the marketplace. And so look, we feel good about the backdrop. The numbers can move around again for anybody by quarter. But when we think about our business and heading into 2026, we feel really good about our ability to continue to capture market share and grow net new business. And that's kind of the key performance metrics that we focus on in -- across the entire organization. So we don't hear that -- we don't hold that -- maybe that potential dire view that you kind of put out there. That's not our perspective on the market. Joshua Shanker: Well, I don't know if it's dire, but I just want to follow-up on one thing that Powell said about that investors don't focus enough on cash flow, and I agree that's true. But do you believe that over the next 3-year period that Brown & Brown's business can outgrow the organic pace of the rest of the industry? Are you in a position -- or it just doesn't matter, cash flow will be the guiding factor for how we operate our business. R. Watts: Yes. Josh, we don't think that's actually the right question, if you don't mind me coming back at this one because the organic is only one part of the equation. One of the things that we've been saying for an extended period of time is you have to also look at contingent as part of our business model in total. Otherwise, you get kind of a false understanding of how the business is performing. Look at last year, we grew the top line, total revenues 23%. We grew our cash by 24%. The organic sure didn't grow that level, right? So you have to put contingents inside. Maybe look -- maybe our business is just different than everybody else. But when you think about Brown & Brown, you have to put the contingents inside of it because you're going to have scenarios where the organic will be down and the contingents will be up, right? And the contingents are very profitable for us ultimately because these businesses should really be valued off of cash, not organic. And the question is, how can you grow your cash over time? We grew at 24% last year to $1.450 billion. That's an incredible year. And just look back to the last 10 years at how we've grown our cash, right? And it's a combination of our acquisitions, organic and contingents. Operator: And our next question will come from Andrew Andersen of Jefferies. Andrew Andersen: Into '26 and recognizing the lost headcount, is there a scenario where you actually have a margin benefit as you're not incurring the comp and ben costs, but you are keeping the revenues? Are you thinking about that in underlying margin guidance? J. Powell Brown: I think that what I want you to understand is we are rehiring teammates that display the characteristics that we look for to deliver very creative solutions to our customers. So some of those people are being hired in those markets effective. Some may be hired elsewhere. But in the near term, technically, that could be the case, but we don't believe that it's going to have a significant impact or a material impact because we are hiring people back. So I think the question is the right question, but I don't want you to go away and say there's some hidden bonus in here. It's -- we believe it's immaterial. Andrew Andersen: Okay. And traditionally, I thought of you all is not really doing team lifts, but if there's an effort to replace these folks' kind of quickly, is that strategy kind of contemplated here? J. Powell Brown: No, we don't think really that way. We think about hiring good people and bringing them on to the team. And so I don't like to use the term never or always, but that has not really been our thought process. R. Watts: Andy, keep in mind our comment earlier because I think maybe some people have believed that it was whatever, 200, 250, 275, those were all producers. That represents teammates across the board. So that's service, account executives, et cetera. J. Powell Brown: We'll take one more question. Is that what we're going to do. R. Watts: We'll run it. We got a few more in the queue. J. Powell Brown: We've got few more in the queue. Okay, go ahead. Operator: Our next question will be coming from Alex Scott of Barclays. Taylor Scott: I wanted to ask about the incentive commissions. And I guess we've seen some of the national carriers who are trying to be a little more disciplined in the face of more competition beginning to have lower premium growth numbers. And so I just wanted to understand if we should expect any impact from maybe volume-based incentive commissions being impacted by that? R. Watts: And Alex, is that just an overall comment on the market? Or is it related to something specific when you asked that? Taylor Scott: Yes, I'll try to be more clear. We're seeing some national carriers have very low premium growth numbers at this point because of competition. And I'm trying to... J. Powell Brown: Yes. Taylor Scott: Understand if in 2026, your incentive commissions could be negatively impacted by that. R. Watts: Always a potential for that. I think you saw some of that actually in 2025, Alex, that we called out in the third and fourth quarter because the carriers are always moving around different measurement targets that could be on persistence or on growth. So yes, those are some of the dynamics going on. Taylor Scott: Okay. But is there anything embedded in sort of what you commented on your retail organic that include that? Or is that something that could be incremental? To help me understand. R. Watts: That includes our commentary unless we get something unusual throwing out that we don't know about. Taylor Scott: Okay. And then I wanted to see if we could circle back on Accession and just see if you would be willing to provide any commentary around how that performed in 4Q and its contribution to revenue. And I know we probably should care and look at more cash flow. But for Accession in particular, just thinking through the different pieces of guidance you've given in the past, I wanted to understand how the growth is going there. R. Watts: Yes. I would say, good for the businesses. So we're very pleased with the performance of the businesses inside there. We're extremely, extremely pleased with how all our new teammates are leaning in, which is wonderful to see in there. The item on the growth in the quarter when we called out the 405 versus the 430 versus 450. Again, that was just an estimate we had going into the quarter. We had to refine revenue recognition. But nothing changes full year how we think about the business. Everything is going really well and coming along with integration. So we're extremely pleased. Operator: And our next question will be coming from Meyer Shields of Keefe, Bruyette, & Woods. Meyer Shields: Two quick questions. First, Andy, the $15 million of adjustment-related contingents, is that a fourth quarter issue? Is that where we should expect the drop-off? R. Watts: No, we'll probably see that more kind of spread between the third and fourth quarters of next year, Meyer. Meyer Shields: Okay. That's helpful. And second, just to clarify, I know you said that the Retail segment should have organic growth better than the 2.8%. Is that comment also applicable to Specialty Distribution? R. Watts: We would expect that the organic growth also would improve for Specialty Distribution during the year, yes. Meyer Shields: Okay, perfect. Operator: And our next question will be coming from Brian Meredith of UBS. Brian Meredith: Two questions here. The first one, you called out multiyear policies as a headwind in retail growth again this quarter. Maybe you can quantify that. And is that going to continue to be a headwind in 2026? R. Watts: Brian, yes, we wouldn't quantify that level of granularity. I think we included that in our commentary about the 100 to 150 basis points in addition to incentives and some other projects. Those are always kind of moving around by quarters. Remember, if there's a headwind this year, remember, they come up for renewal next year. Brian Meredith: Got you. Okay. And then second question, Powell, this is more for you. If I think about going back and when we transition into these soft cycles, I found that historically, you do get these talent wars, and this is obviously a little unusual what's going on with Howden. But as I think about here going forward, is that a correct characterization? And maybe is there likely to be maybe potential pressure on margins, not only Brown & Brown for the industry is perhaps SMB has got to grow at a faster rate than organic revenue growth given just the talent war going on right now to try to sustain growth? J. Powell Brown: That's possible. Yes. I mean I'm not trying to be flippant, but yes, your thought process is fair on that. That could impact the industry, yes. R. Watts: Brian, just the other thing, this industry has always been competitive, though. I mean it's been competitive for many decades. And so I think to our earlier comments, it's why we're very thoughtful about our compensation plans, both on cash and equity and how that creates long-term wealth for our teammates. And we continue to invest across the entire organization. But I don't think that like all of a sudden, like competition just showed up in the last 6 months. It's been here for decades. Operator: And I would now like to turn the conference back to Powell for closing remarks. J. Powell Brown: All right. Thank you all very much, and we look forward to talking to you after Q1. Have a nice day. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, and welcome to the AGNC Investment Corp's. Fourth Quarter 2025 Shareholder Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Katie Wisecarver in Investor Relations. Please go ahead. Katie Wisecarver: Thank you all for joining AGNC Investment Corp.'s Fourth Quarter 2025 Earnings Call. Before we begin, I'd like to review the safe harbor statement. This conference call and corresponding slide presentation contains statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecasts due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. Participants on the call include Peter Federico, President, Chief Executive Officer and Chief Investment Officer; Bernie Bell, Executive Vice President and Chief Financial Officer; and Sean Reid, Executive Vice President, Strategy and Corporate Development. With that, I'll turn the call over to Peter Federico. Peter Federico: Good morning, everyone, and thank you for joining our fourth quarter earnings conference call. 2025 was an exceptional year for AGNC shareholders. AGNC's 11.6% economic return in the fourth quarter drove our impressive full year economic return of 22.7%. Even more noteworthy, AGNC's total stock return in 2025 was 34.8% with dividends reinvested, nearly double the performance of the S&P 500. This outstanding performance on an absolute and relative basis clearly demonstrates the value of AGNC's actively managed portfolio of agency mortgage-backed securities and associated hedges. Looking back, we were confident that AGNC was on the forefront of a uniquely positive investment environment as the Fed's unprecedented tightening cycle of 2022 and 2023, reached its conclusion. On our third quarter earnings call in 2023, we expressed our belief that a durable and attractive investment environment for AGNC was emerging as mortgage spreads began to stabilize at historically attractive return levels. That outlook proved to be correct. And in the 9 quarters since that call and despite several episodes of extreme market turbulence, AGNC has generated an economic return of 50% for its shareholders, comprised of a 10% increase in book value and monthly dividends totaling $3.24 per share. Moreover, during that same time period, AGNC shareholders have experienced a total stock return of nearly 60% or 23% on an annualized basis. And finally, since inception, AGNC has generated a total stock return of over 11% on an annualized basis with dividends reinvested, demonstrating the long-term benefit of investing in this unique fixed income asset class and the durability of our business model across a wide range of market environments. Turning back to 2025, the Bloomberg Aggregate Agency Index was the best-performing fixed income sector in the fourth quarter, and for the year, produced a total return of 8.6%. Also noteworthy, given the similar credit quality, the Agency Index outperformed the Treasury Index by 2.3 percentage points or 36% in 2025. As I discussed throughout the year, the favorable performance of Agency MBS was driven by a confluence of positive factors. First, the Fed shifted its monetary policy stance toward lower short-term rates and greater accommodation, a promising development for all fixed income assets. The Fed also transitioned its balance sheet activity from quantitative tightening to reserve management. Second, interest rate volatility trended lower throughout the year due to the shift in monetary policy, greater fiscal policy clarity and a stable supply outlook for treasury securities which included a greater share of short-term debt. Lastly, the uncertainty and potential risks associated with GSE reform that adversely impacted the agency market early in the year, gradually dissipated as the Treasury Department and other officials communicated and approached to GSE reform that focused on reducing the spread on agency mortgage-backed securities, maintaining mortgage market stability and improving housing affordability. Collectively, these factors, combined with the sizable purchase of MBS by the GSEs later in the year, caused spreads to tighten and drove the substantial outperformance of Agency MBS relative to other fixed income asset classes. As we begin 2026, these favorable macro themes remain in place and provide a constructive investment backdrop for our business. In addition, other positive developments are possible including further actions by the administration to improve housing affordability. The recent $200 billion MBS purchase announcement is a good example of the type of action that could result in tighter mortgage spreads and lower mortgage rates. The funding market for Agency MBS has also improved in response to the Fed increasing the size of its balance sheet and improving the functionality of its standing repo program. The Fed is also considering other actions to further improve the utility of the standing repo program, which if implemented would be highly beneficial to the Agency MBS market. Finally, the supply and demand outlook for agency MBS remains well balanced. At current rate levels, the net new supply of Agency MBS this year is expected to be about $200 billion. When combined with the Fed's runoff, the private sector will have to absorb about $400 billion of MBS in 2026, an amount similar to the previous 2 years. On the demand side of the equation, however, the investor base today is more diversified and positioned to expand with GSE purchases potentially consuming about half of this year's supply. At the same time, bank, money manager, foreign investor and REIT demand should all remain strong. Pulling this all together, the underlying fundamental and technical backdrop for Agency mortgage-backed securities continues to be favorable and supportive of our positive outlook. Moreover, as the largest pure-play agency mortgage REIT, we believe AGNC is very well positioned to generate compelling risk-adjusted returns with a substantial yield component for our shareholders. With that, I'll now turn the call over to Bernie Bell to discuss our financial performance. Bernice Bell: Thank you, Peter. For the fourth quarter, AGNC reported comprehensive income of $0.89 per common share. Our economic return on tangible common equity was 11.6% for the quarter, consisting of $0.36 of dividends declared per common share and a $0.60 increase in tangible net book value per share driven by lower interest rate volatility and tighter mortgage spreads to benchmark interest rates. As Peter mentioned, our full year economic return was 22.7%, reflecting our monthly dividend totaling $1.44 per common share and a $0.47 increase in tangible net book value per share. As of late last week, our tangible net book value per common share was up about 4% for January or 3% net of our monthly dividend accrual. We ended the fourth quarter with leverage of 7.2x tangible equity, down from 7.6x at the end of the third quarter. Average leverage for the fourth quarter was 7.4x compared to 7.5x in the third quarter. In addition, we concluded the quarter with a very strong liquidity position of $7.6 billion in cash and unencumbered Agency MBS, representing 64% of tangible equity. Net spread and dollar roll income was unchanged for the quarter at $0.35 per common share, which includes $0.01 per share of expense related to year-end incentive compensation accrual adjustments. An important driver of our net spread and dollar roll income is the level of unhedged short-term debt in our funding mix as well as the composition of our hedge portfolio. As of the end of the fourth quarter, our hedge ratio was 77%, reflecting the level of swap and treasury hedges relative to total funding liabilities and was unchanged from the prior quarter. At the same time, during the fourth quarter, we opportunistically shifted our hedge mix toward a greater proportion of interest rate swaps. As a result, a meaningful portion of our funding remains short term and variable rate. This is consistent with the current more accommodative monetary policy environment and positions net spread and dollar roll income to benefit as additional rate cuts occur. Looking ahead, we expect that lower funding costs from the October and December rate cuts and anticipated future rate cuts increased stability in funding markets resulting from recent Fed actions to maintain short-term rates within their target range and the shift in our hedge mix toward a greater share of swap-based hedges, will collectively provide a moderate tailwind to net spread and dollar roll income. The average projected life CPR of our portfolio increased 100 basis points to 9.6% at quarter end from 8.6% in the prior quarter due to lower mortgage rates. Actual CPRs averaged 9.7% for the quarter compared to 8.3% in the prior quarter. Lastly, during the fourth quarter, we issued $356 million of common equity through our at-the-market offering program at a significant premium to tangible book value per share. This brought total accretive common equity issuances for the year to approximately $2 billion and delivered exceptional book value accretion for our common shareholders. And with that, I'll now turn our call back over to Peter. Peter Federico: Thank you, Bernie. Before opening the call up to questions, I would like to provide a brief review of our portfolio. Agency spreads to both treasury and swap rates tightened across the coupon stack, especially on intermediate coupons as interest rate and spread volatility remained low and the demand for MBS, particularly from the GSEs accelerated. Hedge composition was also an important driver of performance as swap spreads on 5- and 10-year swaps widened significantly during the quarter. This favorable move in swap spreads followed the announcement of the Fed's revised supplemental leverage ratio requirement and the Fed's actions to ease repo funding pressure. As a result, Agency MBS hedged with longer-dated swap-based hedges performed considerably better than positions hedged with treasury-based hedges. Our asset portfolio totaled $95 billion at quarter end, up about $4 billion from the prior quarter as we fully deployed our new capital that we raised during the quarter. The percentage of our assets with some form of favorable prepayment attribute remains steady at 76%, while the weighted average coupon on our portfolio fell slightly to 5.12%. Consistent with the growth in our asset portfolio, the notional balance of our hedge portfolio increased to $59 billion at quarter end. The composition of our portfolio also shifted toward a greater share of swap-based hedges. In duration dollar terms, our allocation to swap-based hedges increased to 70% of our portfolio from 59% the prior quarter. In light of our more favorable outlook for swap spreads, we will likely operate with a greater share of swap-based hedges in our hedge mix, particularly 1 short-term rates near the Fed's long-run neutral rate. With that, we'll now open the call up to your questions. Operator: [Operator Instructions] The first question comes from Bose George with KBW. Bose George: Can you just talk about where you see spreads currently versus where you saw it in the fourth quarter? And then just help us walk through the dividend coverage. Spreads are obviously tighter, but you've got more capital with higher book value. Just help us do the math there. Peter Federico: Sure. Yes. Thanks for the question. I figured that would be one of the first questions. I'll start with the outlook in terms of ROE and spreads. Obviously, as you pointed out, spreads have tightened a lot. And I think maybe the best way to describe the current environment, and this is essentially what happened in the fourth quarter is that mortgage spreads, I think, have now sort of entered a new spread range. We broke through the range that we have talked about for a long time, really the range that has held for almost 3 years, which is really beneficial to our business and drove the outstanding results that we had in really the last 2 years and in 2025 in particular. But I would say, as we sit here today, Bose, when I think about current coupon spreads to a blend of swap and treasury rates, and I will give you the -- I usually think about things across the curve. I would say that the potential spread for current coupon to swaps is maybe in the 120 to 160 range. And right now, we're just sort of right in the middle of that range, maybe a little bit through it, so call it in the 135-ish type range. I don't know where exactly it is this morning. But I would say that's the potential new range for mortgages relative to swaps and on a current coupon basis to treasuries, I would say it's probably in the 90 to 130 basis point range. And today, I think the number is around 110 when you think about it across the curve. So taking that number and as I mentioned, we would -- we favor swaps in this environment. We have a lot more stability in swap spreads than we had as we start 2026 than we experienced in 2025, and that's really important it allows us to go back to sort of using swaps at a much more heavy pace than we were -- as I mentioned, we were at 70% and maybe going higher. But I would put it at maybe some of spread of around 130-ish, something like that and you look at the leverage that we typically employ, I would say that you could expect returns at the current spread range, maybe in the 13- to 15-ish type percent range, maybe a little bit maybe touch above that depending on the hedge mix. So that translates, I think, into ROEs that are really competitive and really aligned with our dividend, which -- and let me go to the next question, which is I think when you think about the dividend, there's a bunch of considerations. We always talk about the dividend and the sustainability from that perspective, that marginal return. And that is important because one of the factors that will drive our dividend over a long period of time is how we replace our portfolio and these new marginal returns will matter. But what's important about that is that will take an extended period of time to occur. Measured not in days, weeks or quarters but measured in years as the portfolio slowly runs off. The prepayment speed on our portfolio will drive that and also how we reposition the portfolio and how we grow our capital base. So that is something that's much more long term. When you think about the dividend coverage today, it's important to look at what is the return on our existing portfolio. And we obviously were able to put on a really attractive returning portfolio over the last couple of years at this spread environment. If you think about our net spread and dollar roll income, for example, I call it normalized for this quarter, it was $0.35, but there was -- it was dragged down by $0.01 due to some nonrecurring performance-related compensation. $0.36 -- and what is the ROE on that, think about the $0.36 relative to our book value of $8.88. That's about an ROE of 16%. And that aligns very, very well with our total cost of capital. Our total cost of capital, when you add up all the common stock dividends, the preferred stock dividends, our operating costs normalized, it was right at, I think, 15.8% for the -- at the end of the year. So our -- the point is the total cost of capital aligns well with the existing portfolio. The new portfolio still looks really attractive at mid-teens. Obviously, that will take time. And then there's a bunch of other factors that we talk about these all the time. But when you think about our dividend, this is a very dynamic environment. As I talked about, we're kind of shifting spread environments. There's a lot of new information that we will get over the next weeks, months, maybe quarters that will determine sort of the direction and stability of mortgage spreads, that will have implications for our leverage that we'll operate with. The hedge mix is going to be an important driver. And then there's always accounting considerations. Obviously, REITs have a dividend distribution requirement based on taxable income. That's also something that we'll have to factor into our thinking over time. So there's lots of factors, but I think all of that put together is our dividend is well aligned with the economics and the accounting of our business today. Bose George: Okay. Great. And actually, just -- so the existing portfolio, it seems like it covers the dividend well. The incremental portfolio, is it fair to say it's a little bit sort of whatever closer or on the coverage just given the incremental returns are more in the 13% to 15% versus the economic -- versus kind of the breakeven ROE which looks like it's like 15.5% or something? Peter Federico: Yes. I think that's right. And also, I think it's important when you think about the -- when you think about deploying new capital, if you raise capital, the required return on the new capital that we raised is not the total cost of capital. That's on the existing book of business. The new capital that you would raise, I think the right comparison from a dividend coverage perspective, is what is the dividend yield on your stock, which is around 12%. So when you think about deploying new capital, the returns today in the marketplace, as I've mentioned, sort of 13% to 15% are actually in excess of the dividend yield on our stock. So there's ample coverage from that perspective. Operator: The next question comes from Doug Harter with UBS. Douglas Harter: I appreciate the ranges for spreads you gave. Can you talk about how you're thinking about the risk or the potential benefit that could get you either to the high end or the low end of those ranges and how that informs your decision around leverage today? Peter Federico: Yes. Well, obviously -- yes, it's a great question. Obviously, the announcement at the -- I guess it was early in the year -- early this year that really pushed the current coupon spread into this new range was the announcement that the GSEs were going to essentially use all of their portfolio capacity. Now the market was monitoring. Obviously, I mentioned it, everybody knew that the GSEs were growing their portfolio. They have been doing so really since the second half of the year. I think for the year, they grew their balance sheet. This is as of November, they added about $50 billion of mortgages. And I think from the low point, they added about $70 billion. I think -- Freddie Mac, I think, just announced their MVS for December and they had added another $15 billion of MBS in loans. So the market was anticipating that they would use and grow their portfolios and use the capacity that they had. That announcement obviously made it very clear that, that is their intention. And that really caused spreads to tighten quite a bit. From here, what I would say is I think that maybe the most likely scenario is that they move sideways for some period of time and we have to wait and see what type of actions come next from the administration and from FHFA. There are certainly a number of actions that I think could push spreads to the tighter end of the range, I'll give you some examples that I think would be highly beneficial to the agency market in terms of spread tightening. Things like changing their cap on their portfolios. And these are things that I think can be done without congressional approval, so they might be appealing from that perspective. But changing the portfolio cap seems to be within their capacity. Maybe a change in the Fed's balance sheet with the potential of a new Fed Chairman in 2026. The Fed obviously now intends to run its portfolio off. So in a sense, the government through the GSEs, is buying $200 billion of mortgages and the Fed is essentially selling or running off $200 billion in mortgage. Perhaps that may change. That would be obviously something that's not priced into the market. Given the credit guarantee from the government on the GSEs, their explicit guarantee of support, perhaps there could be a rationale for changing the capital requirement, although I don't hear that being talked about very much. So I think there's a number of things that could be very positive. I mentioned the funding market, I think that's a new positive development and maybe there's more changes that the Fed makes with respect to standing repo program, which would bleed into, I think, in a positive way, the Agency market. On the negative side, and there are negatives, there are ideas out there related to, for example, streamlined refinance or G-fees or even the portability or a [ suitability ] of mortgages, those, I think, could have negative consequences, some of them significantly negative consequences. But they might -- some of those -- when you talk about accelerating prepayment risk, it is going to have some negative effect on mortgage spreads. So obviously, there are more convexes, more optionality, and that will cause mortgage spreads to widen. But putting all those together, I think the government has made it very clear it wants greater mortgage affordability and I think some of the changes they may make may just lead to sustainability at these new levels, which I think would be very positive. Obviously, as a levered investor, we're looking for spread stability. That's key driver of our ability to generate attractive returns. And I think that's the most likely environment. But I think there are actions that they still could take that could be positive for the market. Douglas Harter: And then how do you think about what that means for leverage kind of given that are you kind of comfortable in the current range? It ticked down kind of during the quarter, but the average was flat. How should we think about that? Peter Federico: Yes. That's really key. We did -- we have let our leverage come down consistent with the spread tightening. And I would say, right now, we need to see more information in order to make a determination whether we're willing to operate with a different leverage profile. And the key input in that equation is how stable do we believe spreads will be? So what are the actions that the government may take? And will they lead to greater spread stability. So will the actions that they take said another way, be sustainable? Or will they just lead to, for example, a quick, short tightening in mortgage spreads. There's some actions that they take that cost mortgage spreads to tighten another 15 basis points. But if there is no follow-on action then spreads could actually widen back out. For example, if the GSEs were to use up their capacity quickly, mortgage spreads will be tight during that time period. But once they reach their cap, they will like -- mortgage prices will likely revert back to where they were prior to that action. And so what we're looking for is greater insight into what actions they may take. And will they lead to spread stability. And I think that's -- that would be the best benefit for the overall mortgage market from an affordability perspective is can they keep spreads at these levels, which are obviously more attractive from the homeowners perspective than they were a year ago. Operator: The next question comes from Crispin Love with Piper Sandler. Crispin Love: Peter, as you mentioned, the administration is very focused on affordability, lower mortgage rates. But supply here may be the major issue to broader affordability easing. And you did mention in the prior question, some of the things that could be in the toolkit for the administration, FHFA that could be positive for spreads. But if you were in their shoes, what would you do to address the affordability questions. Peter Federico: Well, I think they've done a lot already. I think they deserve -- the administration, FHFA, the GSEs, they deserve a tremendous amount of credit for the actions that they took in 2025. Starting with the guidance -- that sort of the guiding principles that I mentioned and I have mentioned that for a number of times and the treasury in particular, has come out with those guiding principles. The Treasury Secretary continues to reference them. The fact that they are focused on mortgage spreads and the Treasury Secretary in particular, talking about taking actions that maintain spread stability or make them tighter is obviously a really key and one of the benefits of why mortgages tighten so much. So that sort of thinking is really, really important for the market because what it's doing is it's allowing other participants to come into the market. The greater spread stability that they can achieve will allow more and more investors into the market and create a more diverse bid for agency mortgage-backed securities, which will put less pressure on the GSEs to do that. But the combination of the guidance that they had, the actions of the GSEs, those were all very positive. I think they can do other things like the cap, I think, would be one in particular that would give them more capacity and allow spreads to remain at these attractive levels. So I think that's just the key from their perspective is they've got to continue to focus on the stability of the mortgage market, which they are doing a great job of. Crispin Love: Great. That's helpful. And then just one follow-up on the leverage question. Your view seems to be constructive on overall agency MBS investment environment, less rate fall and accommodative administration. Of course, there's always a risk of widening and something unforeseen. But how would you gauge your positivity on the investing environment right now for Agency MBS versus a quarter ago, 6 months, a year ago and how that might impact leverage? And if you do wait for something, could it be almost too late? Peter Federico: Yes. There's a couple of things that I've already mentioned, but I'll add to it because it's a good follow-on question. And that is that when you think about where the mortgage market is today versus a year ago or 2 years ago or 3 years ago, yes, we are in a lower spread environment today, but it's still a widespread by historical standards. So returns, when we're talking about returns in the mid-teens, low to mid-teens. Those are outstanding returns, especially compared to returns that you can get in the marketplace, for example, look at the performance of our stock versus the S&P 500 or even the NASDAQ last year. You can get outstanding returns. And even at these lower spread levels, returns are still really excellent from a shareholder perspective. The key differentiator, which is a very positive is that when you think back to where the environment we were maybe a year ago or 2 years ago, there was a lot more uncertainty about the upper end of the range. And I think what you can take away from the environment today, and this is the credit to the decision makers and the policymakers and the administration is that they are limited in the upside of the range. They are saying we want spreads to stay here or go lower. And I would think if mortgages did move to the upper end of the range, then you would see actions being taken that would push them back down into the range. And that's really an important development and a very positive development when you're a levered investor like we are, is that the range -- the upper end of the range is more certain today than it was certainly a year ago. And I would expect actions to be taken if there were some sort of exogenous event that caused spreads to widen materially. Operator: The next question comes from Trevor Cranston with Citizens JMP. Trevor Cranston: You talked a bit about swap spreads and increasing the amount of swaps in the portfolio during the fourth quarter. I was wondering if you could give us an update on your view going forward if you think there's room for spreads to continue widening in the swap market and sort of where you think ultimately those settle out? Peter Federico: Yes. I do believe that swap spreads will stay -- certainly stay in this range, but I think there is potential for further widening as we go through the year. The Fed is changing it's balance sheet focus from quantitative tightening to reserve management. It was obviously a really critical pivotal change from that perspective. They ease some of the regulatory requirements that I mentioned, the market had anticipated that, that is very positive long run. It makes treasuries more friendly from a balance sheet perspective, which has led to some of the swap spread widening. But the overall funding market now is at a much better footing with the Fed growing its balance sheet, $40 billion a month. We'll see how long they do that, but they are adding reserves to the system. Reserves got below $3 trillion. Now they're back at $3 trillion or maybe even a little bit above. I expect that to continue. And I think, overall, that will put widening pressure on mortgage spreads. So I think from a hedge perspective, we'll be better off in a swap-based hedge and a treasury-based hedge for some period of time. And even if spreads just stay here, then obviously, we can pick up 25 or 30 basis points extra carry, as I mentioned, when you think about those spread environments, that's substantial leverage, 6x or 7x we're talking about another 1% or 2% of ROE. So I think the outlook is favorable for swap spreads. Trevor Cranston: Yes. Okay. That makes sense. And then on MBS spreads, you talked about the positive technicals in the market, which have been pretty strong. I guess the other thing that's obviously helped MBS performance over the last several months has been volatility continuing to drop. So I was curious if we could get your thoughts on volatility going forward, if you think that continues to come down or what your thoughts are around that? Peter Federico: Well, you're absolutely right. I mean that was a key driver of the outperformance of our asset class in 2025 was the decline in interest rate volatility. So we all know anytime interest rate volatility increases, it's bad for people who own mortgage-backed securities because it changes the optionality profile from a borrower perspective. And when interest rate volatility declines like it has, it's obviously a positive from a mortgage bond perspective. Just look at the sort of range of the tenure that we've been in, in the fourth quarter, I think it basically traded in a 25 basis point range. So hardly any movement in any given day. And when you look back over the year, I think I look back to -- so really from February on of last year, we traded in about a 50 basis point range. And again, this is to the credit of the administration and the treasury part of the stability that we're seeing, particularly in long-term rates is because of the focus of the Treasury Secretary and administration on keeping longer-term rates stable. The 10-year in particular, has been an area of focus. So I believe they will continue to approach their issuance from a perspective that will be beneficial to the 10-year rate. Now we've been sort of trading in this 4 to 4.25 range. As we go forward, I think spread yield volatility or interest rate volatility will continue to be generally low maybe not as low as it has been, but generally, though, because there are some more geopolitical sort of risks in the market for sure today. But I think from the treasury's perspective, I think the direction of interest rates is more likely lower than higher given their focus on affordability. But I do believe it to be a slower grind lower if the tenure does go down to 4 or maybe break through 4 a little bit. But I think the volatility environment is going to be positive for Agency MBS in 2026 based on what we know today anyhow. Operator: The next question comes from Jason Stewart with Compass Point. Jason Stewart: Just 2 quick follow-ups. One on capital activity today. Could you give us an update on equity issuance? Peter Federico: You mean quarter to date? This quarter to date? Jason Stewart: Correct. Peter Federico: None. No issuance. Jason Stewart: Okay. And then in terms of your comments, maybe just tie in sort of expectations for ATM issuance? I mean, obviously, 2025 was a big year with your ROE profile, give us some two cents on that. Peter Federico: Yes. It was a great environment, a sort of a confluence of positive factors because we could obviously issue it very accretively and we could deploy it at really attractive return levels. Now we can still issue it accretively, and so that's a positive factor going forward. But obviously, the return profile is not quite as attractive as it was. But as I mentioned, it still exceeds the threshold. So it's something that we will continue to do. But I would also say sort of that we're certainly very comfortable with our size and our scale and our liquidity. Also there's no urgency on our part to feel like we need to grow. The decision to issue capital will be just based solely on the economics that we see in the environment. So we're certainly very happy with our size and scale and liquidity and like where we are today. Jason Stewart: Okay. Got it. That makes sense. And then in terms of the MBS market, we've talked a lot about demand from the GSEs. But outside of the GSEs, when we think about traditional buyers, banks, as rates are going down, and there's been a little bit more mixed activity in terms of foreign demand. What's your take on how those 2 buyers evolve over the course of the next 12 months? Peter Federico: Yes. When you look at the market, I talked about the supply outlook. And again, the supply outlook really is going to be very similar, at least at today's levels. Now obviously, if rates come down and we have more refinance activity, these numbers will change. But again, from a supply outlook, it's about $400 billion that will have to be consumed by the private sector. And we know that the GSEs -- $200 billion, obviously, is very meaningful. So they could consume quite a bit of that supply, which would be very positive. But taking the GSEs out of it, I think what's also important, and this is a differentiator of the market today versus a year ago or two years ago, where the market was really dominated by money managers. When we look at the demand for mortgages today, I see a more diverse investor base, and that's really positive for the overall market. When you look at what money managers have done given where returns are in the equity market, given the administration's focus on long-term interest rates, I think bond fund inflows will continue to be very sizable. Last year, I think it came close to about $500 billion of inflows. The year before that, it was $450 million. So I would expect bond fund inflows to remain strong in the environment -- in the current environment, which would translate to money managers buying -- is probably somewhere between $100 billion and $200 billion of mortgages. So money managers and GSEs could consume a lot of the production. Then we have banks, which we know are growing their position, but at a very gradual pace. But I do expect the regulatory changes that will come in 2026 will be positive for MBS and mortgage risk in general. So I expect banks to buy more than $50 billion, which is, I think, most people's projections. Foreign demand has been stable but I expect that could also have a little bit of upside because I think the environment is a little bit better versus the last couple of years. And then REITs, again, they were a big contributor to the mortgage market in 2025. And I would expect that REIT demand can continue to be strong given all that we're talking about here this morning. So when you add up all the demand, I think you could credibly come up with a scenario where demand is outpacing the supply in 2026. Operator: The next question comes from Rick Shane with JPMorgan. Richard Shane: I need to buzz in one question before Jason. He really covered my topics. But just one quick clarification. It sounds like you guys are slowing issuance given the incremental return on deployed capital, which makes sense. You also said in response to Jason that you hadn't issued any equity through the ATM quarter-to-date. I am curious was that actually by choice? Or are you blacked out on the ATM until you issue earnings just so we understand really how much you're dialing back if it was a function of what you're allowed to do versus what you've chosen to do? Peter Federico: Well, that's a good clarification. I would say 2 things that I would describe my answer to the future issuance as being opportunistic and driven not by any desire to be larger or have greater scale, but just driven by the economics of the opportunity in terms of the value to our existing shareholders. And then from a quarter-to-date perspective, most companies, I think you will find in a blackout period from the end of the previous period to sometime around their earnings call. So that would be a typical pattern for companies to not know...... Richard Shane: Perfect. That was the clarification I was looking for. Peter Federico: Yes. Good follow-up. Operator: The next question comes from Eric Hagen with BTIG. Eric Hagen: I just want to get your perspective on prepayment speeds, maybe at what level for mortgage rates do you think really gets the refi market moving? And would you guys modify the hedging in any way or take off some of the longer-dated hedges, if it looked like refis were really going to accelerate? Peter Federico: Say that last part again, Eric, please? Eric Hagen: Would you adjust any of the hedges or take off some of the longer-dated hedges if it looked like the refi market was really going to accelerate? Peter Federico: So let me start with a couple of questions -- a couple of points, and then we'll -- then you can ask me some follow-ups. Obviously, prepayment risk is greater today and certainly, I think it's greater given the direction of the administration. So composition of the portfolio, I think, is going to be a real key in terms of mortgage performance going forward. I think it's going to -- the story will not -- even though in a tighter spread environment, asset selection becomes a much more critical factor on a go-forward basis. And it's -- what are the assets that you're choosing and what are the assets that you're avoiding choosing, which is really important. Coupon composition is going to be really important. And the type of characteristics you have in your pools is going to be really important. When I look, for example, just to give you a couple of numbers on the coupon distribution. I think this is really important. When I look at our position of 5.5 and above, when I think about the moneyness of mortgages and what that 5.5 means with a mortgage rate, 6.5 or something there, about 48% of our portfolio is in 5.5 and above. But what's important of that population, 87% of that population has some form of underlying attribute or characteristic that we believe will make those cash flows potentially more stable. And so that's really what is really important when you look at the underlying characteristics, whether they're -- the channel they came through or the credit or the geography, all those Fed loan balance, all those things, what's happening with the GSEs in terms of their pricing, how do they all fit together? They could be very significant drivers of performance on a go-forward basis. So the specified pool characteristics are going to be really important. Chris and I were just actually looking at some numbers this morning, which I just thought were interesting. When we looked at, for example, our 6.5 population, which is only 5% of our portfolio, the cheapest to deliver cohort in the 6.5 population today is paying at a 52% CPR. Our population is trading at just less than half of that from a CPR perspective. So the underlying characteristics matter a lot. The coupon composition will matter a lot. It will be the key driver. We also, from an interest rate perspective and from a hedging perspective, as you point out, I think it's also going to be important to operate with a positive duration gap because obviously, as rates go down, it will be more challenging for mortgages and it will affect the supply outlook. So a positive duration gap will be important. And you'll also notice, and we did this last quarter, but it's still there today. We also have actually a fairly substantial receiver swaption position, which will give us some incremental protection. So all the combination of how do we position the portfolio from a hedge perspective, the duration gap using option-based hedges and in particular, avoiding the worst pools and selecting pools that we think have really attractive characteristics should benefit us in this rising prepayment environment. Operator: And our last question comes from the line of Harsh Hemnani with Green Street. Harsh Hemnani: So as we look at the composition of the mortgage market, it's more barbelled today versus what it was over its history. And in the context of the PAR coupon being close to 5%, the coupons at 4% and 5%, there's less outstanding there versus in higher coupons and lower coupons. And then also, it sounds like from the messaging from the administration, GSE purchases are going to come in at those PAR coupons. How is that environment sort of affecting your ability to, first off, pick pools in this environment where there's less outstanding at the coupons you favored and then also deploy capital into those coupons? Peter Federico: Yes. I think I got all that. I would say you're right. I mean one of the things that we have talked about and focused on is the fact that I would expect the GSEs to -- first off, I would expect the GSEs to make decisions based on the economics of the mortgage market, but I would expect their focus of their purchases to likely be around the PAR coupon because that will have the greatest impact on the primary mortgage rate, which is what they're trying to affect. And that's why when you -- for example, when you look at the performance across the coupon stack even quarter-to-date, that 5%-ish coupon is probably 15 basis points tighter. But the rest of the coupon stock on average, for example, our portfolio, and Bernie mentioned our returns quarter-to-date, are more consistent with about 5 basis points on average because all the other coupons didn't move nearly as much. So -- but from an overall perspective, I mean, that's not particularly challenging from our perspective. We certainly have a lot of liquidity in all of these coupons. Obviously, the largest cohorts are the lower coupons and you mentioned sort of those intermediate coupons. But there is ample liquidity. When you think about the $9 trillion market, there is ample liquidity for us to move into various coupons, into 4s, 4.5s. We have a sizable position in those coupons today. So there's plenty of liquidity for us to position the portfolio anyway we want from an overall coupon distribution perspective. And I would expect the current coupon to be the area that has the most focus from an external perspective. Harsh Hemnani: Got it. That's helpful. And then maybe on the duration gap, you touched on this a little bit. It's been growing for the past few quarters, and it adds that downgrade protection in an environment where prepayment risks are elevated. How should we expect that to evolve over the coming quarters? And then what's the boundaries around that, that we should be thinking about? Peter Federico: Yes. You're right. I mean, I think we ended the quarter, our duration gap was like [ 0.3/10 ] a year or something like that. It's larger than that today because the 10-year has backed up. So right now, we have about a half a year -- that was 0.4 at the end of last quarter. I think it's just a little higher than that, maybe 0.5 this morning. Because the 10-year now is up about [ 420 ] or a little bit above. So to the extent that the 10-year rate stays here or maybe moves a little higher, I would expect our duration gap to widen even more because I think the risk to lower rates would obviously increase. I don't expect the 10-year to move very much above, say, [ 435 ] and I expect there to be some risk that it gets back down closer to 4%. So our duration gap probably in this neighborhood where we'll operate from a historical perspective, just to give you some guidance. I mean, I would say in the half year-ish type range, somewhere between 1/4 of year and 3/4 of the year would be typically where we would operate. Operator: We have now completed the question-and-answer session. I'd like to turn the call back over to Peter Federico, for concluding remarks. Peter Federico: Great. Thank you, operator, and thank you, everyone, again, for participating. We're obviously very pleased to be able to deliver outstanding results for our shareholders in 2025, and we look forward to 2026 in the environment that we're in and look forward to speaking to you again at the end of the first quarter. Thank you. Operator: Thank you for joining the call. You may now disconnect.
Operator: Good day, and welcome to the Hope Bancorp 2025 Fourth Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Maxime Olivan, Senior Strategic Finance Manager. Please go ahead. Maxime Olivan: Thank you, Drew. Good morning, everyone, and thank you for joining us for the Hope Bancorp Investor Conference Call for the fourth quarter of 2025. As usual, we will be using a slide presentation to accompany our discussion this morning, which is available on the Presentations page of our Investor Relations website. Beginning on Slide 2, let me start with a brief statement regarding forward-looking remarks. The call today contains forward-looking projections regarding the future financial performance of the company and future events. Forward-looking statements are not guarantees of future performance. Actual outcomes and results may differ materially. Hope Bancorp assumes no obligation to revise any forward-looking projections that may be made on today's call. In addition, some of the information referenced during this call today includes non-GAAP financial measures. For a more detailed description of the risk factors and a reconciliation of GAAP to non-GAAP financial measures, please refer to the company's filings with the SEC as well as the safe harbor statements in our press release issued this morning. Now we have allotted 1 hour for this call. Presenting from management today will be Kevin Kim, Hope Bancorp's Chairman, President and CEO; and Julianna Balicka, our Chief Financial Officer. Peter Koh, our Chief Operating Officer, is also here with us as usual and will be available for the Q&A session. With that, let me turn the call over to Kevin Kim. Kevin? Kevin Kim: Thank you, Maxime. Good morning, everyone, and thank you for joining us today. I'm very pleased to report that we ended 2025 on a positive note with strong earnings growth in the fourth quarter. Beginning with Slide 3, you will find a brief overview of our results. Net income for the fourth quarter of 2025 totaled $34 million, up 42% year-over-year from $24 million in the year-ago fourth quarter. Quarter-over-quarter, net income rose 12% from $31 million in the third quarter, driven by growth in net interest income, strength in customer fee income, lower provision for credit losses, and a lower tax expense, partially offset by higher operating expense. Looking back at the year as a whole, we significantly lowered our cost of deposits, reduced our reliance on broker deposits, enhanced our earning assets mix, added experienced senior leadership and talent to support our revenue-generating capabilities, and strengthened our asset quality with a steady decrease in criticized loans in each quarter of 2025. We also expanded our banking footprint to the strategically attractive market of Hawaii via the Territorial Bancorp acquisition, which closed in April 2025. In sum, we were able to optimize our balance sheet and meaningfully improve our underlying core profitability metrics. As we look ahead, we are excited about the opportunities in 2026 and believe we are well positioned to continue making progress towards our medium-term financial goals. I want to express my sincere appreciation for the dedication of our colleagues at Bank of Hope. Their steadfast commitment to excellence has propelled our organization forward and strengthened our position as the leading regional bank serving multicultural communities across the Continental United States and Hawaii. As we navigate the path ahead, I am confident that our collective focus and hard work will drive even greater positive outcomes in the years to come. Moving on to Slide 4. All our capital ratios increased quarter-over-quarter and remain well above the requirements for well-capitalized financial institutions. Our Board of Directors declared a quarterly common stock dividend of $0.14 per share payable on or around February 20 to stockholders of record as of February 6, 2026. Our Board of Directors also reinstated our prior share purchase authorization, which still has $35 million available. Our healthy capital ratios position us to selectively and prudently return capital to shareholders via a share buyback program while maintaining strong overall capital levels to support growth opportunities and common stock dividends. Continuing to Slide 5. At December 31, 2025, gross loans totaled $14.8 billion, up 1% quarter-over-quarter, equivalent to 4% annualized, driven by broad-based growth across commercial real estate, residential mortgage, and commercial and industrial loans. Year-over-year, gross loans are up 8% largely reflecting the impact of the Territorial acquisition and organic residential mortgage growth. Loan production momentum has improved throughout 2025 with fourth quarter 2025 production volumes up 39% relative to the year-ago quarter. At December 31, 2025, deposits totaled $15.6 billion, up 9% year-over-year, primarily due to the Territorial acquisition and down 1% from September 30, largely due to typical fourth quarter fund movements in certain commercial clients, which normally return in the first quarter of the year. Our strategy is centered on building a durable deposit base by expanding primary customer relationships and improving funding efficiency through thoughtful mix management and pricing discipline. In 2025, we continue to reduce our reliance on broker deposits, which declined 15% year-over-year. Overall, we are pleased with the progress we are making in strengthening the organization. Our continued investments in people and capabilities are reinforcing disciplined growth, expanding our banking franchise, and deepening client engagements as we broaden our market footprint. With that, I will ask Julianna to provide additional details on our financial performance for the quarter. Julianna? Julianna Balicka: Thank you, Kevin, and good morning, everyone. Beginning on Slide 6. Our net interest income totaled $127 million for the fourth quarter of 2025, an increase of 1% from the prior quarter and up 25% from the fourth quarter of 2024. The fourth quarter 2025 net interest margin was 2.90%, up 1 basis point from the third quarter, reflecting the positive impact of lower funding costs, which more than offset the headwind from lower earning asset yields. Year-over-year, our net interest margin expanded by 40 basis points from the fourth quarter of 2024, primarily driven by lower cost of interest-bearing deposits and higher investment securities yields, the latter being partially repositioned in 2025. On Slide 7, we present the quarterly trends in our average loan and deposit balances and our weighted average yields and costs. Reflecting the impact of Fed funds target rate cuts, our average loan yield declined by 12 basis points and the cost of average interest-bearing deposits decreased by 17 basis points from the previous quarter. In 2026, we expect to benefit from two ongoing tailwinds in our balance sheet, the upward repricing of maturing 5-year commercial real estate loans to current market rates and the downward repricing of time deposits. On to Slide 8, where we summarize our noninterest income. In the fourth quarter of 2025, we realized growth across a number of fee income lines and strength in customer level swap fees was a highlight. Throughout 2025, management has been focused on improving fee income execution to diversify the bank's revenue streams. For example, customer level swap fees were $6 million for the full year of 2025, an increase of 270% from $1.6 million in 2024. During the fourth quarter, we sold $46 million of SBA loans compared with $48 million in the third quarter. Accordingly, we recognized SBA loan gain on sale of $2.6 million for the fourth quarter compared with $2.8 million for the third quarter. Moving on to noninterest expense on Slide 9. Our noninterest expense totaled $99 million in the fourth quarter of 2025, up from $97 million in the third quarter. The sequential quarter increase was mainly driven by compensation-related costs, reflecting the impact of hiring to support the company's strategic initiatives and revenue-generating capabilities. The year-over-year increase in noninterest expense from $78 million in the fourth quarter of 2024 additionally reflected the inclusion of Territorial Savings Bank operating expenses. The fourth quarter 2025 efficiency ratio was essentially stable linked quarter at 68%, with revenue growth effectively absorbing the incremental investments that we have been making. Next, on to Slide 10. I will review our asset quality, which steadily improved throughout the year with sequential quarterly balance decreases in criticized loans in each of the quarters of 2025. This reflected our disciplined and proactive approach to underlying -- underwriting and portfolio management as well as successful workouts of problem loans. At December 31, 2025, criticized loans were $351 million, down 6% quarter-over-quarter and down 22% year-over-year. The sequential quarter improvement included a 48% linked quarter decrease in C&I special mention loans. The criticized loan ratio improved to 2.39% of loans at December 31, 2025, down from 2.56% at September 30, 2025, and down from 3.30% at December 31, 2024. Net charge-offs were $3.6 million for the fourth quarter of 2025 or annualized 10 basis points of average loans compared with $5.1 million or 14 basis points annualized in the third quarter. The fourth quarter of 2025 provision for credit losses was $7.2 million compared with $8.7 million for the third quarter of 2025. The quarter-over-quarter decrease in the provision for credit losses primarily reflected lower net charge-offs and the linked quarter change in the allowance for unfunded commitments. The allowance for credit losses totaled $157 million at December 31, 2025, up from $152.5 million at September 30. The allowance coverage ratio was 1.07% of loans receivable at December 31, 2025, up 2 basis points compared with 1.05% at September 30. With that, let me turn the call back to Kevin. Kevin Kim: Thank you, Julianna. Moving on to the outlook on Slide 11. We present our management outlook for the full year 2026. We expect to see year-over-year loan growth in the high single-digit range in 2026, continuing to build on the growth momentum from the second half of 2025 and supported by the hiring that we have been making in our frontline teams throughout 2025. We expect year-over-year revenue growth in the range of 15% to 20% for 2026. This will be driven by our loan growth outlook, continued net interest margin expansion, and strong fee income growth. In terms of net interest income, our budget assumes two Fed funds target rate cuts, 25 basis points each in June and September 2026, in line with the current forward interest rate curve. In addition, we anticipate a tailwind to net interest margin expansion from the downward repricing of time deposits as well as from the upward repricing of maturing commercial real estate loans to current rates. In terms of fee income, we expect to see a continuation of the strong customer fee income momentum that we delivered in 2025. Overall, our outlook is for year-over-year pre-provision net revenue growth, excluding notable items, to be in the range of 25% to 30% for the full year 2026. This reflects the combination of our revenue growth outlook and positive operating leverage. The investments that the bank has been making in people and platforms to strengthen its franchise are anticipated to support our revenue growth outlook in 2026. Going forward, we would consider the fourth quarter 2025 noninterest expense level to be a reasonable starting quarterly run rate for 2026, factoring in ongoing plans to support revenue-generating hires, strengthen frontline capabilities as well as manage quarterly fluctuations. Our outlook assumes a steady asset quality backdrop and an effective tax rate between 20% and 25% on a full-year basis. With that, I will briefly review our medium-term financial targets on Slide 12. We continue to make progress towards our medium-term financial targets and believe we are well positioned to achieve these goals. Our bottom line financial target continues to be a return on average assets of approximately 1.2%. To achieve this metric, we are targeting loan growth in the high single-digit percentage range and revenue growth over 10% on an annual normalized basis. The loan growth target is part of our outlook and plan for 2026 and is expected to drive our revenue growth alongside continued expansion of net interest margin and strong fee income growth. We expect to exceed our normalized revenue target this year. Over the medium term, we are continuing to target an enhanced efficiency ratio. Our current target is for an efficiency ratio in the mid-50 percentage range which reflects our recent and planned strategic investments in the business and personnel to support the development of our commercial and corporate banking capabilities. We believe that our efficiency enhancement will come from a combination of sustained strong revenue growth, disciplined expense management, and ongoing operational process improvement. Improved efficiency remains a medium-term target, and we expect to make progress on the efficiency ratio in 2026 through positive operating leverage, but achieving our target will likely take more than just one year. Ultimately, the combination of attractive revenue growth and positive operating leverage over the medium term is expected to improve our return on assets toward the 1.2% target. In summary, building on the execution of our improved 2025 financial results, our stronger balance sheet positioning as well as targeted team and talent additions have enhanced our capacity to deliver disciplined, profitable, and sustainable growth, creating durable value for our stakeholders in the years ahead. With that, operator, please open up the call for questions. Operator: [Operator Instructions] The first question comes from Ahmad Hasan with D.A. Davidson. Ahmad Hasan: On for Gary Tenner here. Can I quickly just get the PAA accretion number? Julianna Balicka: I'm sorry, we don't disclose that number separately. Ahmad Hasan: All right. And then maybe can I get your thoughts on deposit costs from here in terms of pricing? And do you guys disclose the spot rate for deposit costs? Julianna Balicka: We did not provide the spot rate for deposit costs on this call. I can look that up momentarily. One second. Our spot rate on total deposits was 2.68% as of December 31, 2025. And in terms of deposit costs going forward, as we mentioned in our remarks, the continued downward repricing of the CD portfolio as it turns over will continue to lower our deposit costs in the future. And then we reduced our non-maturity deposit rates alongside Fed fund cuts. So to the extent that there are future cuts, we will continue that practice, of course. And then thirdly, in our outlook embedded, there's also in terms of behind the DDA growth that we are anticipating and planning for in this year, we have been investing in strengthening our TMS treasury management products and services infrastructure and teams in order to be able to expand our customer relationships and capture more of the operating deposit wallet share. So an improved deposit mix will be the third factor in helping to reduce our deposit costs in 2026. Ahmad Hasan: Appreciate the color there. And then maybe last one for me. You guys mentioned new hiring as a potential lever for loan growth in your outlook slide. How should we think about new hiring going forward in 2026? Any sort of new hire targets you guys can give out? Julianna Balicka: Not specific new hire targets, but our business plan does have very specific roles outlined in the hiring that we are bringing on board. Our hiring is focused on supporting revenue generation and the capabilities related to that as well, obviously, frontline and related support. And so in terms of thinking about that from your perspective, I would say that if you start with the fourth quarter run rate that you saw that already has embedded in it, the hiring that we've made in 2025. And then from here on out, when you think about 2026, we're going to continue to add to the hiring. But I would think about it as an OpEx growth rate in the low single digits, sub-5%. Operator: [Operator Instructions] The next question comes from Kelly Motta with KBW. Unknown Analyst: This is Charlie on for Kelly Motta. I just wanted to dig into what the CD repricing looks like, as you mentioned, that down and repricing is a core driver of the NIM going forward. So any detail you can provide about the CD schedule and repricing there going forward into 2026? Julianna Balicka: So in terms of our CDs in 2026, we're looking at a repricing of $6.3 billion. So obviously, a lot of it reprices quickly. I mean CDs are by nature, 12 months or less. And so maybe for the near term, in the first quarter, we've got a total of $2.5 billion of CDs repricing and that weighted average rate that they're repricing from is 3.99%. And the new CDs have been coming in at -- one second, I'll tell you. The new CDs have been coming in at somewhere between 3.90%. Well, actually, I'll take that back. The branch CDs were coming in at that 3.90% kind of percent level. So there's a little bit more competitive, but we also are benefiting from repricing of institutional CDs, and those are coming in at more kind of lower pricing. And so that kind of pricing has been coming in at 3.70%. So it's going to be a blend of both kind of going forward. Unknown Analyst: Awesome. And then I guess just following up on the overall margin dynamics. Can you remind us any sensitivity to cuts and how you view the overall margin expansion kind of heading into 2026? Julianna Balicka: Sorry, can you repeat your question? Unknown Analyst: I guess, the overall margin dynamics and any sensitivity to cuts and how you view kind of the margin expansion from here heading into 2026? Julianna Balicka: Actually, I need to make a correction. The 3.90s that I quoted you from the branch CDs, I was reading from the roll-off WACC column. So I'm very sorry, let me correct that. The new roll-on from branch CDs has been in the 3.75% to 3.80% range. Let me make that correction. And the sensitivity of our margin to the rate cuts, I would probably take a look at the third quarter and the fourth quarter margin relative to rate cuts you've seen in this half of the year and extrapolate from that. I mean, at this point in time, margin -- the rate cuts are expected in the second half of next year. So a lot can change between now and then. So I'll just extrapolate from recent trends. Unknown Analyst: Okay. And I guess from a high level, like looking back on the year, you guys entered Hawaii, just an update on the operations there and the strategy there, if you're hiring teams are still stabilizing operations. Kevin Kim: Yes. Our focus in '25 in Hawaii was to ensure the successful integration of the teams and add resources as necessary. And during the transition period in 2025, we were pleased to see that we did not experience any meaningful deposit fluctuations and the reception by our customer base in Hawaii was pretty positive. In 2026, we are looking forward to generating growth from the strategically attractive market in Hawaii. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Kevin Kim, CEO, for any closing remarks. Kevin Kim: Thank you. Once again, thank you all for joining us today, and we look forward to speaking with you again next quarter. So long, everyone. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.