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Operator: Good morning, ladies and gentlemen. Welcome to today's Encompass Health Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Just a reminder, today's call is being recorded. And if you have any objections, you may disconnect at this time. I will now turn the call over to Mr. Mark Miller, Encompass Health's Chief Investor Relations Officer. Mark, please go ahead. Mark Miller: Thank you, operator, and good morning, everyone. Thank you for joining Encompass Health's Fourth Quarter 2025 Earnings Call. Before we begin, if you do not already have a copy, the fourth quarter earnings release, supplemental information and related Form 8-K filed with the SEC are available on our website at encompasshealth.com. On Page 2 of the supplemental information, you will find the safe harbor statements, which are also set forth in greater detail on the last page of the earnings release. During the call, we will make forward-looking statements, such as guidance and growth projections, which are subject to risks and uncertainties, many of which are beyond our control. Certain risks and uncertainties, like those relating to regulatory developments as well as volume, bad debt and cost trends that could cause actual results to differ materially from our projections, estimates and expectations are discussed in the company's SEC filings, including the earnings release and related Form 8-K and the Form 10-K for the year ended December 31, 2025, when filed. We encourage you to read them. You are cautioned not to place undue reliance on the estimates, projections, guidance and other forward-looking information presented, which are based on current estimates of future events and speak only as of today. We do not undertake a duty to update these forward-looking statements. Our supplemental information and discussion on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information, at the end of the earnings release and as part of the Form 8-K filed yesterday with the SEC, all of which are available on our website. I would like to remind everyone that we will adhere to the 1 question and 1 follow-up question rule to allow everyone to submit a question. If you have additional questions, please feel free to put yourself back in the queue. With that, I'll turn the call over to our President and Chief Executive Officer, Mark Tarr. Mark Tarr: Thank you, Mark, and good morning, everyone. Our Q4 performance was again very strong, capping a stellar 2025. Our 2025 revenue increased 10.5%, driven by 6% discharge growth and pricing growth benefiting from patient mix and patient outcome quality. 2025 EBITDA grew 14.9% as we gained operating leverage and exercised disciplined expense management. Most notably, premium labor spend in 2025 declined by more than $21 million from 2024, even as we added capacity and significantly increase the number of patients we treated. Our quality and patient outcome scores for 2025 were outstanding. Our full year discharge to community rate was 84.6%, discharge to acute care was 8.6% and discharge to SNF rate was 6.1%. Each of these quality metrics is favorable compared to the industry average. I'd like to recognize our clinicians and support staff who bring their expertise and compassion to our hospitals every day and deliver outstanding patient care. We continue to generate attractive returns from the investments we are making and capacity additions. In 2025, we added 517 beds, 390 via 8 new hospitals and 127 through the addition of beds to existing hospitals. We will continue investing in capacity additions as the underlying growth in the target demographic remains at approximately 4% and the demand/supply gap of licensed IRF beds continues to widen. We'll be augmenting our historical two-pronged approach to capacity expansion, de novo and bed additions with a third modality, small-format hospitals beginning in 2027. This will facilitate a hub and spoke strategy to larger and growing markets. In October, we converted our enterprise resource planning, or ERP system, to Oracle Fusion without significant disruptions to our business. Fusion provides us a flexible and sustainable cloud-based IT infrastructure to support our growing business. We are keenly aware of market anxiety regarding IRF industry regulatory changes, specifically the extension of RCD and the initiation of the team model. Beginning with RCD, during 2025, we undertook significant engagement with Palmetto and CMS to ensure correct and consistent application of reimbursement criteria. Our 7 hospitals in Alabama currently have an aggregate average affirmation rate of approximately 93% for cycle 4, which we believe validates our admissions and documentation practices. Leveraging our experience in Alabama, we believe we are prepared for the expansion of RCD into Texas and California this year. The max is responsible for our hospitals in these states are Novitas and Noridian. Novitas, the MAC responsible for most of our hospitals in Texas, has gained substantial expertise with RCD in Pennsylvania, where providers have achieved very favorable affirmation rates. As RCD extends to other states, and we elect 100% prepayment review, affirmation of our claims should reduce our exposure to other Medicare claims audits. The TEAM model implementation began on January 1. Encompass has 89 hospitals in the initial team markets, 41 of which are joint ventures with acute care partners. As a reminder, there is no downside risk to the subject acute care hospitals in 2026 under the default track. As we have consistently done with all regulatory changes, we have prepared extensively for team. It is another episodic payment pilot similar to previous models such as CJR and B-P-C-I, or BPCI, versions of which have been continuously in place since 2014. In those prior cases, concerns regarding the impact to our patient flows were greatly overstated. The presence of these models notwithstanding with the exception of 2020 for obvious reasons, we have recorded positive total and same-store discharge growth every year. Regulatory change is a constant in our business, and we have a long track record of successfully adapting and continuing to grow as the underlying demand for IRF services continues to grow. Our strategic relationship with Palantir continues to bear fruit. In 2025, we focused on initiatives that streamlined admission documentation and enhanced our responses to claims denials. We have recently extended and expanded our agreement with Palantir and look forward to additional successes in 2026 and beyond. In 2025, in addition to substantial investments we made in our operations, we allocated $158 million to share repurchases and returned in excess of $70 million in cash dividends. We maintain a strong balance sheet with year-end net financial leverage of 1.9x. The need for the services we provide has never been greater and is growing. We are uniquely positioned to fill the void. We are incredibly proud of our recent historical performance, but we do not rest on our laurels. Our focus is on the future, which for Encompass Health is very bright. Our company has never before been presented with greater opportunity and we have never been better positioned to capitalize. Our expectation for continued growth is reflected in our initial 2026 guidance. I'll now turn it over to Doug to provide some additional details on Q4 and the specifics of our 2026 guidance. Douglas Coltharp: Thank you, Mark, and good morning, everyone. Q4 revenue increased 9.9% to $1.5 billion, and adjusted EBITDA increased 15.9% to $335.6 million. The revenue increase was comprised of 5.3% discharge growth and a 4.1% increase in net revenue per discharge. Net revenue per discharge benefited from a $2.7 million settlement with a managed care payer related to prior year claims. Bad debt expense for the quarter was 2.1%, flat on a year-over-year basis. Q4 SWB per FTE increased 2.1%. Premium labor costs comprised of contract labor and sign-on and shift bonuses declined $5.8 million from Q4 '24 to $23.8 million. This was the lowest since the first quarter of 2021. Contract labor FTEs as a percent of total FTEs was 1.1%, also the lowest since the first quarter of 2021. Benefit expense per FTE increased 2.9% as we anniversaried the large increase in group medical expense experienced in Q4 of last year. Net reopening and ramp-up costs were $2.9 million in Q4 '25, bringing our full year total to $13.9 million. Q4 net costs were lower than expected as 4 of our 8 hospitals opened during 2025, contributed positive adjusted EBITDA during the quarter, and the losses for our hospitals opened during Q4 were less than budgeted in part due to faster Medicare certifications. We continue to generate significant free cash flow. Q4 adjusted free cash flow increased 23.6% to $235.4 million, bringing our 2025 full year total to $818 million, an increase of 18.5% from 2024. The strength of our cash flow allowed us to fund $736 million of capital expenditures, $158 million in share repurchases and $71 million in cash dividends, while holding long-term debt essentially flat on a year-over-year basis. Our year-end net leverage ratio of 1.9x connotes substantial flexibility for continuing investments in our business augmented with shareholder distributions. Moving on to guidance. Our 2026 guidance includes net operating revenue of $6.365 billion to $6.465 billion, adjusted EBITDA of $1.34 billion to $1.38 billion and adjusted earnings per share of $5.81 to $6.10. The key considerations underlying our guidance can be found on Page 11 of the supplemental slides. And with that, we'll now open the lines for Q&A. Operator: [Operator Instructions] We'll go first this morning to Matthew Gillmor of KeyBanc. Matthew Gillmor: I thought I might ask a couple of questions on the volume front. The way volumes evolve this year was stronger in the first half and then moderate a little bit in the back half. I think there were some comp issues you talked about last call. I was curious if you could sort of flesh those out and then help us think through any comp issues we should be thinking about during 2026, especially the dynamic of the de novos rolling into the same-store base and that timing issue? Douglas Coltharp: Yes. So certainly, in the back half of the year, we were up against some pretty challenging comps. Q3 '24 total discharges were up 8.8% and 6.8% of that was in same-store. And then in a similar fashion, when you moved into Q4 of last year, we were up 8.3% in terms of total discharges and 5.8% of that was in same-store. It was also the case that with regard to contributions from new stores, we were more skewed towards the back end of this year with new hospitals coming on board. You may recall that we had 1 hospital that opened in the last week of the third quarter and then 3 hospitals that opened in the fourth quarter, 1 in each month. And then there was the issue of the unit consolidations and closures that we talked about last quarter. And so as a reminder, we had 2 units, 1 in Sewickley, Pennsylvania, and 1 in Cincinnati, Ohio. Those were spaces that were leased from a host acute care hospital. For various reasons, we terminated the lease, and we anticipate that we'll consolidate that volume into another hospital in the market, but there's a period of time in which that's not happening. We estimated that, that was a headwind of about 30 basis points to total and same-store discharge in Q3. Cincinnati actually closed relatively late in Q3, so we had a full quarter impact in Q4. And so the impact in Q4 was probably closer to 45 basis points. Mark Tarr: I think it's worth noting in terms of our track record of bringing on our de novos. Last year was a good example of how if we can get the Medicare survey quicker than having a long drug out awaiting period for them to come into the survey. It certainly benefits us. Our teams have done a great job getting these hospital staffed, getting the word out in the marketplaces, our design and construction has done the same thing. There are a lot of factors outside of our control as you go through the start-up processes. But our team has just done a really nice job in delivering these hospitals pretty much when the due dates are there. So that has benefited from us in our continued planning and execution. Matthew Gillmor: Got it. Understood. And then as a follow-up, I thought I might get a comment or 2 on the mix. It seemed like the Medicare fee-for-service mix was a little bit higher in the fourth quarter. Is there something you'd attribute that to? And if you had any comments on just sort of the growth across different payer classes that would be great? Douglas Coltharp: Yes. Fee-for-service growth was strong in the fourth quarter. That's good because that's our best payer. We did experience some challenges with regard to Medicare Advantage in the fourth quarter, and it was specifically with 1 national payer where we saw the conversion rate drop, not insignificantly in the fourth quarter. I'm not going to name names right now. I will tell you that if this persists into next year, we may be inclined to name names. The referrals within that specific Medicare Advantage plan were actually up nicely, high single digits for the converter -- for the quarter, but conversion rate, which is the ratio of admits to referrals was down significantly. And there's no reason for that. Again, as we look at the underlying nature of those referrals, they were consistent with the referrals we were getting across the system and across payers. And so what that translates into is, for whatever reason, that planned elected to start the care to a segment of the Medicare beneficiary population, which we believe is in direct contravention of Medicare coverage requirements. We're going to be undertaking some specific actions to address that as we move into Q1. That includes maintaining active communication with the subject plan and also with CMS regarding what we've view as noncompliance with the Medicare coverage requirements. As we did in the fourth quarter, we think that there's going to be an opportunity to backfill with IRF-appropriate patients covered by fee-for-service, other MA plans and the continued growth in our veterans community care network. We will ensure in terms of doing our own part that our clinical liaisons are responding timely to all referrals and doing so with high-quality medical necessity documentation. It's probably an opportunity to enhance that process with some AI tools. And we're going to be implementing an admit and appeal strategy on those MA denials that we believe are clearly in contravention of the Medicare coverage requirements. And then finally, we'll make sure that we continue to reinforce the value proposition for IRFs with the Medicare beneficiaries, making sure they understand the right of choice that they have, with referral sources, with respective patients and also with families and caregivers. Patrick Tuer: Matt, this is Pat. Just to add a couple of points to what Doug said. So one of the callouts he made was on the VA program. We've talked about that before. We continue to drive that initiative and have scaled up some best practices and education across our company and really pleased with the results. So that has now grown to represent 19% of our managed care volume. Our third consecutive quarter of discharge growth in that segment over 20% on the quarter, finishing around 25% to bring the year to 22% growth. We continue to see a lot of upside in that segment, and it's a great opportunity for us to provide IRF access to veterans. The other point that I'll make is on the MA admit and appeal strategy, we've never really taken -- undertaken such an effort before. And 2 of the major payers have Medicare -- excuse me, have conversion rates below 20%. And what we're going to do in a couple of these markets is, if the patient meets Medicare coverage criteria, we're going to admit those patients. And we're going to go through the different levels of appeal process. There's 5 levels of administrative appeal all the way to the ALJ and Federal District Court, where we're going to advocate for access to care. Douglas Coltharp: And these issues with this particular MA plan notwithstanding, and they're really not new, we've seen this pop up from time to time. There is a significant population of IRF-appropriate patients who are still not being treated in IRF. And so there's -- the pond for us to fish out of is plenty big. Operator: We'll go next now to Ann Hynes with Mizuho Securities. Ann Hynes: Thank you for all the detail on some of the regulatory unknowns. That was very helpful. Can you tell us just like how these pilots usually play out? Like I know the team pilots 5 years, 2032, what typically happens after that pilot program? Like do most of these pilots just kind of die out or are they implemented nationally? If you can give us some examples, that would be great. Mark Tarr: No. Ann, if you go back and even back to 2016, 2015, with the plans I mentioned, the CJR, there was a little bit of both in terms of people required to do it or voluntarily got into it. You saw some people really go into it strong, kind of what I would refer to on the bleeding edge. Then you saw a lot of systems kind of wait and see what happens and didn't want to get after it too far. I think it's the nice thing about our ability to work with our joint venture partners in these markets where team will come out. We have a very collaborative approach. Pat and his team have been out talking to all the major systems in our markets impacted to see what their plans are and also to bring forth our value proposition because there's a big quality factor in teams that where the acute care hospitals will be penalized for readmissions. So that's a big part of the value that we bring in to that. So I think that, in large part, as I noted, there is typically an overreaction in terms of what people think will be the impact on our facilities. And with time, as noted, we just continue to grow through them because there are enough patients that would fall outside these plans that can benefit from the care that we provide. So I'll ask Pat just talk a little bit about what he and his team have done, I think specifically in the Boston marketplace, where we have some team introduction. Patrick Tuer: This is Pat. Thanks, Mark. So just to reinforce what Mark said around team and to get a part of your question, so if you look back to BPCI and BPCI Advanced, both of them were 5-year programs that were not expanded after the 5 years. And if you look between those 2 models and then CJR, we added or acquired approximately 4,500 beds during that time. So significant growth in spite of those models. So there's really 3 things that I'll point out to you, aside from the VA strategy, which is a nice opportunity for us to continue to backfill any potential impact. But -- and aside from patient choice remaining. First is, we've had a lot of conversations in our marketplace. As Mark mentioned, Boston, 2 of our largest potential impacted hospitals are in the Boston marketplace. And frankly, we're not hearing a whole lot of chatter from them or our JV partners on that they're going to handle patients differently. In fact, they remain very focused on quality, length of stay, capacity constraints and readmissions. And those are all elements of our value proposition that we have executed on for decades to their benefit. Second, and Doug touched on this, there's substantial opportunity for us to backfill potential volume with other diagnostic categories. So if you think about stroke, brain injury, neuro, cardiac and pulmonary, those are patient categories where people are still twice as likely to end up in a nursing home than in an inpatient rehab hospital. So we put a lot of effort into working to increase our market capture there. And then third, from a team perspective, patients on dialysis with end-stage renal disease are exempt from team. About 4% of our volume currently falls into this bucket. But through our investments in Tableau, where we have almost 70% of our hospitals covered with Tableau and then the remainder with external dialysis, we have the capacity to slightly more than double that volume across our portfolio based on current utilization. So there's a lot of opportunity for us to backfill volume with IRF-appropriate patients across other diagnosis categories or within the team impacted groups as well. Mark Tarr: And at the risk of piling on, I'll just add a couple of things. First, our anecdotal evidence, and this has been consistent for multiple months right now as we canvass the acute care hospitals in the impacted markets is that there is very little focus on team from those hospitals. And it's perhaps not surprising as they face a substantially larger issues with regard to what's going to happen on Medicaid supplemental payments and what's going to happen with regard to the extension or the lack thereof of any ACA subsidies. Further, as we drill down and looked at the target prices that have been set for these conditions in the impacted markets, in almost all cases, regardless of the patient's condition, those target prices cannot be achieved unless the patient bypasses a post-acute inpatient stay, IRF or SNF altogether and go directly to the home. The only way that, that could be safely accomplished is if you increase the length of stay in the acute care hospital. And doing so by even a couple of days would completely erase any of the participation in the risk corridor. Patrick Tuer: And one last comment on this. We've done an analysis early. It's 1 month, but there's been no impact of team associated diagnoses categories within our team impacted markets. So it's really been no impact to volume. Operator: We'll go next now to Andrew Mok of Barclays. Andrew Mok: There was a pretty meaningful beat on labor costs in the quarter with improvements in both wage growth and EPOB. Can you help us understand the drivers of that in the context of moderating volume growth? Mark Tarr: Andrew, just real quick. I think it's kind of twofold. I'll ask Pat to talk specific about premium pay. But I think we're seeing some softening in the labor markets as a whole, which has been a positive thing for us for the last year or so. And then I think, secondly, while we've always been very disciplined around the use of premium pay and managing our staffing ratios, Pat has really dug in with his team to look at some of the outliers we had with our portfolio, and it's been meaningful. So Pat, do you want to give some detail? Patrick Tuer: Yes. And I'll give credit to a few different groups here. So first, our operators have done a tremendous job both bringing in -- excuse me, bringing down turnover. Our in turnover continues to drop. It's at pre-pandemic levels. And at the same time, our centralized talent acquisition team continues to do a tremendous job on the hiring front. So we added, from a same-store perspective, 300 net RNs in 2025, and that brings our 4-year total up to around 1,700. So just a tremendous job to both of those groups there. We feel like there is -- while the rate of improvement will slow that we have an opportunity to potentially narrow the gap in variation in some of our higher utilizing markets on premium pay, in particular. Our 10 most challenged markets, which represent a significant portion of our spend, we are substantially increasing our efforts from our recruiting team as well as recruitment marketing to try to get at those markets where hiring has been a little slower. In particular, I'll point out that we've -- all the growth that we've had in the de novo markets, we have opened those without contract labor. So we are taking some of the resources that we would use to open a hospital and staff a hospital, and we're going to apply that approach to these more challenged markets as well. And then on the EPOB front, while there is some small timing impact of de novos ramping, we are relentless in our pursuit of operational discipline across our regions and in our local markets. And we do that in a way that does not sacrifice quality outcomes or clinical excellence. Mark talked about our discharge outcomes. We had records in 2025 of our discharge outcomes as well as patient satisfaction. We were able to get at these additional efficiencies, and we'll continue to work towards those without sacrificing anything on the clinical front. Douglas Coltharp: And then just to go through the specifics on the Q4 labors, as we mentioned, total SWB per FTE in Q4 was up 2.1%. The composition of that core SW, which does not include contract labor per FTE was up 2.8%, benefits, again, anniversarying the substantial increase in Q4 of last year was up 2.9%, and premium labor was down year-over-year $5.8 million. The EPOB came in at 3.38. That was better than our expectation, and that was largely attributable to the past ramp-up of the de novos that opened in 2025. And as we cited during our comments previously, that was boosted in Q4 by the fact that we got our Medicare certifications on those openings faster than we had anticipated. We don't control that, so we can't guarantee it's going to happen on future openings, but it was a lift in Q4. Importantly, we were able to achieve all of these things with regard to our labor cost while holding nursing turnover at 20.2% for the year and therapy turnover at 7.8%. Patrick Tuer: One last comment here that I failed to mention is, we have talked about this before, but we have made a substantial investment in the development of clinical ladders and tweaking those to increase participation. Because if we can get a clinician on the ladder, their turnover is about 1/3 of what a non-laddered clinician is. And I'm really, again, proud of our operators. We have our nursing participation up to 32%. 36% of our therapists and 47% of our nurse techs are participating on our clinical ladders. Again, we still see upside here, but we're really pleased with our progress. Andrew Mok: Great. And just to clarify, the better labor and preopening -- the Medicare certifications coming in earlier, that's what's driving the better-than-expected preopening cost, correct? Is there anything else? Douglas Coltharp: No. Again, you had not only that impact from Q4, which was predominantly where it was, but the performance of the de novos that opened in 2025 prior to Q4, in Q4 was favorable, and we cited a number of those, 4 of those actually had positive 4-wall EBITDA in Q4. Operator: We'll go next now to Pito Chickering of Deutsche Bank. Pito Chickering: So I apologize in advance for this one, but I want to go in the weeds and talk about the Alabama RCB experience. From a process perspective, can you explain with the 93% affirmation rate, what happens with a 77% of claims that weren't affirmed? When you appeal at 7%, so what percent of those are you winning? And when you appeal to the administrative law judge level, what percentage of those are you winning? So at the end of the day, after you peel and go to the ALJ, what percent of these claims do you guys need to reserve for? Douglas Coltharp: Well, you were in line. You were down in the weeds. Let me first kind of pull us up a little bit, and then I'll see if I can get down to that level. So first of all, there's a perception out there that both team and RCD represent new risk to IRFs. And Mark referred to some of this. In our opinion, they do not. They are ordinary course of business. We have lived continuously with episodic payment models since 2014. And CMS has always had the right audit 100% of IRF Medicare claims on both a prepayment and post-payment basis. And they have done so under a series of programs such as TPE, ADR, RACK, SMRK, et cetera. RCD is just a new acronym for the same old thing. The Medicare coverage requirements under RCD have not changed. The documentation requirements under RCD have not changed. And the third parties performing the RCD audits have not changed. The potential upside to RCD is that if we choose to remain on a 100% review, and Mark alluded to this in his comments, it potentially obviates the other audit programs. Moving specifically to Alabama. 93% is the current affirmation rate for the 7 hospitals in Alabama, where we're dealing with a difficult MAC who continues to non-affirm claims for reasons that are in contravention of Medicare coverage requirements and guidelines. As a result, we appeal the overwhelming majority of non-affirm claims through the multiple levels available to us. And although it's still early to call the ultimate resolution rate because those claims are still pending and because the sample size is relatively small, we're having a good success reversing the denials. We continue to educate Palmetto, and we continue to involve CMS, and we believe that it is more likely than not that, that 93% affirmation rate moves up. When we look at the Pennsylvania experience, it covers more hospitals, and we believe that, that rate, 98% to 99% is more representative of where a broadly adjudicated RCD program will land. And so all of that suggests to us that the go-forward bad debt expense rate that we experience is going to be consistent with our recent historical experience, thus the 2% to 2.5% number that is included in our 2026 guidance. Patrick Tuer: Just 1 quick addition on RCD in Alabama, not necessarily on the bad debt front, but just on the volume and occupancy front. So virtually, again, no impact here. We have expansions that will be underway at 3 of our Alabama hospitals. We're going to be filing for the CON for 3 additional expansions. So that covers 6 of the 7 hospitals in the state. So on the volume side, unimpacted. Douglas Coltharp: Look, Palmetto is a pain in the butt in Alabama. They were a pain in the butt before RCD. Pito Chickering: Okay. Fair enough. That's a pretty honest response. A follow-up question -- that you talked about earlier. I think you said that the referrals were up high single digit, but admissions were way down. Can you talk about generally what you see from MA on conversion ratio from where that went this quarter? And then from a legal perspective, how much leeway does MA have to deny post-acute care? Douglas Coltharp: Yes. So I'll start and then maybe pass it over to Pat. So historically, our total MA conversion rates have run between 25% and 30%, and that's going to compare to Medicare fee-for-service, which is the same patient population, subject to the same Medicare coverage requirements, which is run in the mid-60%. And so that's been a problem all along. Particular payer who shall name named us for at least this quarter, has always been our lowest conversion rate, but they dropped by about 500 basis points in the quarter. This is, again, in contravention of Medicare requirements. So we do have the ability to take this directly to CMS. Because the change was so material in Q4, our first order of business is going to be to try to work directly with the plant itself and say, is there something different, is there something that we can do better to try to do that in partnership? But we're not going to wait and to see the effect of that before we get more aggressive with this admit and appeal strategy that Pat outlined just a bit earlier. Patrick Tuer: What I would add to that is, MA is required to operate with the same coverage criteria as traditional fee-for-service Medicare. They're allowed to have a prior auth requirement, which they do, but they are supposed to adhere to that same coverage criteria. And what we see on a daily basis, and this is not new, is the failure to adhere to that Medicare coverage criteria. So we have typically taken that in stride, and it's been a frustration for our referral sources. It's been a frustration for us. And most importantly, it's been a frustration for the seniors in this country that deserve our level of care. So we have decided that we're -- there's no teeth to the Medicare requirement right now that they have to do that. So we're in a position we're going to pilot this, and we're going to take these claims that are in alignment with the Medicare coverage criteria through the administrative appeal process, through the ALJ and potentially beyond. And we're optimistic. We feel like the facture is on our side here, and more importantly, we're really interested in making sure that seniors have access to our level of care in this country. Douglas Coltharp: I think it's important to note as well, perhaps another silver lining out of RCD is that the affirmation rates that we're seeing in Alabama and that the others are seeing in Pennsylvania suggest that under fee-for-service, which has that much higher conversion rate, the overwhelming majority of patients are appropriate for IRF care, which means that those that are being denied that access by Medicare Advantage are being done so again in contravention of Medicare coverage requirements. Operator: We'll go next now to Whit Mayo of Leerink Partners. Benjamin Mayo: Doug, just wanted to take your temperature on leverage and how you're thinking about the appropriate target. You're going to probably drift below 1.5x soon. Just any thoughts on upping the dividend more, stepping up buybacks on a permanent basis, maybe buying up leases? Just any updated views would be helpful. Douglas Coltharp: Yes. So maybe what we can do is kind of use our guidance to 2026 as a proxy for what things might look like. And so if you look at our free cash flow assumptions, the midpoint of those assumptions is right at about $828 million. Again, using the midpoint of other ranges within our growth CapEx, that's up $725 million. The dividend at its current level is $77 million. So that would suggest, again, if we are achieving our midpoint of EBITDA guidance and our midpoint of the free cash flow that we would fund those uses internally and still have about $25 million of cash. And that would leave us, all other things equal, at the end of 2026 with a leverage ratio of 1.83x. And that implies even if you wanted to be conservative and leave leverage at, say, 2x that there would be capacity for another $230 million to $250 million of buybacks or other distributions. There really aren't other opportunities to buyback leases. So I think to the extent that we generate excess cash and have capacity within the leverage ratio, the most likely utilization of that is going to be additional share repurchases and increases in the dividend. Benjamin Mayo: Okay. And then we haven't heard much about malpractice from you guys. Some of the other providers have been talking about it more. Just how did that develop in 2025, thoughts on 2026? You've got this new reasonable care standard change, I think, with malpractice. Does this change your views at all how you're thinking about it? Douglas Coltharp: Yes. We've seen no significant change in our GPL activity from 2024 to 2025. Operator: We'll go next now to A.J. Rice of UBS. Unknown Analyst: This is James on for A.J. I just wondering if you can give us some color on the rationale behind the changing development as you look to add these small format hospitals and what advantage is this type of hospital provides versus the traditional de novos? Douglas Coltharp: Yes. So it's the confluence of design and opportunity maybe with the dose of necessity cost in. And so from a design perspective, historically, we had trouble coming up with an economically feasible model that would be in the size range that we're talking about. But as we have ascended the learning curve with regard to our de novos, really, over the past 5 or so years, and been able to incorporate more in the way of prefabricated construction, whether in a hybrid model or fully, it's helped us kind of crack the code on this 24-bed prototype. It solves an issue for us where we've got 1 or 2 situations. One is, we've got an existing hospital in a market that doesn't have any more physical ability to expand and yet the demand of the market suggests that more beds are needed. And so this is an economically feasible way of adding more capacity into that market even on a chassis that can't be expanded. It's also the case that as we find in a lot of larger metropolitan markets in Dallas and Houston and Tampa or 3 that come immediately to mind that the overall market is growing, but based on traffic patterns and based on the growth in specific neighborhoods and geographies, the additional beds might best be positioned elsewhere in the market as opposed to in the existing hospital. So again, the standard format that we have come up with and the first will open in 2027 is what we acquire 2 to 2.5 acres based on specific topography. It is a single-story 24-bed chassis. It has got a smaller kitchen because there's no food preparation on site. Obviously, the gym is smaller because we've got a fewer number of patients. And we're able to leverage the management team and the marketing resources associated with the host hospital. So the returns are very favorable. Mark Tarr: It's a market density is a big part of the strategy. Not only you get scale from staff, but you get a brand recognition in the marketplace, which helps us with staffing as you have the employees and the workforce there starts to become more and more familiar with Encompass Health. We've seen that in markets. It gives us an opportunity to provide growth opportunities for our existing staff and management teams. So that helps with retention and also decreases the risk as we add another location in the marketplace. So we think there are a lot of benefits from the small format hospital. And as I noted, it's just yet another modality that we have to add capacity in a marketplace where the need is pointing out the required capacity. So we've got some strong plans going out in the future on this, and we think it's going to be really helpful as we expand that capacity. Douglas Coltharp: And it's important to note that because all of these small-format hospitals will be remote locations, meaning that they are tied to a host hospital, they operate under the same Medicare provider number, which in almost all cases means that managed care contracts and so forth can be extended and don't have to be renegotiated. It also means that you're not subject to another Medicare certification. And so you don't have to do the 33 patients and the ramp-up there. Patrick Tuer: This is Pat. I would also add that we do have 3 locations right now. They're not technically what we would consider a small format hospital, but they operate like it, and they are satellites of a main location. And they drive impressive results and returns. So we do have some experience with this operating model. This is a great way for us to scale this across the country. We have dozens of potential locations that we're going to be looking at for consideration. And we talked about growing or underserved -- excuse me, larger growing markets, but underserved or fringe markets have where we have a hospital are also candidates for this because you may have someone within -- location within 30 miles that it does not have the density of a new requirement for a new hospital, but they could benefit from a smaller location. And we'd still be able to get the leverage that both Mark and Doug have talked about. So we're really excited about this. I think it's going to be a big part of our strategy moving forward and a nice way for us to not only help patients but increase our returns as well. Operator: We'll go next now to Joanna Gajuk of Bank of America. Joanna Gajuk: So I guess I have 2 questions. So one, I want to start a follow-up on the team discussion. And then I have a question on volumes. So first on the team, so thanks for sizing up the exposure here. So 2% of volumes seems very manageable and you expect to be able to replace any lost volumes. So that's good. But just a couple of questions as we try to like do sum up maybe in the future, too. So are these procedures that is included, right, in the team model in the 5 categories, are those coming at an average revenue per district, that's much different than average? Any kind of direction would be helpful here. And it sounds like I just want to clarify, you don't assume much of an impact, I guess, to bottom line this year. But I just want to make sure like is there some sort of a number in terms of EBITDA headwind that you included in your '26 guidance? And with that comment around the acute hospitals are not taking risk in year 1, but would you expect things to change dramatically over time as these hospitals take more risk in the future years? Douglas Coltharp: So Joanna, this is Doug. I'm going to start with the margin and then I'm going to turn it over to Pat for the balance. So there is no real stratification of margin or real diversion of margin across our patient categories. And so it is true that reimbursement is tied to RIC into patient acuity into patient acuity. But when you drill down the specific patient level, you also have to factor in things like comorbidity. And whereas you may be getting a higher reimbursement for a more acute patient, that is in part due to the fact or large part due to the fact that, that patient requires more intense care and typically comes with a lower -- with a longer length of stay. So no real distinction between the margin profile of the patients that will be subject potentially to this demonstration into our other patients. Patrick Tuer: Thanks, Doug. So Joanna, this is Pat. I would say from a margin perspective, Doug is absolutely correct. No, we're not foreseeing any impact on margin. From a net revenue per discharge perspective, it's almost each of these are in line with our average net revenue per discharge. The only 2 that have slightly higher and I mean slightly higher are the ones associated with fractures, so lower extremity with fracture and then hip fracture. But again, we're not anticipating for this to be material. It's all reflected in our 2026 guidance, and we feel really good about our opportunities to backfill. The only other point that I'll make on team is the majority of our team impacted markets have less than -- well, 39 of the 89 have less than 10 discharges tied to team's diagnosis. Almost all of our team impact is tied to 50 markets and half of those are joint ventures. So again, we've reflected this in our guidance. We're really -- we think we're prepared to mitigate this if issues come up, but we're really just not hearing of any changes in referrals or admissions in our markets. Douglas Coltharp: I will note also just further on the margin issue. Part of the reason that you get to that parity with our average revenue per discharge on those particular categories that are subject to team is because those specific patients have more comorbidities that would make them less likely to actually be a participant within the team model in terms of diverting their care away from the IRF because they really need to be in that intense setting. Joanna Gajuk: Okay. That makes sense. And if I may, one question on volumes. I don't think you talked about some breakdown in terms of just the categories. In the past, you would talk about sort of the cardiology, neurology, orthopedic cases in the quarter. So if you can give us that color, that would be helpful. Douglas Coltharp: Well, we provide patient mix every quarter. And we provided the 2%. It's not a direct equation. It's convenient to try to look at this in isolation and just say I'm going to pick those RICs and assume that, that's an estimate for the volume that's in those categories. But that's missing 2 other things. One is the presence of comorbidities that is going to be an element that clinicians make in deciding the appropriate course of care. And the second is, let's say that you even had an acute care hospital that was extremely committed to all elements of team. Again, the only way that they would be able to achieve the target price in many instances is by increasing the length of stay so that they would have a patient who could safely bypass any inpatient -- post-acute inpatient setting. If they do that, the likelihood is that they would be looking for non-team patients where they could reduce the length of stay and that has been 1 of the key elements of our value proposition all along, which is the ability to take a more acute patient with a shorter length of stay in the acute care hospital so that would be offsetting volume there. So the team is not something that will happen in isolation. Patrick Tuer: Joanna, if you're talking about overall volume and just on a RIC basis, we did see nice growth in brain injury up 8.7%, cardiac up 5.1%, neuro 4.5%. Major trauma was up 5% and stroke was up 3.8%. So again, broad-based growth across diagnosis categories. From a mix perspective, with brain injury being our third largest discharge RIC category, that was up 40 basis points to be our largest mover. So again, that's something we're pretty excited about, especially given that it's not a team impacted diagnosis. Operator: We'll go next now to Brian Tanquilut of Jefferies. Brian Tanquilut: Maybe, Mark, as I think about concerns that are emerging on Medicare Advantage rates and how that could potentially translate to payer pressure on providers. I mean how are you thinking about that dynamic? And what are those discussions like with payers as you think about your scale and local market power? Mark Tarr: We always lead with our outcomes, Brian, and it's part of our value proposition. And I don't see that changing going forward. I think the concerns, particularly if you think about just team and some of the -- and certainly with the payers, the quality aspects and concerns around readmission rates back to acute care hospitals, it really puts the premium on a post-acute provider that can take care of these higher acuity patients like we do and have a low readmission percentage. So we're very diligent about leading with our data and our outcomes. When we go and meet with the payer or the medical director for that payer, it's very helpful that we can show them the differences that we can have with an Encompass Health Hospital versus nursing homes or even other IRF providers. So I don't think our strategy on that changes. If anything, we have more data and data sources now than what we did 5 or 10 years ago just to help create that competitive advantage for us. Douglas Coltharp: What is happening out there is the rate of growth in terms of new MA beneficiaries has declined very substantially. And if you listen to some of the dialogue in response to some of the rate updates and so forth coming out of the major plans, they are stating that they're intending to exit more geographies with regard to their MA plans, which is going to shift those patients over to fee-for-service, and that's not a bad outcome for us. Operator: We'll go next to now to Jared Haase of William Blair. Jared Haase: Maybe I'll just stick to one as well. You mentioned the expanded relationship with Palantir. So I'll ask on the technology front. It sounds like you've had some wins around administrative work and revenue cycle management. I guess 2 questions. Number one, just be curious if there's any kind of quick ways to quantify sort of cost savings or other metrics that you track in terms of that deployment? And then as you think about expanding that initiative, is that still broadly around areas that I would bucket under, let's say, revenue cycle management? Or are you seeing other areas of the business to optimize maybe around clinical care patient experience? Douglas Coltharp: Yes. So on the first, it is difficult to assign a specific ROI to the work that they're doing. But hopefully, what it's going to mean is that our success on claims denials is going to continue to improve. The manpower that we need to process those denials is going to decrease and can be shifted elsewhere. So there are going to be some real tangible benefits. In terms of new projects that we're working on, we are going to be focusing on CRM market analysis specifically to help us identify the optimal strategy for positioning in a market in terms of de novos. De novos with expansion capabilities and the use of small format hospitals. Revenue cycle management is something that we'll be looking at later this year and clinical staffing is another one that's on the table. Patrick Tuer: Just to add to that, we're looking for opportunities on the upside to enhance and elevate our clinicians. You talked about clinical care and patient experience in your question. I think that is certainly a goals of ours people don't go to medical school or nursing school or therapy school to become great at documenting and document for half of their shift. So we'll continue to evaluate opportunities to allow our clinicians to do what they do best and have to take care of patients. Operator: We'll go next now to Raj Kumar of Stephens. Raj Kumar: Just one quick one. As we kind of think about in the first quarter and maybe any potential impacts from the winter storm. I see that in your disclosures that one of the facilities that may have been slated for the first quarter was pushed back to the second quarter. So just curious maybe if there's anything embedded in guidance related to any potential winter storm impacts and how we should be thinking about that? Douglas Coltharp: No significant impact from the storm. I do want to call out, we've got 2 other closures that are going to impact Q1 as well. So the first is that we have operated since we acquired this facility in Lexington, Kentucky, Cardinal Hill, we've operated a 75-bed SNF unit. It's the only one -- only SNF unit that we have had, it ran at a low ADC, 25 ADC. Both the beds and the ADC were included in our IRF bed count and discharge number. And that unit basically had 0 profitability. We closed that at the end of December. So you're going to have some carryover impact from that. You'll have the continued impact, although lessening a bit from Cincinnati and Sewickley. And then we've got one more unit consolidation that is taking place, and that is we have a unit in Bridgeport, West Virginia, which is in the Morgantown market that is housed within an acute care hospital. It's at the end of its lease. So we are closing that effective February 28. Unmitigated, meaning not picking up volume elsewhere in the market as we go into 2026, that creates about a 70-basis-point headwind for 2026 discharge growth, all of which is in same-store. We think that we will mitigate somewhere between 35 and 40 basis points of that. Operator: We will go next now to Parker Snure at Raymond James. Parker Snure: I was just wondering if you could give some detail just on your outlook on provider taxes or supplemental payments. Maybe just remind us your total exposure there and then just your outlook for '26 and then maybe some potential upside from the a few pending programs, particularly in Florida that you may get some benefit from. Maybe just talk broadly about supplemental payments and kind of your thoughts there. Douglas Coltharp: Yes. So the EBITDA impact from net provider taxes for this year was about $21 million and a little over $3 million of that was out of period. I think a core assumption is that, that would stay relatively flat as we move into 2026. Parker Snure: Okay. Great. Douglas Coltharp: And by the way, that $21 million compared to an EBITDA contribution of $15.5 million last year, with a comparable amount being out of period. Operator: And gentlemen, it appears we've answered all the questions today. Mr. Miller, I'd like to turn things back to you, sir, for any closing comments. Mark Miller: Thank you, operator. If anyone has additional questions, please call me at (205) 970-5860. Thank you again for joining today's call. Operator: Thank you, everyone. Again, that does conclude Encompass Health's fourth quarter earnings conference call. Again, thanks so much for joining us, everyone, and we wish you all a great day. Goodbye.
Operator: Good afternoon, and welcome to Garanti BBVA's 2025 Financial Results and 2026 Operating Plan Guidance Webcast. Thank you for joining us today. Presenting on behalf of Garanti BBVA, we have our CEO, Mr. Mahmut Akten; our CFO, Mr. Atil Ozus; and our Head of Investor Relations, Ms. Ceyda Akinc?. [Operator Instructions] With that, I now would like to hand over to management for their presentation. Ceyda Akinc: Hello everyone, and thank you for joining us. We are excited to be with you on another earnings call. Before getting into our financial performance details, let's as usual, go over the broader macroeconomic environment. Turkish economy grew by 1% Q-on-Q in the third quarter and for the fourth quarter, we now cast a slightly positive quarterly growth. Therefore, parallel to our previous expectations, we maintain our GDP forecasts as 3.7% in '25 and 4% in '26, consistent with the still-resilient activity outlook. In terms of inflation and monetary policy, seasonally adjusted inflation improved into year-end, however, January CPI figure reinforces our view that the pace of monetary easing will become increasingly data-dependent and points to a slower pace of rate cuts compared to consensus. In this regard, we maintain our call of 25% inflation and 32% policy rate for 2026-year-end. In terms of current account deficit, it remains broadly manageable, although the trend has deteriorated, reflecting domestic demand dynamics and the gold channel. We expect the current account deficit to GDP to be around 1.5-2% range. The outlook remains sensitive to the Eurozone growth and Brent oil dynamics. In terms of budget deficit, we expect budget deficit to GDP to remain around 3.5%. led by tighter expenditures control and strong revenue generation. Now moving into our financials, I'll start with the headline figures. In '25 once again, we delivered a strong track record of achieving results in line with with our commitments. Our key P&L metrics came in fully consistent with our guidance, and cumulative net income reached TRY 111 billion, corresponding to 21% year-on-year growth and a 29% return on equity. In the fourth quarter, our bottom line was impacted by tax-regulation-related effects. Excluding this one-off impact, our ROE would have been around 30%, which was fully in line with our guidance. Despite operating with the lowest ratio, we continued to deliver an ROE above the sector average. As always, we maintained our focus on capital-generative growth, which is clearly reflected in our sector-leading CET1, Common Equity Tier 1 ratio. This earnings outperformance was once again driven by core banking revenues-and with that, let me move on to page 7. We have now delivered growth in core banking revenues for eight consecutive quarters. In the fourth quarter, core banking revenues grew by 11% Q-on-Q, driven mainly by higher net interest income, which was supported by a declining funding cost environment. Trading income declined Q-on-Q during the quarter, we repositioned our TL securities portfolio and we reduced our exposure to securities with relatively lower yields. Net fees also remained resilient, registered 5% quarterly growth with the increasing contribution from money transfer and lending-related fees. As a result, our core banking revenues reached TRY 300 billion, which suggests the highest level among peers. A big part of this success stems from our asset mix-now moving into Slide 8. Our asset growth continued to be fueled by higher-yielding customer driven sources namely loans. Performing loans share in assets further increased to 58% and lending growth was across the board. I will touch upon this on the next slide. In securities, I would like to highlight that we had a favorable securities mix with lower CPI and increase foreign currency share. During the year, we had strategic additions to foreign currency and TL fixed rate securities. Moving into Slide 9 our TL loan portfolio reached TRY 1.7 trillion, while we continued to maintain a well-balanced mix between consumer and business banking loans. In the fourth quarter, we sustained our quarterly growth pace of 10% in TL loans, bringing full-year growth to 45%, which is above our operating plan guidance. Throughout the year, we further strengthened our long-standing leadership in TL loans, with market share gains across all retail products and SME loans. As we grow, we remain highly disciplined and continue to keep a close focus on asset quality and with that, let's look at the evolution of our asset quality. In the third quarter, consumer and credit card related flow to Stage-2 restructured and SICR portfolio continued, yet the share of Stage-2 within gross loan remained flat at around 10%. Our Stage-2 coverage ratio declined due to improved repayment performance of some individual-assessed firms. While our stage-2 loans coverage is now 9%, if we look at the TL and foreign currency breakdown, our foreign currency Stage-2 loans coverage remains healthy at 16%. In terms of NPL movements, Now, let's walk through the evolution of our NPLs; our NPL ratio increased modestly to 3.1% in line with expectations, and we are witnessing the natural consequence of robust consumer and credit card growth that sector registered in the last couple years. Retail and credit card portfolio still accounted for 70% of net NPL flows. If we move on to the net cost of risk, on page 12. Net provisions increased in 4Q, reflecting the absence of the exceptional provision reversals recorded in previous quarters. On a cumulative basis, cost of risk closed the year better than the guidance with the impact of large-ticket provision reversals, which are not expected to repeat in this year, as I will explain in more detail on the guidance slide. Now moving to the other side of the balance sheet, how we are funding the balance sheet growth? Not only in assets but also in funding, we rely on customer-driven sources. Total customer deposits exceeded TRY 3 trillion and now make up 69% of total assets and remain TL heavy. This quarter, in TL deposits, we gained a notable market share and our TL deposit market share increased to 21% among private peers. On foreign currency side, deposits increased by 4%. Half of that growth was due to gold price increase related parity impact. The rest can be explained by the flow from maturing KKM deposits. Growing demand deposit base, which is one of the key pillar of our margin performance, continued to support deposit growth. Demand deposits currently make up 41% of total deposits. Our diversified and liquid funding mix is also backbone of our success. With two new transactions successfully completed in 2025, total volume of subordinated bond issuances over the past two years reached $2.45 billion, making us the bank with the largest subordinated bond issuance in the recent years. We achieved another major milestone by issuing Turkiye's first Biodiversity and Blue-Themed Bond. We also secured a syndicated loan from international markets with diversified maturities. This year, we introduced a 3-year tranche for the first time, and a 2-year tranche for the first time since 2017. Putting all of this together, our total external debt currently stands at $9.8 billion, of which $3.5 billion is short term. Against this, we maintain a comfortable and strong foreign-currency liquidity buffer of $7.1 billion. Our active funding management is also visible in net interest income, on page 15, in the fourth quarter, our net interest margin recovered by 60bps with the support of declining deposit costs. On an annual basis, net interest income including swap cost doubled which points to 1.2% annual margin expansion. Our net interest margin reached 5.4%, we continue to have by far the highest net interest margin and net interest income level among major peers and our aim is to preserve this leading position. If we look at the margin component, as shown on bottom-right side of the slide, TL core spread has started to recover as of 4Q, and we expect this recovery to continue throughout 2026. We utilized more swaps in 4Q due to its funding cost advantage relative to TL deposit costs. In terms of CPI linkers' income, CPI rate used in the valuation increased to 32.9%, based on actual inflation data. Therefore, on a quarterly basis, we had positive contribution from CPI linkers' income. However when looking at CPI interest, we should also take into account its funding cost and as of this quarter we have started to share with you the net contribution of CPI Linkers' to net interest margin. In the fourth quarter CPI Linkers' negative contribution is compared to 3Q due to increased income on an annual basis CPI increased net impact to margin was -0.4%. Let's move on the other P&L item fees. Our fee base remains robust, up 50% year-over-year. On an annual basis, payment systems fees were the main driver of the growth. In the fourth quarter, contribution from lending related fees and money transfer fees gained momentum. I would like to highlight that, we are number one in money transfer fees and in both life and non-life insurance fees. We increased our mutual fund market share by 1.3% to 11.6%, which also provided additional support to our fee base. Moving to our operating expenses, our OpExbase grew in line with our operating plan and was up by 67% in 2025. As we have been communicating, we have been investing in customer acquisition through salary promotions. And to enhance customer experience and increase customer penetration, we have been leveraging the power of artificial supports our revenue generation capability. As a result, significant portion of operating expense base is covered by fee income and we have the lowest cost/income ratio. As per our capital strength, In the fourth quarter, our solvency ratios improved with support from strong profitability and Tier-2 issuance we had in October. Our consolidated CET1 realized at 13.1%. Capital adequacy ratio reached 17.5% without BRSA forbearance. The foreign currency sensitivity on capital remains limited, 13bps negative for every 10% depreciation. With TRY 179 billion TL excess capital, we maintain a solid buffer to support our long-term growth strategy. With that, let me now summarize our performance before moving into operating plan. As I mentioned in '25, we sustained our unmatched leadership in earnings generation capability and once again demonstrated a strong track record of achieving results in line with our commitments. Net interest margin performance and cost growth were broadly in line with our operating plan, while fee growth clearly stood out, driven by strong momentum in payment systems and lending-related fees. In fact, in TL loans, our growth outpaced inflation, supported by consumer, credit cards, and SME loans. Net cost of risk performed well better than expectations, benefiting from provision reversals recorded during the year. Now, let me walk you through our operating plan guidance. I will begin with the macro assumptions on the left, as these form the foundation of our planning framework. Our baseline assumes a gradual easing cycle in the policy rate. The pace of monetary easing will become increasingly data-dependent and points to a slower pace of rate cuts in the second half of the year. Inflation will continue to decelerate, closing the year at around 25%. However, given the stickiness in services inflation, we believe CBRT will maintain a sufficiently tight stance, implying ex-post real policy rate of around 6-7 percentage points. Turning to balance sheet growth on the right-hand side, we expect TL loan growth to be in the range of 30-35% foreign currency loan growth at mid-single digit levels. Net cost of risk is expected to normalize, settling in the 2 to 2.5 percent range, reflecting the absence of large-ticket provision reversals and the natural impact of strong growth in consumer and credit cards. Regarding margins, we project net interest margin expansion of around 75 basis points, on top of its highest level. I would like to highlight that the extent of this improvement will largely depend on the pace of rate cuts and the evolution of macro-prudential measures. As I mentioned earlier, our assumption of 32% year-end policy rate represents the upper end of market expectations. We deliberately adopted a conservative approach during the budgeting process in order to prepare the balance sheet for funding costs remaining above the policy rate, particularly on the deposit side. On fees, we expect growth of 30-35%, as a result of strategic investments, we expect OpEx growth to exceed average inflation. And that said, on a bank-only basis, we expect approximately 80-85% of the OpEx base to be covered by fee income. Finally, bringing all these elements together, we are targeting mid-single digit positive real ROE. Since 2018, real ROE has remained negative; however, in '26, we expect this to turn positive, supported by declining policy rates. This concludes my presentation. Thank you for your listening. Now, we can take your questions. Operator: [Operator Instructions] Our first question comes from David Taranto, Bank of America. David Taranto: The first question is on costs. Your cost growth has been running above the sector for some time, yet your revenue margins have also been higher. So this hasn't weighed on your relative profitability. But for this year, guidance again suggests cost growth at the higher end of the sector. So could you elaborate on the key cost drivers for this year? Should we view this as front-loaded investment ahead of what will hopefully be a lower inflation environment? Or are these increases more structural? And looking ahead, should we expect Garanti's cost growth to move closer to or maybe potentially below the sector levels in the future years? The second question is on fees. Your fee growth guidance appears broadly in line with the volume growth expectations. Could you elaborate on your guidance here? I assume we'll see a meaningful deceleration in payment-related fees. And in which segments do you expect to see stronger growth this year? And is there a meaningful seasonality that we should be aware of in terms of fees? And the last question is on margins. Your year-end policy rate expectations of 32% seems slightly above the market review. How would your NIM expectations change if the policy rates were closer to 30% instead? And could you also share your expectations regarding the deposit rates under your base scenario? Do you assume deposit beta to improve at some point this year? Mahmut Akten: David, thank you for all the good questions. First of all, on the cost growth, as you noticed, yes, we have a higher than inflation cost growth for basically several reasons, but primarily one on non-HR, one on HR. In Turkey, for a while now, most banks and institutions makes 2 salary increases every year. And then therefore, second increase, which is July to December, is not fully reflected in the prior year. So when you make the increase in January, you also have further increase from the base. So there is a bit of higher than inflation increase in the cost base. But as inflation comes down, the impact of that increase in the second half of the year will be lower, as you can imagine. That's number one. But more important increase actually is related to non-HR. And within non-HR, we internally, we look at this differently, especially customer acquisition cost is a different animal. It's an investment for the future. And in Turkey, especially payroll or pension, we pay promotion as you are aware of, and that's every 3 years. So you get 3 years of inflation within those numbers as you replace 1/3 or slightly more than that of your acquisition cost suddenly with 3 years inflation. So those numbers are a bit investment for the future. We expect as we go forward as inflation comes down, and this will affect also this payroll acquisition cost as well that 3 years inflation will come down. The impact to the extent is reflected on cost-to-income ratio. But we expect that cost-to-income ratio slow down or reduce down to 40% going forward. That's our expectation. And we have been highly investing in the AI within the BBA framework, and we start to see impact in efficiency, as you will see in the coming year. That's number one. Number two, fee growth. Again, as you clearly and correctly point out, as interest rate and inflation comes down, some of the payment commissions will come down properly. But we are actually offsetting that with both loan commissions, a bit of regulation also positive effect on the FX loans. So that has happened last week. But more importantly, we have investment in especially insurance type of commission-generating products and wealth management. We are expecting that to be offsetting the decrease in payment commission. So we expect a similar pattern in terms of ratio going forward as well. That will be the positive side. And the third on deposit rates. Again, I think if you look at the third quarter and fourth quarter, even though the policy rate significantly reduced, we didn't -- we were not able to reflect all of it to the deposit cost up until very recently. That's part of it, a tight monetary policy and data-driven Central Bank policy, which came with certain regulatory measures on the banks and one of which that is very important and relevant was related to deposit rate. We had 4 weeks windows to have a certain Turkish lira total deposit ratio, and that has been recently extended to 8 weeks. That has been a big plus because every 4 weeks trying to hit the ratio, it creates this synthetic competition. And despite policy rate reduction, we are not able to reflect 100% of that reduction in deposit funding. But a few weeks ago, that time break has been extended from 4 weeks to 8 weeks. That has been clearly a positive news. And then also the -- we had some level of challenge with the gold prices, especially after, I think, starting October, right? As gold increases, the total Turkish lira deposit ratio came down. That also put certain pressure on deposit ratios or deposit rates. But we start to see with this 8 weeks interval and a bit of stability now this week on the gold prices, we see that more stability and better correction in the deposit ratios and deposit interest rate. It's getting very close to overnight repo rate, which is a good news for us. So we expect further improvement in deposit rates going forward in the next months. Operator: Our next question comes from Ashwath from Goldman Sachs. Ashwath PT: I have a few questions. The first one being on your NIM dynamics. You expect 75 basis points of expansion. Would you mind breaking that up between the impact from lower CPI and the impact on core spreads? And in relation to the topic on NIMs, when do you expect to see NIMs peak? Would that be in the second half of the year? My second question would be on the dollar exposures across your balance sheet. From what I can see, your loans are around 25% to 27% in terms of U.S. foreign currency exposure, your deposits a bit higher in terms of 37%. Would you mind also telling me how much of your equity is also held in dollars or in foreign currency terms? The third question I had was around the ROE. It's good that you're guiding for real ROEs to be in the mid-single digits. My question here would be more on your expectations on your long term. Where do you think this real ROE figure would settle in an environment where there's inflation settling below or at 20% or below. And in that scenario, where do you think currency's NIMs would be at and also its normalized level of ROE? Mahmut Akten: Okay. Let's try to answer all the questions. One of them was related to 75 bps improvement, if I took my notes right. We see a further improvement in loan-to-deposit margin, 150 bps actually, but reverse repo and swap is additional 0.7%. However, CPI income this year will be with the inflation coming down, minus 60 bps and the reserve remuneration will be another minus 70 bps as well. That's the reason we are conservatively forecasting 75 bps improvement. And regarding the improvement in NIM and spread, we expect towards the end of second quarter, we'll probably see the highest level this year as well as we start to see a slowdown in the policy rate reduction starting third quarter, and we'll see further emergence between the reduction in loans as well as spreads. There was a second question about equity. Can you? Ceyda Akinc: Yes, we will get back to you regarding the second question. Mahmut Akten: On the dollarization. Okay. And the third question was related to ROE, right? Atil, would you like to take that? Kemal Ozus: Yes. In terms of return on equity, our guidance for 2026 is a real return on equity improvement. Over the long term, when we assume that it was your question, normalized ROE over long term, when we assume that inflation will limit teens, like, I mean, 15% to 20% level. We expect a return on equity -- real return on equity above inflation around 8% to 10% could be our sustained long-term return on equity. Mahmut Akten: And I think there was a question also -- a follow-up question on the -- what's a stable NIM for long term. We expect that to be around 500 bps as well. We have been always relatively high. But conservatively, we think something around 500 bps will be a relatively good margin as we increase our customer base and loan book. Does that answer your question? Ashwath PT: But just wanted to clarify regarding the numbers in terms of expansions. You said 150 basis points in terms of core spreads, 60 negative from the CPI, 60 from the reserve requirements. What was the other 70 you mentioned? Ceyda Akinc: The rest was the -- between the repo and swap funding costs. So the other funding instruments. Mahmut Akten: That's also positive. Ceyda Akinc: Yes, because swap costs will also come down in line with the declining funding costs. So therefore, we are projecting to get a positive from swaps and repos. Mahmut Akten: And we are already seeing it actually in the swap markets... Operator: It seems like we don't have any more audio questions. So moving on to the written ones a bit. First of all, Valentina asks for some color on how loan and deposit spreads have been developing so far in first quarter and what we see as the main risk to our NIM guidance? Mahmut Akten: Valentina, we are seeing actually with this 4 weeks to 8 weeks conversion, we start to see a positive improvement in cost of deposits actually despite some volatility in the MTR market. So we might be even a bit conservative in first quarter, but we'll see an improvement to almost 50 bps in the first quarter, let alone. So it's a positive improvement, and we start to see it this week further. To be honest, there is a certain level of regulation that has been published last week related, for instance, growth in overdraft, which is highly profitable product as well as credit card. But not everything has been applied so far yet. This might be a bit more limitation on credit growth, especially on the most profitable one on the consumer side. And then there has been a bit of limitations on FX loans as well, further restriction given the higher inflation. As we point out all of this guidance, Ceyda, especially underlying is everything is data-driven a bit. That's the reason on our guidance, as usual, we are a bit conservative, at least whatever we say we want to deliver at minimum that level. But we see limited downside, but regulatory framework might be always a bit challenging. And then we forecasted even last year in our forecast, we have been a bit above the market in terms of our inflation expectation and policy rate expectation being year-end 25% and 32%. I think we have been the highest in terms of inflation and interest rate perspective. We are more emerging to those numbers. It sounds like based on the January and February data. At least for now, we don't see those are at risk because higher policy rate would definitely challenge us as well in terms of our expectation, but we are not at that point at the moment. Operator: Valentina's second question comes regarding insights on asset quality trends, particularly in the SME and corporate segments. Mahmut Akten: A perfect question. SME and? Operator: Corporate segment... Mahmut Akten: Now in reality, 60%, 70% of our NPL is related to consumer retail segment. There, we are -- we continue to see improvement. On consumer, we see substantial improvement versus a year ago, close to -- in terms of NPL roll rates, more than 40% improvement as well as we see further improvement in credit card, which is the highest NPL product normally. We also see an improvement of 20%, 25%. We see a good January start. And then when it comes to wholesale and SME, wholesale, we had an exceptional year last year. We had a lot of provision release because of the asset sales and collection efforts. This year, we have a bit of -- a bit more of those, but not at the same size. But regular NPL flow in January has been half of what we have seen in terms of NPL inflow of last year. On SME, SME, I think in one of these calls, we have discussed this in the past as well, has been only 13%, 14% of our NPL roles. It has been more like 16%, 17% lately. But when we look at the January as well, our NPL roll rate in SME has been 20% less than the last year. So there is an improvement. And then the recent development regarding to credit guaranteed fund support by the government will be helping on the SME segment specifically for those who are late in their payments will benefit from this credit guaranteed fund. So that will also further help our numbers. And in the third and fourth quarter numbers related to retail, I just want to underline that. Lately, we see a further regulation that helps us to extend the terms for the delayed consumer customers as well. In the third quarter, we restructured quite a bit of them. And then this reason our fourth quarter provision is higher than the third quarter because for those customers who were going to the NPL, we have deferred and restructured and some of them still went into the NPL. But lately, with the regulation last week and then similar to credit guaranteed fund in the retail side, -- the government also -- regulator also permitted us to restructure late credit and credit card and GPL loans for up to 48 months. So it's going to help further to reduce overall provision and NPL flow. And there might be, to an extent, a shift between first quarter and second quarter as well, but overall will help to relieve this. But overall asset quality is getting better, and we have regulator support and government support on both SME and retail customers. Operator: We have a couple of questions on the audio line. So our next question comes from David Taranto. David Taranto: Sorry I have one follow-up. Just wanted to confirm one technical point. Is your mid-single-digit positive real return on equity guidance based on your year-end CPI expectation of 25% or on your average CPI assumption, which I guess is a few percentage point higher. Mahmut Akten: Based on 25%... Operator: Our next audio question comes from Tomasz Noetzel. Can you hear us? Okay. I think he has some problem with the line. Tomasz Noetzel: Can you hear me now? Operator: Yes, we can hear you now. Tomasz Noetzel: Apologies for last time. I just have one clarification and follow-up questions that was asked before. Possibly, I may have missed that when you answered that. But what will be the potential NIM upside should interest rates go further down to, let's say, 28%, not 32% as you guided because that's some market expectation that rates could go down as slow in Turkey this year. How should we think about the NIM upside in that scenario? Thank you for confirming that... Mahmut Akten: Yes. Every 100 bps change in policy rate has -- for the full year, it affects the NIM by 15 bps. Operator: Our next audio question comes from Simon Nellis. Simon Nellis: I think I put these questions through the chat as well. But yes, my first one is on risk costs. So you're guiding for higher risk costs this year. Can you just run us through the key drivers of that? And where do you think risk cost normalizes kind of longer term? And my second question would just be on the effective tax rate. What should we pencil into our numbers this year and next year given the big jump in the fourth quarter and recent regulatory changes there? Mahmut Akten: Yes. Regarding first question, actually, we had a lot of one-off large ticket provision reversal this year. Excluding those, the bank only cost of risk could have been 2.4% this year. But we had all these one-off items that we successfully achieved this year for large ticket provision reversals, mostly related to sales and collection. And our consolidated figure was 2.1%. And regarding next year, we have different products with different rates, but we expect conservatively again between 2% to 2.5% cost of risk. Our credit card cost of risk has been historically as well around 4% for retail, 3% SME 2.5% and wholesale 0.5%. We don't expect that too much to change. But recent regulatory changes will provide further positive news for cost of risk. We have not incorporated those numbers yet. We are just starting on credit guaranteed funds potentially in 2 weeks or so on restructuring on retail, this extra relief on conditions will be starting next week. So there might be some positive news on that, which might get us to be closer to 2% rather than 2.5%. Our normalized cost of risk historically has been around 1.5% to 1.7%. But given the high interest rate environment, it's probably normal to be around 2%. That's our take. And there was a second question. Kemal Ozus: It was about the effective tax rate. Mahmut Akten: Yes. Kemal Ozus: It will be similar to 2025 because already there's a change in the tax law, and it has been reflected in the fourth quarter. So full year, you can consider is full year 2025 is reflecting the new normal, let me say. So you can use 2025 as a proxy for the next year as well. Mahmut Akten: Yes. And Simon, aside from this, I think when we show the numbers, there is always from one quarter to another, there is one-offs. So it's not very easy in banking to normalize all the numbers and make it an apple. But again, quarterly income, especially the fourth quarter doesn't reflect fully the improvement in NIM. One reason was tax rate that has been shown there are only 3 quarters of the tax around TRY 2 billion, but the full impact is TRY 2.7 billion if there wasn't any change in the tax regulation. So that will bring TRY 9 billion to TRY 9.7 billion actually, apple-to-apple, our profitability in the last quarter. And because of the restructuring in the third quarter, there has been a movement of NPL. We saved some of these customers, but the movement also understated the P&L on the fourth quarter and overstated the P&L in the third quarter because of the consumer credit and credit card provisioning. So quarter-by-quarter, if you correct those 2 items, our profitability last quarter would have been TRY 31.7 billion. And on top, we had certain security optimization, things like that. So actually, even though you don't see directly the improvement in NIM in those numbers, if you correct for one-offs, the trend has been positive, and we'll continue to see that in the coming quarters as well. From that perspective, we feel comfortable with the improvements. Simon Nellis: Okay. And -- just on the tax rate, if I calculate it right for the parent bank, you had an effective tax rate of around 22.5%, 23% for 2025. I mean that's still well below the statutory rate, right, which is 30%. Are you sure that effective tax rate will be around that level this year? Kemal Ozus: Yes, around 20%, 25%, you can use because although the tax rule change about the inflation accounting, but there's still some cause inflation accounting treatment of the revaluation of assets, which are bringing some deferred tax asset year-on-year. This is one reason why effective tax rate is below 30%. Mahmut Akten: And also because of subsidies, different tax rates and as well as subsidies income level is different. In some subsidiaries, we have lower tax rate and some subsidies, we have some tax cushion as well. So depending on the performance of all the subsidiaries and our consolidated figure will be still relatively good. Simon Nellis: And do you think that should be sustained further out? Or will the DTA effect fade and the tax rate go higher? Kemal Ozus: It could change depending on the revaluation rate or the inflation rate, let's say, which is interlinked. So when the inflation is lower in the coming years, let's say, mid-teen inflation or devaluation rate, we may see an uptick in the effective tax rate. Operator: Our next audio question comes from Mustafa Kemal Karakose. Mustafa Karakose: My first question is about loan pricing. What should we expect in terms of loan pricing for the next year? We have seen so much ups and downs in loan rates recently. And my second question about spread between policy rate and the deposit rate. How much -- how many spreads do you expect for the next year and beyond? And my third question is around about ROE guidance. Do you assume any mark-to-market gain in your ROE guidance? Because if there will be some mark-to-market gains, your equity base will be higher. Mahmut Akten: Thanks. First of all, loan pricing, as you point out, depending on the product, there has been some volatility on loan pricing. But overall, because of the positive side of the regulation in some sense, given the limits on loan growth, the expected decrease in loan pricing has not been realized, given that we don't have much room to grow in loan because of the caps. Depending on the product, as you said, there has been sometimes ups and downs that's related to 8 weeks window. Sometimes when we get close to the end of the 8 weeks, especially on very digital products, we might have sometimes need to change the pricing to be within the cap. But what is important is the trend in terms of trend the reduction or reduction in the loan prices is below our expectation, are not fully parallel with the policy rate reduction. So it's not a perfect 100% beta there. Regarding deposit pricing as well, because of, again, regulatory measures because of the Turkish lira ratio, typically, in the past, what we have seen, we are not seeing right now, which means normally our incremental deposit pricing is below the Central Bank policy rate around 50 to 100 bps below. And you see that right away in the 2 days after the Central Bank policy rate, we see a significant reduction. But given that there is ratios and there is a lot of dependency on the FX situation and interest, which has been recently realty has been around gold and silver, but regardless, because of those ratios, the incremental cost of deposit has been slightly higher than the policy rate nowadays 50 to 100 bps. So instead of actually 50 to 100 bps below the policy rate. So we are not seeing the similar reduction in deposit as well. But overall, despite all this, we are improving as we see on the fourth quarter, our margin regardless because of the duration differences. We have been always investing in the customer side on loans. As you see in this quarter as well, our security fixed book has not changed much. We actually had some optimization, which you don't see from the numbers to be more sustainable and more profitable security book, but we are still at 58% customer loan versus our peer group at 49%. So I believe this is going to be reflected relatively positively on our numbers going forward. But we see 50 bps to 100 bps above policy rate. This will diminish in the following weeks as well as volatility reduced in the market, given that we are switching from 4-week windows to right now 8 weeks, which is a big plus in terms of our major. And then there was the last question about return on equity guidance. Kemal Ozus: I can take that. I mean we did not incorporate a significant amount of mark-to-market gain in our ROE calculation. Our foreign currency -- our securities foreign currency TL, there's an increase in the foreign currency part toward 40%. And in TL, we have AFS book and the hold-to maturity book. So we don't have much exposure to interest rate changes in equity in total. So we did not incorporate a significant amount of mark-to-market. Mahmut Akten: We have significantly lower sensitivity to interest rates -- that has been our policy and strategy. Operator: Our next audio question comes from Ali Dhaloomal. Ali Dhaloomal: I had this question actually about the TL spread policy rate. My question is just actually about wholesale funding. I mean what should we expect from Garanti this year in terms of issuance? I mean, last year, you have been very active in the Tier 2 format. But also in terms of other instruments, I mean, are you looking to do more in the DPR format or others? That would be great to have some color. Mahmut Akten: Sure. Let me speak first and then Atil will add. On wholesale funding in the past as well, we have been opportunistic. We have relatively high liquidity always, but going to always grow -- further strengthen our capital as well. So we had, yes, Tier 2s. But at the time we did Tier 2s, there has been substantial spreads or cost between Tier 1 and Tier 2. Depending on the needs in the following months, we'll be, again, opportunistic on how we decide on funding, but we don't have a decision at the moment, but we see very much reduction in the overall spread between different instruments. But also from senior funding standpoint, we don't -- we are not in rush to do so. But DPR type of instruments or senior loans is always 2 depending on the cost, we might tap those markets as well. What do you think, Atil? Kemal Ozus: Yes. I mean, nothing to add. I mean, yes, DPR for many years, I mean, we were not in the market. I mean -- but with the new developments, DPR market could also increase. So we may be in the market depend on conditions and the pricing. Operator: Moving on with the written questions. The next question comes from, Valentina. She says, in first quarter, usually the banks take some one hit off it on capital due to operating risk adjustments. Can you share roughly what impact on capital we should expect? Mahmut Akten: 83 bps. Operator: Next written question comes from Orkun Godek. How do you evaluate the potential implications of the recent regulatory changes introduced over the weekend? In addition, there's an expectation for an easing of loan regulations in the final quarter of the year. What is your take on this view? Mahmut Akten: Yes. I think when do we see easing of the regulation, I don't really have an answer. Yes. I mean you would expect with the reduction in interest rates, there might be further reduction, but there are 2 main instruments on cooling down the economy. Number one, interest rates. And if you believe that interest rates are coming down, that will further strengthen growth and investment and loan book. So I'm not sure whether we will see a significant release on loan caps. However, having said that, as I said, it is not fully negative for us as one of the -- I mean, one of the largest bank in terms of balance sheet, given our customer base, we have a higher growth cap, and we are pretty much tapping that growth every quarter to meet our customer needs. And those caps also in parallel are requiring to interest rate or loan yields to settle at a higher rate, which also helps cooling down economy. So we'll see how it goes. Inflation is not an easy animal. So we'll see quarter-by-quarter, data by data. I would say that. And then that was the first part. The impact of regulation, the recent regulation, yes, there are several parts. One is significant growth in credit card limits and overdraft limits. Those have been 2 products used extensively. And there were other items, as we mentioned, one that was very helpful doing restructuring of the credit card blade loan book, which is significant. And then FX loan book growth has been reduced to 0.5%. Again, recently, we have seen on the FX loan book decreasing interest. So further limitation on the growth of FX will actually help in the NIM side, but it has a negative impact on the volume side. So it makes us more road focus in our customer day-to-day business. So I'm not concerned about that as well. On the credit card and overdraft, yes, I mean, Turkey is a consumption-driven market and credit card has been highly utilized versus the past 5 years, especially after COVID and after effective money being only TRY 200 and then rising of the e-commerce and online shopping, we have seen 40%, 45% credit card share in terms of day-to-day payment going up to almost 70%. I think still the tax -- still the regulation on credit card is being worked out. The details has not been fully published. Given that we have significant market share on credit card and overdraft, any optimization on limit or risk will adapt easily. Last year, we have captured a very high market share of the new credit card customers as well. Last year, our customer growth has been close to 3 million customers, and now we have more than 30 million customers who have account with us more than 50% of the total market. So I think any optimization that's guided by the regulator will apply it. And then we have -- we will have some effect, but will not be significant in my view. But we'll see how it turns out over the next few months. As you know, in the regulation itself, things are being worked out. What I mean is like, for instance, there has been regulation regarding the school payments, which is an important one ticket, large ticket item. There has been some exceptions on the overdraft. Potentially, there might be exceptions on credit card as well. That reason we'll see over the next few weeks and months how this play out. But as the largest player in the credit card market and overdraft, we believe that we can optimize and leverage our customer base and will not affect it negatively from this change as well. Operator: We have an audio question from Furkan Vefa Tirit. Furkan Tirit: Just to clarify, you said for every 100 basis points of rate cuts, 15 basis points of effect on ROE, right? Is that true? Mahmut Akten: On NIM, but full year -- so initially lower, yes. Operator: Moving on with the written questions. We have one from Bulent Sengonul. He asks, does your 75 bps margin expansion guidance include any easing in macro prudential measures? Mahmut Akten: No. Operator: Okay. Moving on to the next one from Bulent. Does your mid-cycle NIM and ROE targets assume that macro prudentials are fully normalized? Mahmut Akten: No, we don't expect macro prudential, which means around the ratios not fully normalized this year. So we still -- even in this environment, we expect to have a real ROE at the end of the year. So we are, again, I mean, I briefly said only no, but the prior question as well, we have been conservative in our approach. As I said, everything is data-driven. And so far, inflation and interest rate expectation of other banks has been wrong or it has been going up. So we have been conservative in our approach, and we expect no change on the regulation. Operator: We have an audio question from Tomasz Noetzel. Tomasz Noetzel: Yes. I can just ask for clarification on your fee guidance. Does this include any changes to regulation in terms of interchange fees or anything like this? Could you please clarify that as well? Mahmut Akten: Yes, we expect some changes and reduction interchange. But at the moment, the interchange is already set up a bit low. So we haven't seen a change recently, but it will, at some point, there's a breakeven policy rate. But we expect to compensate that with wealth management, insurance and other service and commissions. So we incorporate the reduction in payment. Normally, payment has not been that high as a percentage of total fee. We normally normalized rates around 55%. But nowadays REI is around 67%. So there will be a reduction to normalization, but the insurance and wealth management brokerage commissions and crypto type of commissions is increasing in our overall commissions. So that has been always within the plan, and that's the reason in our strategy, these type of commissions are important to offset the very strong payment commissions we have. I hope that answers. Operator: We have a written question from Cemal Demirtas. What's the sensitivity of your ROE assumption to 1 point lower or higher inflation? Mahmut Akten: We actually -- we have a perfect number of 1%, 15 bps. We didn't calculate, but back of the envelope, you would expect to around 0.5%, 0.6%. But Ceyda will get back to you on the exact number that Ceyda needs. These are the questions I need to answer. You need to calculate that as well. But definitely, that will be an improvement in ROE as well to get a better number. So I think we finish all the questions. There is one more. Okay. Let's go for it. Operator: It seems like we have one more question, a written one from Valentina. She asks a follow-up question on 83 bps negative impact. Do you think this can be easily offset? And expanding on this, why do you see your CET1 buffers throughout the year? Kemal Ozus: Yes. Of course, this 83 basis points is one-off impact since, I mean, in the new year, the operational risk is increased based on your prior year income calculation. With the current year profit, I think we will be compensating that. Of course, in the first quarter, there will be some reduction out of the dividend payment. And I think we will be compensating these... Mahmut Akten: There will be some baseline effect as well. Kemal Ozus: There could be baseline impact around 45 basis points in the second half, assuming that Basel IV will be enforced at that time. But with the internal revenue generation, we will be compensating those impacts. Mahmut Akten: Any further question? So I think we finished the questions. So it was really good list of questions. So thank you very much for everybody's participation. Really, we are pleased to conclude 2025 with very strong numbers. Again, reflecting our strategy, as I pointed out in the prior meetings as well. We are focused on customer-driven business. Our strategy is to expand our customer base and have sustainable profitability, not quarter-on-quarter, but on the long term. And so we continue to do some investment you see in the non-HR OpEx or trading, sometimes optimization, things like that. And -- but regardless, if you do one-off corrections, as I pointed out, our Q4 apple-to-apple is better than Q3. Q3 is better than Q2. So this continues like that. And then in the first month, January, we see also relatively good results for January above our budget, our internal targets. So we continue to make consistent progress. But our focus on digital transformation, AI transformation, efficiency, sustainability agenda, innovation continues to be our top of the agenda. And then going into new year, as you point out in your questions, our sensitivity of our security portfolio is relatively low. We are positioned ourselves in any situation. And then our focus is sustainable, delivering sustainable value for all of our stakeholders. So that's the strategy, hopefully, 3 months later, these days, we'll come together and we'll also show you even a better picture going forward. Again, thank you very much for everybody's participation and your patience late in the evening. So I hope to see you and to hear from you 3 months later in the next earnings presentation. Have a nice evening to all of you. Thank you.
Operator: Good morning, everyone. Welcome to AutoNation's Fourth Quarter 2025 Conference Call. Leading our call today will be Mike Manley, our Chief Executive Officer, and Tom Szlosek, our Chief Financial Officer. Following their remarks, we will open the call to questions. And I'll now hand the call over to Derek Fiebig, Vice President of Investor Relations, to begin. Derek Fiebig: Thanks, Adam, and good morning, everyone. Welcome to AutoNation's fourth quarter conference call. Before we begin, I'd like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued today and in our filings with the SEC. Certain non-GAAP financial measures, as defined under SEC rules, will be discussed on this call. Reconciliations and on the website located at investors.autonation.com. With that, I'll turn the call over to Mike. Mike Manley: Yeah. Thank you, Derek. Good morning, everybody, and thank you for joining us today. I'm on the third slide. We're pleased to report a solid fourth quarter and full year results for AutoNation. During a turbulent year, we delivered 3% revenue growth and 8% adjusted net income growth and four consecutive quarters of year-over-year EPS growth, ultimately leading to an increase in adjusted earnings per share of 16%, half of which went to share repurchases. Adjusted free cash flow exceeded $1 billion, up approximately 39% from 2025, and we deployed over $1.5 billion in capital, which resulted in a 10% reduction of the shares in circulation with the remainder invested in the business, including $460 million in M&A to acquire some strong brand assets. Our balance sheet remains extremely healthy with year-end leverage largely unchanged from the prior year. 2025 was the first year that AutoNation delivered earnings and EPS growth since 2022. And as I said, it was a solid year of growth and performance by the group. Relative to the fourth quarter, the industry faced tougher sales comparisons to last year, when post-election sales surged, driving a Q4 2024 light vehicle SAAR of 16.7 million. Also, sales in this year's fourth quarter were negatively impacted by the strong pull ahead earlier in the year as consumers reacted to the tariff announcements and purchased vehicles prior to the expiration of government incentives for electric-related powertrains. We felt these impacts across most brands with the biggest impact in premium luxury. In the fourth quarter, our same-store unit sales of new vehicles decreased by 10%, including declines of 60% in battery electric vehicles and 10% in hybrid powertrain vehicles. For the year, however, our new unit growth was 2%, largely in line with the overall industry. With regard to new unit profitability, we delivered a sequential increase from Q3 to Q4, ended up approximately $2,400 per unit. In the fourth quarter, we improved our used-to-new ratio from a year ago as used sales tracked more favorably than new. Although used unit sales decreased 5% from 2024 on a same-store basis, with growth in units higher in the $40,000 price point more than offset by declines in lower price used unit sales increased by 1%. Used selling prices held up well in 2025 across all price bands, the full year, our gross profit increased 5% reflecting improved gross profit on the retail side and strong results in used vehicle wholesale. Retail profitability per unit for the year was in line with 2024, but modestly lower in the fourth quarter. Reflecting a tightening supply market. Notwithstanding this, our team continued to demonstrate strong performance in acquiring vehicles through trade-ins and directly from the consumer through our We Buy Your Car efforts, with more than 90% of our sourcing of vehicles through internal channels. And naturally, we're focused on continuing this discipline but also improving our purchase and sales unit pricing discipline and cycle times. We ended December with 25,700 used vehicles in inventory, and expect this number to increase as we progress towards a stronger March and summer selling period. Tom Szlosek: Customer financial services had an excellent quarter, growing unit profitability by 8% from the prior year and 4% sequentially. Fourth quarter and full year gross profit per unit for CFS were the highest we have had in the history of AutoNation. Our customers continue to purchase more than two products per vehicle with extended service contracts continuing to be the top offering. Which is, of course, fantastic for our future aftersales revenue and customer retention. Our finance penetration continues to grow with around three-quarters of units being sold with financing. The momentum in aftersales maintained, and we delivered record fourth quarter and full year revenue and gross profit. The quarter, total gross profit increased by 6% or 4% on a same-store basis. Our growth was led by customer pay, which increased 8% on a same-store basis and warranty, which increased 6% on a same-store basis. Improvements in our aftersales performance were not restricted to just revenue, We also improved our total gross margin for the year by 80 basis points to 48.7%. We continue to focus on our technician workforce by recruiting, retaining, and developing our technicians and I think the efforts are certainly paying off. Turnover has decreased. Franchise technician headcount increased more than 3% from a year ago on a same-store basis. Is up more than 5% on a total store basis. Strong momentum at AIM Finance was maintained, including a $19 million year-over-year swing in profitability to $10 million. Originations for the year increased by $700 million from 2024 with the portfolio now exceeding $2.2 billion. Portfolio continues to perform in line with our expectations from a delinquency and a loss perspective, and the business' base costs have remained stable. Enabling attractive profit scaling for portfolio growth. As I mentioned earlier, this was the fourth consecutive quarter of year-over-year increases in adjusted EPS with our full year adjusted EPS growing by 16% from 2024. Cash flow for the quarter and the full year was also fully adjusted free cash flow was up 39% from 2024. And our investment-grade credit rating and balance sheet anchored on a low net capital high free cash flow model enabled us to once again deploy significant capital for CapEx, M&A, and share repurchases. During 2025, we expanded our presence in three key markets, including of a Ford and Mazda store in Denver, as well as an Audi and Mercedes store in Chicago, and a Toyota store in Baltimore. All in all, great results. I think good progress and a solid performance by the AutoNation team. Now I'm gonna hand the call over you to you to take everyone through the results in detail. Thanks, Mike. I'm turning to slide four to discuss our third quarter P&L. Derek Fiebig: Mike explained the factors that impacted our fourth quarter vehicle unit sales and revenues. Total revenue for the quarter was $6.9 billion compared to $7.2 billion a year ago. Driven by a decline in revenues from new vehicle sales of approximately 9%. New revenue per unit retail was stable year over year, As Mike mentioned, our CFS and aftersales businesses delivered strong top-line results with the highlight being the 6% growth in aftersales. Fourth quarter revenues from sales of used vehicles were essentially flat year over year. For the full year, revenue increased 3% to $27.6 billion including our CFS and after sales, which were up 85% respectively from 2024. Revenue for new vehicles was up approximately 3% and for used vehicles, 1%. Revenue per unit retail increased modestly year over year for both new and used. Fourth quarter gross profit of $1.2 billion decreased by 2% from a year ago for the quarter. Only half of the rate decline in revenue. The positive outcome reflects declines in new vehicle gross profit being significantly offset by 6% growth in aftersales. For the year, gross profit was up 3% led by our CFS and aftersales, which were up 87% respectively. From 2024. Our adjusted SG&A expenses were flat in the quarter and 68% of gross profit. During the quarter, we increased our advertising expenditures specifically targeting upper funnel demand creation activities and had higher expenses for our service loaner fleet to support the growth in our aftersales business. This also will help bolster used inventory levels. Full year SG&A was 67.3% of gross profit, absent the fourth quarter investments I just mentioned, our SG&A as a percentage of gross profit would have been in line with our targeted range for both the quarter and the full year. Adjusted operating income, which decreased 7% from the fourth quarter last year increased 3% for the full year. Below the operating line, the fourth quarter floor plan interest expense decreased by $6 million or 10% from a year ago as our discipline our our disciplines around inventory, continued and average interest rates moderated, reflecting the movement in short term interest rates. In 2025. For the full year, floor plan interest expense decreased by $30 million or 14%, reflecting the same factors. Fourth quarter non vehicle interest expense increased $3 million or 7% from a year ago, reflecting higher average balances and slightly higher blended interest rates stemming from our debt refinancings in 2025. As a reminder, we reflect floor plan assistance received from OEMs in gross margin. This assistance totaled $35 million in line with a year ago, Net of these OEM incentives, the net new vehicle floor plan expense for the fourth quarter totaled $13 million down from $18 million a year ago. For the full year, new vehicle floor plan expense totaled $46 million, down 74 down from $74 million in 2024. In all, this resulted in fourth quarter adjusted net income of $186 million compared to $199 million a year ago For the full year, adjusted net income increased 8% to $77 million. I'll get into details a bit, but adjusted free cash flow for the year was outstanding Mike mentioned. And enabled share repurchases that reduced share count by 10% year over year. Adjusted EPS was $5.08 for the quarter, an increase of 2% from a year ago and was $20.22 for the full year, an increase of 16%. From 2024. Adjusted earnings per share excludes the business interruption insurance recoveries related to the second second quarter two thousand twenty four CDK business incident This amounted to $40 million on a pretax basis for the quarter and $80 million for the full year. Adjusted earnings per share also excludes charges for severance expenses and asset impairments. Slide five provides some color for vehicle performance. We've covered the market conditions leading to the fourth quarter's new unit sales decline of 9% or 10% on a same store basis for the quarter, The decline in sales of electric vehicles contributed half of the unit sales decline. Sequentially, internal combustion engines were up 8% from the third quarter which is in line with historical norms. Our market share also improved from the third quarter. For the year, unit sales were up 2%. As I mentioned, average sales prices were stable. For the quarter and the year. Mike Manley: Vehicle unit profitability averaged approximately $2,400 for the quarter increasing more than $100 or 5% from the third quarter. This sequential increase was consistent with prior years and reflects strong commercial performance in the face of declining OEM dealer incentives. New vehicle inventory amounted to forty five days of supply, up six days from the fourth quarter of last year and down from two days. At the September. Turning to slide six. Used vehicle fourth quarter retail unit sales decreased by 5% on a same store basis and 3% on a total store basis. Average retail prices were up about 3% for the quarter, and 1% for the year. And for the full year, used unit sales increased by 1%. Overall, used vehicle profit was down 6% for the quarter but up 5% for the year reflecting increases in used retail and used wholesale. Q4 used vehicle profit per unit of $14.38 was lower than a year ago, reflecting higher acquisition costs, as Mike mentioned. For the full year, used profit per unit of $15.55 was flat from a year ago. We remain focused on optimizing vehicle acquisition, reconditioning, inventory velocity and acquisition pricing And we're investing in creating a better customer experience. Overall, industry supply of used vehicles remains tight, We continue to be competitive in securing used vehicles from our own retail operations, including trade ins, we'll buy your car, services loaner conversions, and lease returns, and we continue to source more than 90% of our vehicles. Through these internal sources. Let me move to slide seven on customer financial services. Momentum in CFS performance continues. Unit profitability was up 8% in the fourth quarter. And 6% for the full year. Reflecting improved margins on vehicle service contracts, consistent product attachment and higher penetration of finance products. The continued strong unit profitability performance at CFS is even more impressive considering the growth of AN Finance. Which while superior in long term profitability diluted our CFS PVR unit profitability in the fourth quarter by approximately $130 per unit. Absent this impact, our CFS unit profitability of twenty eight ninety one that you see on the slide for the fourth quarter would have been greater than $3,000. CFS total profit grew at a rate lower than our historical norms in the fourth quarter given that new and used volumes but was still up 8% for the full year. Slide eight. Provides an update on AN Finance. Our captive finance company. And its excellent performance. As expected, the profitability of AN Finance gaining meaningful traction as the portfolio matures, and we get leverage of the fixed cost structure from the outstanding growth. For the full year, we improved from $9 million operating loss in 2024 to a $10 million operating profit. Including 6,000,006 million dollar profit in the fourth quarter. During the quarter, we originated $400 million in loans bringing the full year originations to 1,760,000,000.00. Up from 1,060,000,000.00 in 2024. Had approximately a $170 million in customer repayments in the quarter. Aon Finance portfolio ended the year at $2.2 billion has more than doubled since last year. The quality of the portfolio continues to improve. Our credit and performance metrics are improving. With average FICO scores on originations of six ninety six for the full year of 2025 compared to six seventy eight a year ago and six twenty three in 2023. Thirty day at the end of 2.7% were largely stable. As a percentage of the portfolio and in line with our expectations. And as we've discussed in the past, we do expect delinquency rates to continue to normalize as the portfolio continues toward full maturity. Delinquency rates migrating to the three percentage range. Our loss reserving method methodology incorporates this expectation. The nonrecourse debt funded status of the portfolio also continued to improve. As we have improved advance rates for our warehouse facilities and are benefiting from higher nonrecourse debt funding levels from our $700 million ABS issuance completed during the second quarter. Our debt funded status at December was 88% compared to 75% a year ago, and 59% in 2023. And this improved funding has freed up over a $140 million of equity funding we have used for other capital allocation opportunities. In January, we completed our second ABS offering for AN Finance, for just under $750 million at a blended interest rate of 4.25% with an advance rate of 98.7%, both improvements from our second quarter two thousand twenty five ABS offer. On a pro form a basis, this new offer will increase the funded status of the portfolio to more than 90%. Derek Fiebig: Closing off on AM Finance, business' attractive offerings are driving strong customer take up and we continue to expect attractive ROEs in the business driven by profitability growth, and moderating equity requirements. Moving to Slide nine, after sales. Represents nearly one half of our gross profits continued its impressive revenue and gross profit momentum. Gross profit for the quarter of close to 600,000,000 was an AutoNation record. Our results reflect higher repair order count, higher value repair order, and improved labor productivity. For the quarter, same store revenue increased 5% and gross profit was up 4%. And for the full year, same store revenue increased 6% and gross profit increased 7%. The improvement in fourth quarter's gross profit was led by customer pay, which increased by 8% and warranty, which increased 6%. Internal reconditioning was modestly lower in the quarter reflecting lower used vehicle sales as we've discussed. Our fourth quarter gross margin was stable versus 2020 at 48.3%, Now this reflects higher growth in the wholesale parts business which has more modest margins than the rest of the aftersales business. But it was offset by improvements in growth rates and customer pay, were up 70 basis points. We remain focused on the points technology to drive additional volume and productivity on and on hiring. Developing and retaining our technicians. As Mike mentioned, these efforts have helped to increase our franchise technician headcount by more than 3% from a year ago on a same store basis reflecting better technician retention. The increased the increased technician workforce is key to consistently delivering mid single digit growth and after sales gross profit. To Slide 10, adjusted free cash flow for the year was 1,050,000,000.00 or 125% of our adjusted net income. Adjusted free cash flow increased by nearly $300,000,000 a year ago and free cash flow conversion improved by 20 basis points. The increased cash flow represents stronger operational performance including our continued focus on working capital and cycle times. CapEx management and prioritization, resulting in $20,000,000 less CapEx in 2025 and the recovery from the CDK outage, including $80,000,000 in business interruption related insurance receipts I mentioned earlier. We excluded the CDK recovery from the 120 per 125% free cash flow conversion calculation. Capital expenditures depreciation ratio was 1.25 compared to 1.4 a year ago. We continue to focus on driving free cash flow to improve or to provide maximum capital deployment capacity. Turn to Slide 11. For the full year, we deployed over $1,500,000,000 in capital with half of it being reinvested in the business in the form of CapEx and M and A. And half returned to our shareholders. Remain prudent in our CapEx methodology which is mostly maintenance related, impulsory spending and totaled 309,000,000 for 2025. We continue to actively explore m and a opportunities to add scale and density to our existing markets, In 2025, we invested 460,000,000 closing on transactions in Baltimore, Denver, and Chicago as Mike discussed. Share repurchases are an important part of our playbook for the full year We repurchased 785,000,000 or 10% of their at the beginning of the year. At an average price of a $193 per share. In the last three years, we've we've repurchased a total of 2,100,000,000.0 representing 36% share count reduction. At an average price of a $170 a share. In our capital allocation decisioning, we also consider our investment grade balance sheet and the associated leverage levels. At quarter end, our leverage was 2.44 times EBITDA, almost identical with the 2.45 times EBITDA at the end of last year. And well within our two to three times long term target. Giving us additional dry powder for capital allocation going forward. Now let me turn the call back to Mike before we go into question and answer. Mike Manley: Yeah. Thanks, Tom. So in summary, 2025 was a year of growth for AutoNation. Organic growth was volume up, revenue up and after sales margin up. Acquisition growth with the addition of five dealerships with great brands cash flow growth, as Tom mentioned, with adjusted free cash flow over 1,000,000,000 up 39% Capital allocation, think in the year was very balanced and disciplined and all of this in combination resulted in that increase in adjusted net income and improvements in adjusted EPS of over 16% that both Tom and I have been talking about. And I think capped off a very solid year of growth. For AutoNation. And I'd like to thank all of colleagues and associates in the business for everything that they did. So just briefly turning and looking ahead to twenty twenty six and just some of the commentary that we have. We obviously expect to move in line with the market. And, we think the market will be slightly down in 2020. '6 compared to 2025, but there could be some benefits. From known tailwinds around withholding tax rates, refunds, and bonus depreciation? But that's our expectations we sit here today. From a new unit profitability, we think it will remain fairly stable for the 2025 levels. That's expectation at least for the the coming few months. And we believe that the used vehicle market is going to still remain constrained to some extent, but we think it will show improvements year over year. From our CFS business, we spent some time talking about that on the call. But what's important for us is to maintain the performance that we have. And that's a big, big focus for all of us, but being very aware of customer sensitivity to monthly payments which clearly is a key topic for the business. And for us going forward, we're going to continue to expand AM Finance portfolio and grow its profitability. That will drive more SG and A leverage that Tom mentioned in his commentary. And then just finally turning to aftersales, I'd like to bank our aftersales. Colleagues across the entire business for the record that they delivered in Q4. We think we're well positioned, frankly, to continue that growth in mid single digit growth numbers. And I think we have believers, and we're certainly putting the resource in place to help facilitate that. I think all of that will enable us to continue to deliver strong cash flow. And obviously, be able to deploy significant capital We've got a strong financial position. Tom mentioned our investment grade balance sheet. I think our operations are disciplined. I think we can continue to do that, continue to improve productivity Ultimately, the aim is to continue the growth that I mentioned before. So with that, I'm going to open it up for questions, if I may. Derek Fiebig: Yeah. Adam, if you could please remind, the audience how to get in queue. Operator: Of course. If you'd like to ask a question today, please press star followed by one on your telephone keypad. If you find your question has been answered or you'd like to withdraw, please press star followed by two. First question today comes from Rajat Gupta from JPMorgan. Rajat, your line is open. Please go ahead. Great. Thanks for taking the Rajat Gupta: Just had a couple, you know, just first on on the new car business. The unit numbers seem a little weaker, you know, than than some of the peers, you know, some of the industry metrics. Although, the profitability was was better. I'm curious Was there a temporary trade off decision that you made in the quarter? Around, you know, profitability versus sales, or or was it just a function of know, comparisons and just your regional and brand mix, that might have driven that 10% same store decline. I have a quick, follow-up. Thanks. Mike Manley: Yeah. Rajat, this is Mike. I think there are a number of things that were taking into consideration. Firstly, we mentioned that we saw year over year end, in fact quarter over quarter a reduction in OEM dealer facing incentives. We offset some of that with margin because obviously, impact net transaction price. But particularly year over year, that reduction in we had to be very careful in our consideration and balance between volume and margin. In fact, the largest drop, by the way, was dealers OEM dealer support for hybrid and battery electric vehicles as you can imagine. That was one dynamic that we saw in the quarter. The second one was if you think about where the key reduction came from us, EVs and bebs represented about 30% of our mix. Q4 twenty twenty four. That dropped to 20% in Q4 twenty twenty five. That's 60% reduction in EV volume. So the biggest impact on that 10 that you referenced by far came from electrified powertrains I think the combination of those things and the way that we were trying to make sure we had a good balance between, our market share performance, but also margin led to what we delivered, which was I think, a good a good sequential improvement in new vehicle margin. And also reflective of some of the things we were trying to do in the business. And it was two things really that resulted in the position that we ended with. Rajat Gupta: Understood. Understood. That that's helpful. And then just, you know, maybe for Tom, you know, on on automation finance, Really, really quick and, you know, good progress there in terms of the maturity of that portfolio. I'm curious, how should we think about the cadence of profitability over the next year or maybe, you know, the year beyond? I mean, I I are we at a point in your trade off between penetration pace versus portfolio maturity that it's safe to expect a continued inflection in the profitability here. I'm curious, like, how you plan to balance that. You know, any guardrails you can give us you know, maybe even around net interest margin or or loss ratios also would be helpful. Thanks. Tom Szlosek: Thanks, Rajat. Yeah. We're we're really happy with the the growth that we're seeing in the portfolio. I mean, the growth rates I mean, let's put it this way. The the doubling of the portfolio you know, is is a real harbinger for the future. And, you know, we don't we don't realize all those benefits in the in the year it doubles. As you realize because of the you know, the charges, the upfront charges for CECL and so forth. As as we mentioned, $6 million we achieved in the fourth quarter And I think that's probably a a decent starting point as you look you know, on a quarterly basis through 2026. So that that, you know, will give you some you know, a nice starting point for what the what the P and L will look like for for ANF. I I think we're we're reasonably confident on net interest margin. The portfolio from a delinquency perspective and risk perspective is well managed by the team. Delinquency, as I've said, will grow as you know, it's it's mostly a brand new portfolio. So you start to see your delinquencies as it matures, but we've got that factored in. So I so I believe that our performance trajectory the income improvement will will continue. We'll be in a good position throughout you know, 2026. Rajat Gupta: Got it. Got it. Do you do you expect to maintain these What what's the upper end you have in mind on penetration? For the for the portfolio? Or immediate I think it's Tom Szlosek: I mean, it's it's it's really strong on on the used side, as you know. I mean, on on the on on the new side, we we're we're partnering with our OEMs as well, you know, from a financing perspective. Yeah. So as we grow, continue to grow our our used business, we we do see opportunity to drive further penetration. We got great partnerships It's a great programs with our our lending partners outside of ANF, but I think we're gonna you know, help continue this trajectory. But let me just add just some color to it if I may, Tom. I think he's I I think Tom's exactly right. There are a few things that are that that that are important to us. One is we work in partnership with all of our OEM which means we're very, very clear with our teams about that relationship. And frankly, we cannot compete with an OEM cap tip because of the way that they subsidize either their leases, obviously, or their finance and and that is not our job to do. We've improved our penetration in what we call the market that is open for us to be competitive in, and that is those new vehicles, those few new vehicles that don't qualify wouldn't benefit our customers wouldn't benefit from subsidized finance. And, obviously, all of our used vehicle volume that falls within the buy box that we've established for the company. We're very, very disciplined in that buy box, and our penetration has improved over the years, but we still have headroom to improve even further. The constraint really on our growth, even though it was very good, was well balanced, between Jeff Butler, who's our CEO of that business, and Tom. To make sure that in terms of the way we're thinking about allocation of resources in the business, we had balance. But it could have grown faster than it did. But I'm I was very pleased with the discipline that they said. So I do think that there is opportunity from a penetration point of view And as we mentioned earlier, my penetration mainly is coming from the used car market and as I we think there'll be some stability in volumes in that area. Rajat Gupta: Understood. Understood. Great. Thanks for all the color, and good luck. Operator: The next question comes from John Babcock at Barclays. John, please go ahead. Your line is open. John Babcock: Hey, good morning, and thanks for taking my questions. I guess just quickly, just on capital spending. Is there any reason to think that 26,000,000 would be any different, from 25? And then also, you could just talk about the M and A market, how that looks right now and and how you plan to balance out with share buybacks near head, that'd be great. Tom Szlosek: Yeah. Thanks, John. Thanks for the question. From a from a CapEx perspective, I think we're I I think 2025 levels are a reasonable starting point for 2026. I mean, it's pretty pretty locked down in terms of the spending that that we do. As you know, it's it's mostly you know, maintaining our our properties and and keeping up with OEM requirements on, you know, latest, you know, models to stores. We've got some service growth as well that we're, you know, supporting. But I think I think the levels that we spent at in in '25 are sustainable, for 2000, '26. In terms of m and a, and and Mike's is involved in this as I am, so it'd be good to hear his commentary as well. But know, we we had a had a really strong year. We saw a number of opportunities across you know, all four quarters in 2025 in terms of you know, opportunities. I think we were selective Like, you you saw where we spent our money in terms of regions and brands and as Mike said, you know, we've got we we ended up with some high very high quality brands and you know, in territories where we have density. Where we think we can create operating synergies. And I'm I'm confident that, you know, 2026, there'll be you know, continued opportunities for us in the dealership space. And remain disciplined. I mean, we'll go for the ones that you know, pencil out for us. And then allow us to take advantage of you know, where we're present and and where we can drive operating synergies. Mike Manley: Well, I think it was pretty completely answered, but just add some color on the process that we have. Like all organizations, when we think about the capital deployed, we have a number of hurdle rates, but the key one for us is on a per shareholder basis. What are we able to return thinking about it from individual shareholder perspective. Which to a large extent can be an interesting hurdle to have when you think about m and a. The good news is there are opportunities where not only does the business that we're interested in deliver reasonably that we can bring significant synergies to it. And, obviously, that's not something that is, usually or or very easily apparent when you first think about purchase prices of some of these assets. But it is clearly a big consideration for us because we have, significant invested resources and capabilities that we obviously get leverage in the businesses that we're adding so long as we're adding them into geographies and densities that make sense, and and that is a big part of the calculation. We're also thinking about the incremental EBITDA that is delivered from these acquisitions and how we can leverage that in the business for further return to our shareholders, whether it is through revenue or net income growth or whether it is in terms of share repurchases. So I think there are opportunities that are coming to the market. It is reasonably buoyant, in my view. We are, like everybody would tell you, very selective. And very clear on the hurdles of what makes an attractive target or not. I think that's the best I can add to what Tom said. John Babcock: Thanks for that color. Then just one follow on. I am just kind of curious. How did how did hybrid GPUs trend in the quarter? And then also, what are your expectations on when EV electric vehicle GPUs might start to normalize with typical combustion engine vehicles Any color on that would be helpful. Yes. Well, as I already mentioned, on comments, we saw quite a significant flow pullback in terms of incentive contribution from our OEMs in terms of dealer support incentives. So let me get the exact numbers for you so that I can be completely completely accurate with you. So from overall GPUs on hybrids And were largely flat. Tom my numbers on that on HEBs. Reduced on battery electric vehicles in Q4. But we obviously benefited from a very significant mix change in the quarter from a stabilization of mines I think if the if the industry stabilizes around two to 3% penetration and that will be based upon a proper demand and supply balance then I think you will begin to see some improvement in margins both on battery electric vehicles in particular, but that, in my view, is not gonna happen in 2026. Think it will take longer for that, but I do think you will see improvement in hybrid margins throughout 2026. With a with a better balance because many people find that a much more attractive powertrain combination. Than just battery electric vehicles. Tom Szlosek: Tom, just Yeah. Just yeah. Yeah. On the sequentials, you know, we've been very stable in terms of hybrid electric as a relative to total revenues or total unit sales on on new roughly 20% a quarter, and that that has remained. Very stable. We have seen a decline in in bevs themselves in favor of ICE engines probably to the extent of five to 6% from first quarter to fourth quarter. Okay. Thanks. I'll get back in queue. Operator: The next question comes from Geoff Lick at Stephens. Geoff, please go ahead. Your line is open. Geoffrey Lick: Good morning. Thanks for taking my question. Mike, as you point out in your several times in the prepared remarks, obviously, there's a lot of extraordinary items this year in terms of pull forwards and obviously, the compare from last year. After the election. I was just wondering if you could just break down the year, you know, thinking of 2025 as the base and now you're as you go in, is there any particular callouts in terms of parts of the year or items that you would kinda call out, hey. This is gonna be a particularly more challenging compare or, hey. Things get a little easier. Here or there? Just wondering your perspective there, just kind of thinking of you know, an extraordinary year of 2025 is not what you're comparing against. Mike Manley: I think it's a great question. You know, we we obviously we obviously saw the dynamics of various different announcements impact in March, April. For example, when tariffs really became very much front of mind. And then as we approached for those electrified powertrains, the end the end of incentives, there's a the two key points where I think when we think about comps, we just need to be mindful just need to be mindful of that. I do think that there's a when I review the year, what I feel we did well was really to navigate those events. Obviously, you feel good when you're in a period of of pullback. But when that goes away, you try and make sure that you fill that vacuum as as effectively as you can to continue the performance and the momentum in the business. And I think the demonstration from us and our results over the full year showed that even in a turbulent year, we can continue to perform at a reasonable level. And deliver the results to our shareholders. And I'm pleased about that because you know, as we came into 2025, I think none of us had the expectations of how it would actually play out. We obviously think 2026 will be more stable, but I I'm there's no way I can call that. What I can tell you is that we have a business model that's that I think is is robust, a business model that is disciplined. What gets thrown at us will not only navigate, but we'll try and find those areas where we can maximize the opportunities that that come I think this year, we're gonna be, as we have always done, focused on affordability, frankly. You know, we we all know what's happened with net transaction prices over the last few years and and how that's impacted monthly payments. And it's been a topic of discussion both on our calls, but with other people calls as well. And I think we're gonna be everybody will be very mindful of that and seeing how that may move through the year as as really an indicator of whatever strength is in the new retail market and and used market as well. So that's kind of my top of mind thoughts in response to your question. Geoffrey Lick: And then just a quick follow-up. I was wondering maybe you could put your OEM hat back on. As we get into the second half of this year, there's going be a sizable year over year increase in lease returns Just thinking about what that how that might impact you know, the dealership business, but also some of these lease returns are gonna be deeply underwater. Specifically the EV ones. Just wondering how you see the that dynamic of how the OEMs will handle that and how that will affect the franchise business? Mike Manley: Well, I would imagine every single OEM is already provided for that. Frankly, because I don't think it's we don't need to get there and it suddenly be a surprise. I think it is very well forecasted. I think it's very evident from some of the early signs that we are seeing. And any OEM should have assessed that in their portfolio and should have provided for it. There have been a number of very large provisions that have been announced, and and I'm not sure it it also continue it also would cover forward looking liabilities such as residual values. I think increased lease returns into the business is a very, very good thing. I think the important part of that is that they return to market at a correct market price and that the OEMs work with the dealers to try and make sure that that that is a stable price in the marketplace. And not transfer some of the liability that may be there in terms of actual residual values onto the dealers and ultimately to some extent onto consumers. So, firstly, in summary, it's well known that there are certain models, certain powertrains, where the original residual value estimates are incorrect. Think they're well known. They should be provided for. And I think the dealers will benefit from those lease returns and work with their OEMs to try and get a reasonable fair price for those vehicles in the marketplace. We're certainly looking forward to the benefits that come from improved lease returns in our business. Geoffrey Lick: Thanks very much for the, the quest answers, and, look best of luck on 2026. Operator: The next question comes from Daniela Haigian from Morgan Stanley. Daniela, please go ahead. Your line is open. Daniela Haigian: Thank you. Good morning, everyone. So you you touched on this a little bit in the in the prior question, but how are you viewing affordability pressures as it relates to consumer credit availability as we enter this new year? You also mentioned consumer sensitivity to monthly payments. Have you seen any change in consumer behavior in the aftersales business, whether it's willingness to pay for certain repair orders or or otherwise? Mike Manley: Yeah. I I as I said earlier, obviously, depends how far you wanna go back, but people still referring back six years now to pre pandemic. But we've seen significant compound growth in monthly payments that have basically been driven by a combination of average transaction price, but some differences in in charged APR. I think there will be some relief in charged APR as we get into this year, further into this year, particularly towards the back end. But there's no doubt that affordability is front of mind. I think the OEMs are going to look at how they can provide more affordable models in the market marketplace either through decontenting because they are also absorbing, as you know, whatever the residual tariff impact will be on their, cost of goods sold as well. So I think that, they're they're gonna try and manage that without significantly impacting net transaction price and maybe with some maybe with repackaging. I think as a result of that, that's one of the reasons why we think the new car market in particular will probably be down somewhere between 25% for the year. We anticipate that that's in our view. We think that we will perform at a minimum in line with that, maybe slightly better. We think that there is pent up demand that will hold the used car market relatively stable. Albeit there may well be some shifting down to slightly lower prices in in there. In terms of consumer behavior, we haven't really seen much behavior. In the aftersales business, it's very competitive. We have seen over the last few years, and Christian tracks this religiously with his team, we have seen much, much more attention to the cost and pricing of service and parts within the business. And we know we compete with non franchise providers of service and parts because our growth really is targeted on improving our penetration in the three year old plus aftersales market. And to do that, you obviously have to provide great convenience, great service, but you've gotta be very competitive on price. So we can achieve that without an impact on our margin. And the aftersales team, I think, did a good job. We talked about the improved improvement in in aftersales margin. We just gotta keep keep doing that. There is no right to that business. We have to conquest it. And to do that, it's a combination of price and service. So they're much, much more price sensitive particularly as the as the vehicle gets a bit older. And you just have to be aware of it and respond accordingly. Daniela Haigian: That's helpful. And then digging more into the used market, have you seen any mix shifts or do expect to see your strategy evolve in terms of older or newer within that that segment, especially as off lease volumes begin to return later this year? And then you also spoke to an opportunity to acquire more competitively in that market. So any commentary or color there would be helpful. Thank you. Mike Manley: Yeah. So firstly, if you take our results, I think we performed really well in $40,000 plus vehicles. We saw growth in that segment, and it's it's a segment that I think we're very strong in. Where we did not perform really to market was in that particularly that sub $20,000 price range. And some of that is because when we think about vehicles we want to sell to our customers, many of those vehicles don't fit the profile that we wanna put in the marketplace. And I think chasing volume of a four use car is not we wanna do for the brand. But notwithstanding that, we are looking very, very carefully at how we can achieve a slightly different balance in terms of price segments if our used vehicles, which would naturally mean stocking vehicles of a lower price band, say sub, the purpose of this discussion, $30,000. But how do we do that and get the right inventory? That is a very, very competitive that's a very, very competitive marketplace, as you can imagine, and this is where we've got to leverage our scale and our reach. And the way we would do that is our ability to respond to customers very quickly when they're looking for values. Our ability to be flexible in terms of how we can go and get those vehicles or have those vehicles drop dropped off, the speed of our payment, and the fact that when you sell a vehicle to automation, you're selling it to an investment grade company, and and you you you get certainty with that. So I think we got to we got to leverage the infrastructure and the teams we have So in summary, I think there is mix shifting that we should be aware of, and we should also make sure that we are playing in that, which is say, sub $30,000 vehicles, and we've got to leverage our strength to be on. more successful at acquiring inventory in that area. And that's what Chris and team is focused Daniela Haigian: Thank you. John Babcock: Used market. The GPUs in the second half were down versus the previous six quarters, more at the 1,600 level. Do you think this is more of a demand or a supply issue? And and how should we think about that heading into 2026? So Tom, you want to answer this, and then I'll add some color or would you like me to answer? No. Happy to do it. I'll build off of what you said earlier. I mean, you know, you're you're right, John. You know, the fourth quarter was a low mark for the year in terms of used GPU. We were we were disappointed. We we know that some actions that we can take will get us back to the norms that we had in the first and second quarters. We you know, eventually, we expect to be in in target on a longer term basis, 2,000 per unit. Some of it is the basics Mike Mike mentioned. Acquiring at the right price, reconditioning properly, not excessively, and and and getting the, you know, day one pricing correct. The market is tighter, so it's important to move with speed when know, when we're, you know, doing acquisitions. But we do have opportunity. I mean, the short term, getting the right mix, as Mike mentioned, you know, calibrating brands, price points, and the like. Aging, managing our funnel, our our commercial funnel of opportunities all the way through to closure, the second, you know, shorter term opportunity we have. And as as we said, you'd doing reconditioning, you know, efficiently and quickly and getting the vehicles out to the floor longer term. We're really encouraged by the business. We'll be making some investments in it. We do wanna improve the, you know, customer journey, as you know. It's become much more virtual and digital, and and we're putting that capability in place. And and we'll continue to work around too. That's an investment we wanna make. So in summary, you know, we're a lot of attention to the business and you know, know that we'll be driving unit profitability and overall profitability higher. Mike Manley: I think that was a really comprehensive answer. There's not much that I can add but one thing I think that is going to show us the strength of being a new car retailer. That is if you look at sourcing channels, there has been increased competition really across all sourcing channels, not just trading. We buy your car, obviously, auction. That's going to continue. We've been able to offset some of that cost pressure through mix changes as well. In terms of how we source vehicles. And I think that's something that we have the ability to do because we operate a very, very sizable new car sales organization, and, that that is a great and often often undervalued channel because it is still the best channel to source. Excellent used car vehicles. And I think it will think it will play I think there'll be more competition, and I think that will be part that channel will partially offset that partially, not completely. Because you also get price pressure in that channel, which is knock on price pressure from more visible channels, but it will partially offset some of that price pressure And I think Tom answered the rest really really incredibly well. Thanks, Tom. John Babcock: Okay. Great. Thanks for that. Really good answer. And then on on new GPUs, can you give us a sense of what you're seeing in the marketplace You mentioned that you're seeing sort of continued stabilization and I think the market is going be very encouraged if we see that continue. Tom Szlosek: Yeah. Thanks, John. I mean, I mean, the third quarter to fourth quarter, Mike talked through the improvement in the overall, the weighted GPU notwithstanding the you know, the pressure we we've got on OEM dealer incentives. We're encouraged as we build our plan for 2026 that there are actions that we can take to continue that stabilization so far. So good. We haven't closed for January. Haven't do expect to see a stable December to January. So off to a good start, I'd say. You know, on that front. It takes, you know, takes discipline. Do this with industry inventory levels also. Operator: Apologies. Please stand by. Adam, can you hear us now? Derek Fiebig: Can hear you loud and clear. Are we live with all of our guests? Tom Szlosek: Yeah. We're good. We are. Good. Sorry about that, guys. I don't know. What happened from a technology point of view, but I I will just repeat what I said. I was referencing Raja's question right at the very beginning about the balances, the puts and takes in our business. And I think that's an important one to know as we get into this year. I think what we're trying to build is obviously, a growing after sales base of a pool of customers that we can continue to serve and and drive up our loyalty. That means that we want to make sure that we don't lose pace with the marketplace and to do that, we obviously have to be competitive to make sure that that we stay at a minimum in line in line with market. We do try and balance it where we can balance it. So as that market develops and we see what happens, there may well be more or less pressure on margins. But as Tom said, we have seen stability from third quarter to fourth quarter, and our expectation, particularly in H1, that we think to a large extent that will continue in '26. Yep. John Babcock: Thanks so much. Thank Yep. Operator: Next question comes from Colin Langan from Wells Fargo. Colin, please go ahead. Your line is open. Colin Langan: Great. Thanks for taking my questions. Just want to ask on after sales growth was 6% on a same store basis, which I think historically, it's you know, go back many years, it was three or 4%. I mean, should we think of that staying at the higher end of sort of mid single? Or you think there's just some, you know, maybe good news this year, some catch up this year from some of the issues last year? And then also on the margin there, margins also have been actually quite strong much higher than they were five years ago. Is that sustainable, or does that moderate a little bit into to '26? Mike Manley: So I'll give you my my view on that. We talked about the competitive nature of after sales and the fact that what we want to do is to conquest in particular, vehicle park of three year old vehicles. I think what that means is that hourly rate, obviously, needs to be competitive. So the fact that that by its very nature says that we the margins that we delivered are going to be constrained to some extent. Albeit still incredibly healthy, and we're very pleased with them. We do think that there's opportunity for us with different products that we can offer and different ways of communicating with the customer that we can provide more work on a per RO basis That doesn't necessarily drive up margin, per se, but it does help us a lot. With regard to the productivity that we have in our business. So there may be some incremental opportunity on the margin side, but that's not what we bake into our plans. What we bake into our plans is is more sustainable growth. Not margin growth per se. Tom. Yeah. I guess the the other thing is we we have plenty of capacity to support you know, more repair orders. Physical capacity. And as Mike said, our you know, we've been able to grow our technician workforce. But if we can continue that with with minimal additional investment, you know, we have the plant place to support more business, which itself will drive higher margin rates as well, better absorption. So I think we're positioned with the you know, to sustain the, you know, the trends we've had. And you know, continue to and Christian and the team continue to manage this very closely. Mike Manley: Yeah. I think the other thing that you mentioned earlier in your commentary that we should just we should just remind Colin of. You know, between Christian and Gianluca, we have think, been successful at growing our wholesale business. And wholesale, as we know, is much, much more competitive, and the margin is diluted. So I think that that is a that is for us a big area, again, of opportunity of growth and that will have from a headline perspective downward pressure on the margin. So you know, when we talk about after sales margin, I think we need to be clear that you base see a moderation in the margin that we report, and that may well be a mix driven thing. It may not be margin per se through our workshop. So please just bear that in mind when you're thinking about the future and and what Tom and I just said. Colin Langan: Got it. And just secondly, any thoughts on and A? I think in the past, you've talked about 66% to 67% being the right target. Is that still sort of a long term target and any sort of actions that might help you you know, reduce costs into next year that gets you closer to 66? Tom Szlosek: Yeah. Good question, Colin. Yeah. First of all, reaffirm 66 to 67 is a is a our intended target. We were a bit higher in the fourth quarter and and probably will be a little bit higher as we as we go forward here. At least in the early part of the year. You know, we've made some upfront investments on on advertising and it's really to in the upper funnel, which you know, for us means, you know, creating demand as opposed lower funnel where you're actually trying to capitalize on known demand. And and we feel like we've got some opportunity to drive better you know, upper funnel activity. So that's requiring a little bit of incremental investment here. And it's it's also talked about our loaner pool. We've made we've made some conscious investments in It helps you on the used vehicle side when they come out of the when they come out of the pool. So and we talked about you know, a tight market, but that that gives us a little bit of a relief valve terms of supply. But importantly, it it's also helping us support the the, you know, service business, you know, in its totality. So apart from those, you know, two incremental things, I expect us to you know, continue to drive towards the, you know, lower end of that range we talked about over the long term. And we've got, you know, a a number of different initiatives in place As you know, the biggest component of SG and A is compensation. And it's important for us to have good productivity when it comes to both sales and service. We feel like we've got excellent training programs and standard procedures that we've got the cycle service. To. To drive productivity and and comp and benefits. I meant I talked about advertising. And the the other big category is is just you know, other SG and A. We've got a number number of good initiatives to manage through some of these inflationary things that we're seeing, like energy costs, know, as an example. We're trying to standardize our our usage model around the utilities to offset some of that. So it's it's a it's a it's an effort that we're heavily focused on and and just reiterating where we are in terms of Hopefully, that helps, Collin. Colin Langan: Yeah. Super helpful. Thank you very much for taking my question. Operator: I'll now hand back to the management team for any closing comments. Mike Manley: Yes. Thanks, Adam. Again, thank you very much for joining the call today and all of your questions. And just finally, as I mentioned earlier, I just wanna thank the AutoNation team. For what we delivered. And as usual, then you will know this. That's behind us now. We've got 26 ahead of us, so let's get to it. Operator: Concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.
Operator: Welcome to the IBEX Second Quarter FY 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] To note, there is an accompanying earnings presentation available on the IBEX Investor Relations website at investors.ibex.co. I will now turn this conference over to Greg Bradbury, Investor Relations for IBEX. Greg Bradbury: Good afternoon, and thank you for joining us today. Before we begin, I want to remind you that matters discussed on today's call may include forward-looking statements related to our operating performance, financial goals and business outlook which are based on management's current beliefs and assumptions. Please note that these forward-looking statements reflect our opinion as of the date of this call, and we undertake no obligation to revise this information as a result of new developments, which may occur. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause our actual results to differ materially from those expected and described today. For a more detailed description of our risk factors, please review our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on September 11, 2025, and any other risk factors we include in subsequent filings with the SEC. With that, I will now turn the call over to IBEX's CEO, Bob Dechant. Robert Dechant: Thanks, Greg. Good afternoon, and thank you all for joining us today as we review our fiscal second quarter 2026 results. I'd like to start by recognizing the entire IBEX organization for delivering another outstanding quarter yet again. Their continued consistent execution underpins our financial and operational success and is key in building IBEX into the category disruptor we are today. Looking to our results, I am pleased to report that the momentum we've built across the business accelerated in the second quarter, enabling us to deliver exceptional results with headline revenue growth of 17% and adjusted EPS growth of 46%. Quarter-over-quarter, we are continuing to further separate ourselves from the pack in the BPO market. In fact, this quarter marks our fourth consecutive period of double-digit organic revenue growth, well above competitive growth rates and underscores our clear differentiation. And this continues to resonate well in the market. Our market-leading growth is a direct result of the differentiation we have built into our business and our ability to execute against it. At the top, our growth starts with our new logo engine, which consistently is able to win trophy clients versus our much bigger competitors. In Q2, we had significant wins in HealthTech and FinTech. HealthTech has been a standout performer, growing rapidly since we launched the vertical in 2021 and is on track to become $100 million by the end of the fiscal year. This success demonstrates our ability to build and scale new verticals from the ground up. Outside of the new wins, we are also driving growth within our existing customer base. Our approach is simple. Once we begin working with a customer, we build that relationship over time through a combination of exceptional operational delivery and differentiated service model built with innovative technology at its core. As a result, we are able to become more than another vendor, we are a trusted partner. One example that typifies this dual approach is our recent expansion into India. We entered this strategic market in late March of 2025, and we now have 2 sites with nearly 1,000 agents up and running. Beyond traditional contact center services, we've expanded our capabilities into the region to include broader revenue cycle management and credentialing services to better support our health care clients. This expansion has been fueled by both organic growth with existing clients and new logo wins in the region. Expansion into India represents one of our highest growth vectors and will continue to be a key driver of growth as we reach critical mass. Our combined outperformance has allowed us to achieve several major milestones in calendar year 2025, including surpassing $600 million in revenue while growing 16% during that time. And we were able to do it profitably, generating $80 million of EBITDA with 13% margins. This continues to validate that we have structurally built our company for performance where our growth vectors are also our margin expansion vectors. Today, the IBEX brand is stronger than it has ever been. Our employee and client Net Promoter Scores remain world-class, underscoring that the image we project to our customers is consistent with the culture we've built internally. Our market-leading growth, combined with our healthy balance sheet are enabling strategic investments in our growing AI capabilities as well as further expansion into strategic markets and in top-performing geographies. We believe we are further along than any of our competitors in our AI solutions, partnerships and deployments. As a reminder, our Wave iX AI solution has 2 dimensions: one where we leverage business insights organization and partnerships with best-in-class Agentic AI technology companies to create successful AI solutions for our clients. These solutions allow us to create a seamless end-to-end customer journey from AI agent to human agent. The second dimension of Wave iX is where we deploy AI internally across the agent life cycle. These purpose-built AI technologies enable us to drive operations more efficiently and effectively and dramatically improve agent hiring, training and onboarding, what we call speed to green. As a result, IBEX is increasingly being recognized as an industry leader in AI-powered CX. Said another way, the transformation of our contact center operations to AI-powered is enabling us to extend our separation on both operational and financial performance. We are now moving beyond our leadership position in BPO 2.0 and are defining the market for BPO 3.0. To accomplish this, we are continuing to invest in bolstering our team and strategic partnerships to support this critical vector for growth. To that end, we recently promoted our President of IBEX Digital and Deputy CFO, Mike Darwal, to the role of Chief AI and Digital Officer. As you might have surmised, Mike's worn many hats over a decade plus here that he's been with IBEX, and he's proven himself to be an invaluable member of our leadership team. Mike has been the Chief Engineer of the success of our soaring digital business. As the CX industry and IBEX continues its transformation from AI-supported to AI first, we will continue to invest in the talent and the resources to maintain and extend our leadership. Looking ahead, IBEX is well positioned for success in the second half of the fiscal year and beyond. We have built a structurally sound company with a market-leading growth profile, expanding margins and strong cash flow generation. We also have one of the finest and growing rosters of trophy clients in the industry, each with significant outsourcing spend and expansion potential. Additionally, we continue to set ourselves apart from the traditional BPO CX provider, both in terms of our financial performance as well as our leadership in the AI evolution of the space. Now before I turn the call over to Taylor, I want to welcome Jack Jones as our new Chairman. Jack has been an invaluable Board member for nearly 9 years. Prior, he was one of the biggest buyers of BPO services during his 26-plus years at JPMorgan Chase and was a key executive for 5-plus years at Expert Global Solutions, a leading CX company. We are all excited to have him step into the Chairman role. With that, Taylor will now go into more detail on our fiscal second quarter financial results and guidance. Taylor? Taylor Greenwald: Thank you, Bob, and good afternoon, everyone. Thank you for joining the call today. In my discussions of our second quarter fiscal year 2026 financial results, references to revenue, net income and net cash generated from operations are on a U.S. GAAP basis, while adjusted net income, adjusted earnings per share, adjusted EBITDA and free cash flow are on a non-GAAP basis. Reconciliations of our U.S. GAAP to non-GAAP measures are included in the tables attached to our earnings press release. Turning to our results. Our second quarter results are once again among the strongest in our history with record revenue and EPS. Second quarter revenue was $164.2 million, an increase of 16.7% from $140.7 million in the prior year quarter, marking our fourth consecutive quarter of double-digit top line growth. Revenue growth was driven predominantly by growth in our high-margin HealthTech vertical of 35.1%, travel, transportation and logistics of 20.2% and retail and e-commerce of 17.2% as well as strong performance by our digital acquisition services, partially offset by an expected decline in telecommunications, one of our smallest verticals of 23.1%. We continue to win and grow in all geographic markets and our focused efforts to grow our higher-margin offshore delivery locations are continuing to have a favorable impact on bottom line results. Our highest margin offshore revenues grew 16.2% compared to the prior year quarter. Our nearshore locations grew 8.5% and our onshore region grew 27.5%, driven by growth in our high-margin digital acquisition services. Offshore revenues comprised 52.3% of total revenue and onshore revenues expanded to 24% of total revenue from 22% in the prior year quarter, reflective of the growth in our digital acquisition services. Our higher-margin digital and omnichannel services continues to strengthen, growing 19% versus the prior year quarter to 82% of our total revenue. We have structurally built IBEX so our growth vectors are our highest margin regions in services, and we expect that we will continue to be successful in driving growth in these higher-margin regions in services as new client wins and growth in our embedded base continue to be focused in these areas. Second quarter net income increased to $12.2 million compared to $9.3 million in the prior year quarter. The increase was primarily driven by the continued growth of work in our higher-margin offshore regions and operating leverage gained from SG&A expenses as they decreased from 18.3% to 16.8% of revenue. Our tax rate was 19.1% versus 20.2% in the prior year quarter, primarily attributable to changes in revenue mix across our taxable jurisdictions and favorable discrete tax benefits in the current year quarter. We expect our effective tax rate before discrete items to remain consistent at 20% to 22% for the remaining quarters before any discrete items, including discrete tax benefits related to stock-based compensation. Fully diluted EPS was $0.83, up 45% from $0.57 in the prior year quarter. Contributing to the EPS growth was the impact from strong operating performance and fewer diluted shares outstanding as a result of our ongoing share repurchase program. Our weighted average diluted shares outstanding for the quarter were 14.7 million versus 16.5 million 1 year ago. Moving to non-GAAP measures. Adjusted EBITDA increased to a record of $20.7 million or 12.6% of revenue from $16.5 million or 11.8% of revenue for the same period last year. The 80 basis point improvement in adjusted EBITDA margin was primarily driven by growth in our higher-margin offshore locations during recent years, growth in key high-margin verticals from existing and new clients launched throughout fiscal year 2025 and fiscal year 2026 to date and a reduction in SG&A expenses as a percentage of revenue. Adjusted net income increased to $12.8 million from $9.6 million in the prior year quarter. Non-GAAP fully diluted earnings per share increased 46% to $0.87 from $0.59 in the prior year quarter. As a company, we're pleased with the client diversification we have established over the last several years. For the second quarter of fiscal year 2026, our largest client accounted for 10% of revenue, and our top 5, top 10 and top 25 client concentrations represented 39%, 57% and 79% of overall revenue, respectively, as compared to 39%, 54% and 79% of overall revenue in the prior year quarter, representative of a well-diversified client portfolio. Over the past decade, we have done a tremendous job retaining our top 25 clients and are excited to see one of our signature wins from fiscal year '25 already move in the top 20 and one of our signature client wins from fiscal year '24 move into the top 10. Switching to our verticals. HealthTech increased to 17.4% of second quarter revenue versus 15.1% in the prior year quarter. Travel, transportation and logistics increased to 14.1% versus 13.7% in the prior year quarter. Retail and e-commerce remained consistent at 28.6%, and our other vertical increased to 13.7% compared to 10.6% in the prior year quarter. These increases were driven by continued growth in multiple offshore geographies and our continued ability to win significant new clients in these verticals. Conversely, our exposure to the telecommunications vertical decreased to 8.7% of revenue for the quarter versus 13.1% in the prior year quarter as we see lower volumes from legacy carriers, marking the first time since pre-IPO, this vertical comprises less than 10% of revenue. Revenues from the FinTech vertical were relatively flat and represented 9.3% of revenue for the quarter versus 11% in the prior year with expectation of growth in the ensuing quarters. Moving to cash flow. Net cash generated from operating activities was a second quarter record of $6.6 million for the second quarter of fiscal year 2026 compared to $1.1 million for the prior year quarter. The increase was driven by increased revenues and profitability as well as lower use of working capital. Our DSOs were 73 days, up from 71 days at the end of the first quarter, which is consistent with our expectations. We expect our DSOs to remain stable in the mid-70s on a go-forward basis. Capital expenditures were $11.7 million or 7.1% of revenue for the second quarter of fiscal year 2026 versus $4.3 million or 3.1% of revenue in the prior year quarter. This planned increase was primarily driven by expansion in our offshore regions to meet our strong demand. Following our typical seasonal pattern, free cash flow was an outflow of $5.1 million in the current quarter compared to an outflow of $3.2 million in the prior year quarter due to the increase in capital expenditures. During the quarter, we repurchased approximately 78,000 shares for $2.9 million, bringing our fiscal year share repurchase to $170,000 or $5.6 million and leaving $7.8 million on our share repurchase authorization. We ended the second quarter with $15.5 million of cash and debt of $1.4 million for a net cash position of $14 million, consistent with a net cash position of $13.7 million at the end of our last fiscal year. In the second quarter, we continued to build on the momentum we have generated over the past 12 months. Our strong quarterly revenue performance was again led by meaningful growth in our higher-margin geographies, services and vertical markets, particularly in HealthTech. This combination of drivers led to a record quarterly adjusted EBITDA of $20.7 million. As we look ahead to the second half of the fiscal year, our robust balance sheet is enabling us to make opportunistic investments to further extend our current AI leadership position. Additionally, with the clear returns we've already seen, we are proactively investing in increased sales resources as well as capacity in our top-performing geographies, positioning us for further success in the years ahead. Considering our outperformance in fiscal year 2026 thus far, we are confident in further raising our revenue and adjusted EBITDA guidance for the year. Revenue is now expected to be in the range of $620 million to $630 million versus a previous range of $605 million to $620 million. Adjusted EBITDA is now expected to be in the range of $80 million to $82 million versus a previous range of $78 million to $81 million. We now expect capital expenditures to be at the upper end of our previous $20 million to $25 million range. Our business is well positioned for today and the years ahead, and we're excited about the future of IBEX as we head into the third quarter of fiscal year 2026 and beyond. With that, Bob and I will now take questions. Operator, please open the line. Operator: [Operator Instructions] Our first question comes from David Koning with Baird. David Koning: Great job again. And I guess to kick it off, a lot of market turbulence around AI and who's going to win and who's going to lose and new products coming out. It sounds like you're doing very well. Just you talked a little bit already about it on the call, but maybe give a little more color on the demand you're seeing. Is your industry and your company a benefit of AI? Is it a headwind? Maybe just talk through that a little more. Robert Dechant: Yes, Dave, and thanks for the question and your opening comments. I couldn't be more prouder of the team that just continues to deliver quarter-over-quarter. Look, I think we have established ourselves in the AI leadership position in this industry. And there's a lot of good things that comes out of that. it helps our new logo engine going in and winning traditional just BPO deals because this is a company that can take the journey of where those clients, those trophy clients want to go. So it helps us significantly in that. Number two, it helps us in the operational execution of the day-to-day business that we have to outperform, to distance -- to continue to distance ourselves from the pack in terms of performance, which then pays off in market share growth. As an example, and I think this is on the slide, our top 10 clients, we grew 20%. Where did that come from? It came from market share because of our outperformance. Then the third dimension is where we now are creating those AI agentic solutions, AI agents. But the value proposition that we have is very, very unique because we're leveraging the power of our business insights organization and what we do on the human side, and we kind of create that what I'll call seamless journey end-to-end. And it's almost think of it as like an integrated supply chain in the world of years ago and all of a sudden, you get more velocity through that supply chain and you engineer cost out but you create it as an integrated supply chain. That's what we're doing and the vision that we're sharing that's different, I believe, than anybody in the industry right now, and that's resonating well. David Koning: Yes. Great. I guess, secondly, just the mix of business is changing, it sounds like very favorably, higher margins, better growth away from telecom towards health care. Does that change the kind of sequential pattern of revenue through each year? Or does that -- usually Q3 and Q4 are down a couple -- a few percent sequentially, whatever it is. Is there any like changes either to that or any other mix shift impacts to the business? Robert Dechant: So that's a really good question, Dave. And I would say, as most of us kind of have gotten to understand, the world of retail is very, very heavy in the December quarter, right, as you get from Black Friday, Cyber Monday all the way through the holidays, Christmas and all. And so we've been a leader in that vertical for a long time. And so you would see a huge spike in Q2 as kind of you highlight. And then that would start tapering off in Q3 and Q4. I think the mix has changed. And if you look at what we did last year, you could see that Q2 to Q3 sequential did not go down like it has historically. So it does change some of that. And so we feel pretty good about, I think, maybe a little bit more consistent flow over the 4 quarters and less massive -- just a massive spike for Q2. David Koning: Yes. Okay. And maybe -- that's helpful. And then maybe just one quick last question. The gross margins went down year-over-year, but the operating expense percent of revenue got way more favorable. Is that a little mix of maybe the offshore shift? Or what's driving that? Taylor Greenwald: Do you want me take that, Bob? Yes, sure, Tim. Yes. No. So you're right. We're doing a very good job in terms of growing our SG&A expenses less than revenue, and you're seeing SG&A come down as a percent of revenue. And if you look at our gross margins, we're very -- we feel very good about the trajectory of our gross margins in the long term because if you look at the growth vectors, as Bob was mentioning, they're the high-margin vectors, right? It's the vertical markets, it's the offshore geos, it's the services, high-margin services. and then you throw AI in, it's the high-margin geos and services, which are driving our business forward. But we do have a couple of headwinds currently, and they're not bad -- necessarily bad headwinds to have. One is on our deferred training revenue. I think we touched on this in the first quarter and also saw it in the second quarter that the year-over-year impact on deferred training as we're growing, we have more training and we expensed most of the training costs in period, but the revenue associated with training gets spread over the cost of the program. So that's a bit of a headwind for us right now during this high-growth phase. And then in addition, we're less than a year into India right now, and we're still investing in India, and we are up to where we expect those margins to be. So those are 2 headwinds that we feel right now. But as I said, they're not necessarily bad headwinds to have. It's just representative of the growth. Operator: And I'm not showing any further questions. I'd now like to turn the call back over to Bob Dechant for any closing remarks. Robert Dechant: Great. Thanks, Josh. And thank you all for joining us today. And as I've said, I couldn't be more proud of what IBEX has accomplished and what this team continually does quarter-over-quarter. We are a differentiated company. We are best-in-class in culture, engagement, our tech stack, and we are leading the clubhouse in AI. And so put all those together, the -- we really like where the future is for this business, and we look forward to reporting in the next 90 days. Thank you all. Have a good night. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to The Carlyle Group Inc. Fourth Quarter 2025 Earnings Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question and answer session. To remove yourself from the queue, press star 11 again. As a reminder, this call may be recorded. I would now like to turn the call over to Daniel Harris, Head of Investor Relations. Please go ahead. Daniel Harris: Thank you, Michelle. Good morning, and welcome to The Carlyle Group Inc.'s fourth quarter and full-year 2025 earnings call. With me on the call this morning is our Chief Executive Officer, Harvey Schwartz, and our Chief Financial Officer, Justin Plouffe. Earlier this morning, we issued a press release and a detailed earnings presentation, which is available on our Investor Relations website. This call is being webcast and a replay will be available. We will refer to certain non-GAAP financial measures during today's call. These measures should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. We have provided reconciliation of these measures to GAAP in our earnings release to the extent reasonably available. Any forward-looking statements made today do not guarantee future performance, and undue reliance should not be placed on them. These statements are based on current management expectations and involve inherent risks and uncertainties on Form 10-Ks, including those identified in the Risk Factors section of our annual report that could cause actual results to differ materially from those indicated. The Carlyle Group Inc. assumes no obligation to update any forward-looking statements at any time. In order to ensure participation by everyone on the call today, please limit yourself to one question and return to the queue for any additional follow-ups. And with that, let me turn the call over to our Chief Executive Officer, Harvey Schwartz. Harvey Schwartz: Thanks, Dan. Good morning, everyone, and thank you for joining us. 2025 was a record year for The Carlyle Group Inc. We significantly outperformed the targets we identified at the beginning of the year. We delivered record fee-related earnings, up 12% year over year, materially exceeding our original forecast. We also had record FRE margins, 47%. We generated $54 billion of inflows, again significantly outperforming our original $40 billion target. Engagement across the global franchise and all client segments from institutional to wealth continued to build throughout the year. Transaction fees were a record $225 million, up almost 40% year over year. We closed out the year with record assets under management of $477 billion, driven by strong investment performance and robust fundraising across the platform. Importantly, our 2025 results demonstrate the breadth, depth, and durability of our global business. Before I walk through our results in more detail, let me just briefly comment on the macro environment. Looking back at 2025, despite concerns around shifting geopolitical dynamics, the market proved to be resilient. M&A and IPO activity accelerated as market sentiment improved. 2025 ended with credit spreads near all-time tights, and equity markets at all-time highs. Over the last several years, a lot has been written about low levels of monetizations in the private equity industry. The Carlyle Group Inc. has proven to be an exception to that narrative. Since 2024, we have been the number one private equity sponsor globally by IPO proceeds, generating roughly $10 billion of IPO issuance over the past two years. This number is more than any other firm in our industry. The most recent example of this is Medline. Medline raised more than $7 billion and an equity valuation of $49 billion, a milestone transaction for The Carlyle Group Inc. and the broader market. This was the largest sponsor-backed IPO of all time, the largest healthcare IPO ever, and the largest IPO of 2025. The transaction was meaningfully oversubscribed, and today's trading is more than 50% above its IPO price. Medline is a great example of the types of businesses our teams look to invest in—a market leader in their sector with a great management team. Medline has an exceptional track record with more than fifty years of sales growth since inception, and The Carlyle Group Inc. is quite proud to have partnered with Medline's founders and leadership team over the last four years. But it's not just Medline. Standard Aero marked the second largest sponsor-backed US IPO in 2024 and has appreciated approximately 30% since its public offering. We listed two companies in Japan—Aran Breweries and Rigaku. Rigaku was the largest ever sponsor-backed IPO in Japan. We also IPOed Hexaware, which was the largest ever sponsor-backed IPO in India and the largest technology services IPO globally in more than a decade. While it's clearly worth noting we've been a leader in IPOs over the past two years, what's equally important is the breadth and diversity of these offerings across geographies and sectors. More broadly across our GP portfolio, activity remained quite strong. We returned $18 billion of capital to investors in 2025 and $18 billion in 2024. Our teams remain highly focused on returning capital to our investors, and we expect exit momentum to continue into 2026. All of this has contributed to our strong performance across our corporate private equity funds. Our latest vintage U.S. Buyout fund appreciated 17% for the year. Our third and fourth vintage Japan buyout funds appreciated 60% and 30%, respectively. Our most recent European technology fund was up 20%. Moving on to Carlyle AlpInvest, 2025 was a record year of growth, reinforcing AlpInvest's position as one of the most influential private market solutions platforms globally. AlpInvest has returned over $10 billion to our investors and invested a record $14 billion, highlighting both the breadth of the market opportunity and the scale at which the platform is operating. We closed our largest ever secondary strategy at $20 billion, continuing to grow our co-investment platform and expanding our portfolio finance strategies. Demand for secondary solutions remained strong as investors seek liquidity and portfolio optimization. The Carlyle Group Inc. continues to be a meaningful contributor to FRE growth and platform differentiation. In global credit insurance, we continue to see strong momentum across the platform. Direct lending had a record quarter of originations. We continue to grow and invest in the platform, adding key leaders and talent. We've added a new head of direct lending and senior origination professionals, enhancing origination and integration across our private credit strategies. Our performance continues to be strong, with realized losses across the portfolio running at an average of just 10 basis points per year over the past decade. Additionally, we continue our leadership position in CLOs. Amidst a record level of industry-wide issuance, The Carlyle Group Inc. priced a record 39 CLOs last year. The Carlyle Group Inc. was the most active CLO manager for US activity. CLO inflows of $7 billion in 2025 were up almost 20% from the prior year. I also want to touch on the momentum we have in global wealth. In 2025, we continued to see significant progress in our strategic approach to global wealth. We had another year of record inflows, almost doubling evergreen wealth AUM year over year. Demand was strong across our Evergreen suite. We soft-launched CPAP, our private equity solution for individual investors, in the US with a select group of leading RIAs. With the launch of CPAP, we've established our three key solutions across each of our businesses, with options to access The Carlyle Group Inc. for credit, secondaries, and now PE. This is all the result of strategic investment that we started to make three years ago. We continue to invest in resources across the entire wealth spectrum, including mass affluent, retail, and retirement. We expanded our wealth organization meaningfully this year, growing headcount by approximately 50% and adding specialized capabilities to support sustained growth across channels. We hired a head of retirement solutions, a new role at The Carlyle Group Inc., reinforcing our conviction that wealth and retirement are long-term growth engines for the firm. In conclusion, we enter 2026 with strong momentum. In 2025, we delivered on our strategy in a very concrete way—growing fee-related earnings, significantly exceeding our inflows target, deploying a record amount of capital, returning money to investors, and positioning our portfolios to take advantage of a more functional exit environment. We will continue to build on this strategy and foundation we have established over the last several years. Our focus remains on investment performance, disciplined capital allocation, and delivering long-term value for our global investors and shareholders. We also announced that we are hosting a shareholder update in February. We look forward to seeing you there. At the event, we will share multi-year financial targets and more insights into the strategic direction of the firm. Now, we will continue to build on our success. With that, let me turn the call over to Justin. Justin Plouffe: Thanks, Harvey. Good morning, everyone. I'd just like to start by saying how excited I am to assume the CFO role and have the opportunity to work more with each of you. And, of course, a big thank you to John Redett for his time and leadership as CFO, for his help and guidance, which has made this transition so seamless. Turning to our results, in 2025, we had our third best year ever in terms of distributable earnings. We generated $1.7 billion in DE for the year, or $4.20 per share. This was up 11% from the prior year and is our highest level since 2022. For the fourth quarter, we generated $436 million of DE, or $1.01 per share. Fee-related earnings were a record $1.24 billion in 2025, a 12% organic growth rate, driven by sustained operating momentum across the firm. The full-year results significantly exceeded our initial guidance. And for the fourth quarter, FRE was $290 million. Total fee revenues were a record $2.6 billion for the full year, a 10% organic growth rate. Fee revenues were primarily driven by Carlyle AlpInvest, which was up 46%, and Global Credit, which was up 13%. For the quarter, fee revenues were $670 million, an increase of 2% year over year. Our full-year FRE margin was also a record 47%, up from 46% last year. This margin expansion reflects continued operating discipline and the scalability of our model. Three years ago, we outlined an organic growth strategy which has clearly been successful as we have delivered consistent earnings growth. We continue to invest in priority growth initiatives, such as Global Wealth, insurance solutions, and asset-backed finance, among others, and see significant opportunity in each for continued growth. We remain focused on investing for growth and expect that margins will further expand as revenues continue to scale. In addition to record financial metrics, we had an incredible year of activity across the platform in 2025. Inflows totaled $54 billion, well above our initial guidance and our third best year on record. Inflows increased 32% year over year, led by Global Credit and Carlyle AlpInvest, which each increased by more than 60%. Evergreen wealth inflows were also a record in 2025, which more than doubled the prior record set in 2024. For the fourth quarter, we generated $9.2 billion of inflows across the firm, with more than half of that total from a diverse set of strategies in global credit. Deployment was a record $54 billion in 2025, up more than 25% versus last year, led by a more than 40% increase at Carlyle AlpInvest and nearly 30% growth in global private equity. We deployed $17 billion in capital in the fourth quarter alone. With $88 billion of available capital across the firm, we are well positioned to continue deploying capital throughout our business. Realized proceeds totaled $34 billion, almost 20% higher year over year, and our second-best year on record, reflecting improving exit conditions. We returned 17% of beginning value over the past year, significantly higher than the industry average. We realized $12 billion of proceeds in the fourth quarter alone for our fund investors. Turning now to segment performance, Carlyle AlpInvest generated a record $274 million of FRE for the year, up nearly 60%, and almost four times the level from just two years ago. Growth was driven by strong institutional and global wealth fundraising, and continued scale benefits across the platform. AlpInvest's distributable earnings were also a record of $319 million in 2025, almost 70% higher than last year. The business remains well positioned for further growth as net accrued carry ended the year at $656 million, up 21% year over year. For the fourth quarter, AlpInvest DE was $67 million, up 12% from 2024. In global credit, we delivered a record $402 million of FRE for 2025, up 21% from the prior year. FRE has grown at a 20% organic CAGR over the past three years. Net realized performance revenue tripled year over year, contributing to a record $481 million of DE in 2025. For the quarter, FRE increased 4% year over year to $102 million, and DE was up 7% to $123 million. Global Private Equity realized over $18 billion of proceeds in 2025, the highest level in the past three years. In addition, we've already signed or closed $7 billion of proceeds in corporate private equity just year to date. Strong appreciation in our two most recent US buyout funds drove net accrued performance revenue to nearly $2 billion. Finally, I'll say a few words on capital management and the balance sheet. We ended 2025 with a strong balance sheet, including $2 billion of cash, over $3 billion of investments, and almost $3 billion of net accrued carry. Our net accrued carry was up 9% sequentially in the fourth quarter, driven by strong appreciation in several of our largest funds. Together, these assets represent approximately $23 per share of pretax value. And on capital management, we returned a record $1.2 billion of capital to shareholders between dividends and share buybacks during 2025. Looking ahead, we entered 2026 with solid momentum across the platform. We expect continued growth supported by a diversified fundraising pipeline, expansion in global wealth, and improving capital markets conditions. While the macro environment remains complex, it is generally constructive for deployment and realization activity. We look forward to providing additional detail at our 2026 shareholder update on February 26. With that, I'll now turn the call over to the operator to take your questions. Operator: Thank you. As a reminder, to ask a question, please press 11. And our first question comes from Alexander Blostein with Goldman Sachs. Your line is open. Alexander Blostein: Hey, good morning, Harvey. Welcome, Justin, officially to the CFO role. So, Harvey, to your point, The Carlyle Group Inc. showed a lot of momentum in beginning to drive pretty meaningful realizations in the private equity portfolio in 2025. You sound constructive, but, obviously, the environment's changed a bit just in the last couple of days here. Would love to get your thoughts on how you're thinking about sort of sustainability in the monetization momentum into 2026? How dependent are you guys on the equity market exits versus more M&A transactions that you might see in your backlog? Thanks. Harvey Schwartz: You know, I'd be reluctant to extrapolate the last week's volatility into something that becomes longer stretched. You know, we're all gonna have to see how the market responds to this kind of reallocation of capital and some concerns about capital spending. I'll tell you, we get our best information, Alex. We've talked about this before. From our proprietary data in our portfolio. When we look across all the companies that we own and interact with, the January data looks very good. So if you were just to look at that data, you would feel very good about GDP growth, margins, EBITDA generation. And so I can extrapolate that, obviously, from our portfolio, given the size of it, to the broader economy in the US and globally. But it looks pretty good. Obviously, the markets have demonstrated some jitters. And we'll all navigate through that. But I would say, in aggregate, again, we're all going to deal with the market environment we get. But credit spreads have moved a bit. There's a bit of hesitation. It's a bit of a, how would I say it? A bit of self-first ask questions later as people readjust their portfolios. But the economic engine feels quite good. Having said that, the markets have demonstrated some fragility, and we've talked about that. But I don't think that should be too surprising given we're at record highs. But, again, going back to the engine and the performance, it feels very good. Alexander Blostein: Thank you. Operator: Our next question comes from Glenn Schorr with Evercore. Your line is open. Glenn Schorr: Hello there. How are you? Harvey Schwartz: Great. Glenn Schorr: So look, you're in an interesting spot to comment on what's going on in perception in the direct lending and credit world because, you know, you have a piece in CPAC, you have a piece in your secured lending fund. But for the most part, you've built a big credit business outside of what's in the line of fire right now, at least publicly. Right? So in your CLO and your ABS business. So my gut is, forgive me for putting words in your mouth, you've been probably thinking about having a bigger presence in the direct lending world over the last couple of years as you've seen the growth. And software exposure excluded. I'm curious how you think about the state of play, how you think about credit quality and exposures out there, and more importantly, how does any of this inform how you're thinking about growing your credit platform and including a bigger presence in the wealth channel? Thanks. Appreciate the thoughts. Harvey Schwartz: Hey. Thanks, Glenn. Well, maybe, if need, I'll let Justin fill in some details on the credit business because he was a key driver of building that over the last twenty years. But what I would say with regards to how we're being informed by all this, there was a lot of discussion last year about direct lending. The marginal market participants coming in and driving spreads tighter and maybe terms a bit too aggressively. Ironically, when I showed up three years ago, some of the conversations I had about had with you were things like, hey. Guys should be bigger in direct money. Now we've been very systematic and thoughtful about how we've been doing that. But we've really been, I'd say, kind of positioning for the opportunity set to open up like this. And so we feel quite good about it, given our footprint and ability to scale from here. As I mentioned, we've added a new head of direct lending and Justin drove a lot of that along with Mark Jenkins, obviously. New originations. So we feel quite front-footed. On the wealth front, we continue to have the platforms. Actually, we were positive on all our flows in the fourth quarter. One of our best quarters ever across the entire platform, including credit. And we're launching on more platforms. And so again, momentum feels good. There's just nervousness that has gripped the market for the last couple of days. But again, we're being thoughtful, very thoughtful about deployment. But we feel good about the positioning, the breadth of the franchise. I don't know, Justin, if you'd add anything. Justin Plouffe: No. That's exactly right. I mean, we've built our credit business specifically to cover really the full universe of what private credit has to offer, to be diversified and build durable portfolios that, you know, should do well through cycles. And, of course, we've been managing credit for more than twenty-five years through multiple cycles. So I think our credit business is really an all-weather business. I get to incredibly well positioned to weather any of this volatility. And we're seeing that result in terms of investors' appetite. As Harvey said, we had significant inflows into our credit wealth funds this quarter. So we're in a good position. We feel really good about our portfolio and our business. Glenn Schorr: Okay. Art, I don't know what we'd do with the detail that we got yesterday, but a lot of the companies were able to provide the software and related exposure as a percentage of AUM, a percentage of each of the businesses. Are you able to give us a little apples to apples to put things in perspective? Harvey Schwartz: Yeah. You know, software investing has never been a big driver for The Carlyle Group Inc. You know, as you know, our power allies have been in things like aerospace and defense and healthcare and industrial. So it's never been a huge driver of our business. I think others were giving a percentage of AUM. Ours is 6% of total AUM, which I believe is below others. But, again, not a huge driver of our business and not something we think is problematic. Justin Plouffe: We try to use the broadest possible definition of that 6%. Harvey Schwartz: That's right. Exactly. All-inclusive as however you could think about it. Not part of caps, tax, everywhere it could be. But as Justin said, this is not a piston in the engine that has been a key driver of The Carlyle Group Inc.'s strategy. Glenn Schorr: Thank you, guys. Harvey Schwartz: Thanks, Glenn. Operator: Our next question comes from Mike Brown with UBS. Your line is open. Mike Brown: Great. Good morning, guys. Harvey Schwartz: Good morning, Mike. Mike Brown: Hey. So maybe I'll ask on the margin here. So it reached 47% here in 2025. And, you know, looking at the segments, it looks like AlpInvest was the best driver followed by credit. GPE's margin climbed a bit here. AlpInvest had some tailwinds from catch-up fees. And, just looking forward here. So, Justin, you mentioned that margins expect margins can continue to expand. Can you just touch on each segment? Which segment could see the most expansion in 2026? And then, longer term, which segment drives the margin higher longer term? Which one could kinda be the biggest growth engine there? Harvey Schwartz: So we'll go into more detail of that on the twenty-sixth. I really hope you can join us for that. And we go through the multi-year plan. What I will say about the margin just reflecting on the past three years is I think what the team has done is pretty remarkable because they've managed to invest in the business, add resources, grow headcount, thousand basis points, basically, since really reposition the platform, and drive the margins the day I showed up. So it's been a really remarkable effort. But we'll go into more detail on all those things on the twenty-sixth in terms of the forward outlook. Mike Brown: Okay. Looking forward to the update. Thanks. Harvey Schwartz: Thanks so much. Operator: Thank you. Our next question comes from William Katz with TD Cowen. Your line is open. William Katz: Okay. Thank you very much. I presume the answer will be see you on the twenty-sixth, but I'll ask it anyway. I was wondering if you could maybe talk a little bit about where you might stand in terms of capital raising, particularly for the Fund IX. Looks like Fund VIII had really good appreciation. Hear your comments on the realization pace and the DPI metrics as well. And then I'm curious, you are running up against the conclusion of your repurchase program. I'm wondering how you're thinking about capital priorities into the new year. Thank you. Harvey Schwartz: Thanks, Bill. So I'm trying to figure out what I say before I say see you on the twenty-sixth. So a lot of the forward-looking stuff, we are gonna go into, obviously, much more detail on the twenty-sixth. I would say that the client engagement and the fundraising is impressive for a whole host of reasons. But when I think about it and what the team has accomplished over the last couple of years, it really is about the diversification in the business mix both across institutional clients. So it's pension funds. It's insurance. It's sovereigns. And obviously, the strategic pivot in the wealth channel now having basically all three flagship funds up and running, but it's also geographic. And so you have this nice diversified set across clients and geographies. And opportunities that's really driving all of it and the success of the $54 billion that we bought. I'm not sure on the success of the last couple of years. And so we'll give you more insights. But I would say, again, we feel quite well positioned for forward trajectory. Given the when we look at the fundraising over the next couple of years, flagship vehicles that'll be in the market, but everything that's gone into building and supporting those flagship vehicles and resources we've added. So but but will see on the twenty-sixth. William Katz: Thank you. Operator: Our next question comes from Patrick Davitt with Autonomous Research. Your line is open. Patrick Davitt: Hi. Good morning, everyone. Appreciate the software exposure at percent, but I would imagine your CLOs have a fair amount of exposure. And those loans are obviously down a lot. So could you frame the exposure just in the CLO bucket? And to what extent the performance as a result of this recent volatility could impact overcollateralization tests. Thank you. Justin Plouffe: Our CLO performance has been among the best in the industry. Our team has done a phenomenal job. Our software exposure is right on top of the index. We're not overweight. We're not underweight. And, look, when we invest in software, we've been doing this for many, many years. Right? So we've had disruptive technologies before, and our teams are very, very well positioned to address these. So, look, our CLO business is the best in the world in my view. Their performance has been fantastic. I don't expect this recent volatility to affect them at all. Harvey Schwartz: If anything, again, I don't wanna make near-term market predictions because things are so sort of, I don't know, one day, we could be tighter. One day, we could be looser. But there may be some technical opportunities here in the marketplace across that business, which give us the opportunity actually to launch a few deals. But again, I think, look, Justin grew up in that business. The team's world-class. But that's a, we're kinda, as he said, right there with the index. Patrick Davitt: Thank you. Operator: Our next question comes from Brennan Hawken with BMO Capital Markets. Your line is open. Mark Pelletri: Thanks for taking my question. This is Mark Pelletri on for Brennan Hawken. Within AlpInvest, the fees proceeding this quarter, I believe that it exceeded the $56 million reported for the full year. Could we read that to imply there was negative catch-up fees this quarter? Justin Plouffe: Not negative. No. They're not negative catch-up fees this quarter. We did have catch-up fees earlier in the year. But if you actually strip those out, AlpInvest management fees were up 4% quarter over quarter. So the momentum there is still good. Mark Pelletri: Yeah. Thank you. Operator: Our next question comes from Steven Chubak with Wolfe Research. Your line is open. Steven Chubak: Hi. Good morning, Harvey, and welcome, Justin. Appreciate you guys taking my question. So wanted to ask on transaction fees. Had another really strong year. You indicated you anticipate a more active monetization backdrop for next year. With transaction fees just nearly tripling over a two-year time frame, now is there any way for you to help frame the revenue upside or potential? Are there any areas where you feel like you're under-earning? And are there any remaining gaps on the platform in terms of your overall offering? Harvey Schwartz: We'll give you more insights into that on the twenty-sixth in terms of the forward. I think I like that. You know, you really, yeah. Sorry. But we really kinda nailed it. In terms of what I think is most impressive. Is this basically was almost at zero when I showed up three years ago. What I think it really demonstrates is the ability of the platform, the way the team has led and built this business, and really flexibly focused on a strategic priority. You may remember a couple years ago, one of the work streams I talked about was capital markets and transaction fees. And I think there were some skeptical people that thought we wouldn't be able to build this out. Short answer is, and we thought it before, there are some gaps. There's still some businesses that because of historical fund documents, will come online. An opportunity set. But we still see upside, but we'll give you more color on that on the twenty-sixth. Steven Chubak: Fair enough. Thanks for taking my question. Justin Plouffe: Thank you. Operator: Our next question comes from Brian McKenna with Citizens. Your line is open. Brian McKenna: Thanks. Good morning, everyone. So there's clearly a ton of momentum in the wealth channel, and it feels like flows are really beginning to inflect here. I suspect a lot of this has to do with your efforts on the branding front and what The Carlyle Group Inc. has to offer these clients globally. But can you spend a minute talking about the Carlyle story you're telling in the wealth channel today? What's resonating with these distribution partners and their clients? And then are there still opportunities to further enhance your brand in the channel? Harvey Schwartz: So this is obviously a strategic pivot three years ago. And this is what we've done. First of all, the brand is global. Iconic, long, long history. And that is fundamental to being on platforms being recognized globally. You know, we, David Rubenstein and the team, have been going to The Middle East since the nineties. We were the first to have a franchise in Japan. We stayed in Japan for twenty-five years. They're the only firm that didn't leave. So it's this commitment geographically and the brand recognition which is a cornerstone of an ability to deliver solutions. Obviously, performance is a key driver here. And the way the teams have thought about driving these solutions is about creating diversification. And so the breadth of diversification is quite important to our clients. And then, of course, there's the client engagement. Working with our partners all over the world, getting very close to the advisors. I personally spend time with advisors. It's quite critical for us to understand their needs. We're not in the business of telling everybody that in every single person's portfolio, they should have private markets, but where it makes sense, we want to make sure that we're providing the most value add in terms of a series of options with diversification that can be durable and deliver over the long term. So we're very, very focused on that. I will say the team's done a remarkable job of adding resources. We've done things that have been seen very well by the market, like the Oracle Red Bull partnership. So it's been a multi-pronged investment here, which has really driven this. And we think there's very, very long-term upside. And we're enthusiastic to see what happens ultimately in a retirement channel. So again, long-term driver, but we're being very disciplined about it. Brian McKenna: Great. Thanks, Harvey. Harvey Schwartz: Thank you. Operator: Our next question comes from Ben Budish with Barclays. Your line is open. Ben Budish: Hey, good morning and thank you for taking the question. Harvey, most of the forward-looking questions, I appreciate your saving for the investor update, but I'll ask maybe a two-parter anyway. For specifically for 2026, just curious if you could talk about what you're expecting in terms of management fee growth. I think this year should be a bit of a funky year with some large flagships coming to market later in the year, realization picking up, which could be a headwind to fee-earning AUM in the private equity segment. And so probably, you know, this year, not quite as indicative, at least from a management fee growth perspective, of what I suspect you're gonna talk about. So curious if you can give any color there. And if you can't, maybe just one other question on the year on the realization side. Given where CP7 and CP8 are, I think there's an expectation we should see realizations before realized performance revenues come in. Just curious how we might think about that trajectory as well over the course of this year. Thank you. Harvey Schwartz: Yeah. Again, so I don't want to disappoint you, but we're going to go on such a level of detail on this on the twenty-sixth. That I think giving you a fuller picture makes a lot more sense in terms of the strategy and how everything is coming together. Again, the only thing I'll go back to on realizations is how proud we are of our team. You know, a couple years ago, the global private equity leadership really decided that our clients wanted monetizations. They took advantage of a very attractive market environment. It was a very deliberate strategic decision across the platform. As I said before, it was global. We were a market leader. We monetized more IPO assets than anybody in the world. And so we're quite proud of what they've done. But this is strategically how they position the platform. But we'll go into a whole host of detail on the 26. So I apologize for leaving you a little bit short on the kinda near-term questions. Ben Budish: Alright. No worries. Thank you. Operator: Thank you. Our next question comes from Kenneth Worthington with JPMorgan. Your line is open. Kenneth Worthington: Hi, good morning. Thanks for taking the question. So 2025 was a good environment for the CLO market. How is 2026 looking for The Carlyle Group Inc. here? For CLOs sort of inside and outside the U.S.? And does the software and AI angst sort of impact the outlook here? And then along the same lines, you set up a fund to help with the equity pieces. To what extent are you utilizing that equity, and how much dry powder does that fund still have? Harvey Schwartz: I'll let Justin get into the details of the CLO business. What I would say on the AI of things, again, this is more of a broad market. Environmental atmospheric, I think. I mean, again, we've seen the fragility in the markets. I think they're really just trying to process what the implication is across markets and industries. But specifically on the CLO business, I'll turn it over to Justin in terms of how we feel about the marketplace and environment. Justin Plouffe: Yeah. We've had an incredible two years in our CLO business in terms of issuing new deals, but also resetting deals and extending the life of those deals. The team has been incredibly active in that regard. And that makes our business just more durable over time. Now the year started off in CLOs. Constructive, I'd say. Spreads are tight on both sides of the arbitrage. I think we're gonna have another active year. I don't know if it'll be the record year of the last two years, but our team is, in my view, the best in the business. If there is activity in the CLO market, we will be participating. And the business is really well positioned now that we've extended the life of so many deals over the last two years. Kenneth Worthington: Great. Thank you. Operator: Thank you. Our next question comes from Michael Cyprys with Morgan Stanley. Your line is open. Michael Cyprys: Great. Thank you. Just a question on the credit business. It continues to put up meaningful growth across the overall credit platform. Just curious if you could elaborate a bit on some of the steps you're taking to enhance originations, expand your sourcing funnel, and what actions might you look to take here in '26? Justin Plouffe: Yeah. We've done a number of things to enhance originations, really not just last year but over the past five years under Mark Jenkins' leadership. I mean, recently, just in the past year, we did hire Alex Chi from Goldman Sachs to come in. Fantastic track record. Thirty years at Goldman in that business. We hired Mike Mayer, who's got decades of experience in origination. We've actually built out our origination team even beyond that just in the last few months. And that's just in direct lending alone. So we've got a fantastic origination engine. We did the most originations we've ever done in credit in the past year in 2025 with almost $30 billion of originations. So that engine is hitting on all cylinders. And as I said, it's a broad-based durable business. It crosses many, many different parts of the private credit universe. And so no matter where the market goes, we have a strategy. We have a team that we think is ready to take advantage of. So we feel great going into 2026. Michael Cyprys: Any steps you might take here in '26? Around expanding sourcing from here, or is it all done enhancing the origination machine? Harvey Schwartz: It's mostly done, but we'll get more into the strategy on the '20 in terms of how we're positioning. Because we do think we have some unique levers we can pull. But in terms of the resource build-out, Justin and the team have done a great job in the past year. Michael Cyprys: Great. Thanks. Looking forward. Operator: Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Daniel Harris for closing remarks. Daniel Harris: Thanks, everyone, for your time today. I know it's been a very busy week. Look forward to seeing all of you on February 26 for the shareholder update. If you have any questions following today's call, feel free to follow up with investor relations. Have a great weekend. Operator: Thank you for your participation. You may now disconnect. Good day.
Ruth: Please stand by. Morning. My name is Ruth, and I will be your conference operator today. At this time, I would like to welcome everyone to the Biogen Fourth Quarter and Full Year 2025 Earnings Call and Business Update. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Please limit yourself to one question to allow other participants time for questions. If you require any further follow-up, you may press star 1 again to rejoin the queue. Today's conference is being recorded. Thank you. I would now like to turn the conference over to Mr. Tim Power, Head of Investor Relations. Mr. Power, you may begin your conference. Tim Power: Thanks, Ruth, and good morning, everyone. Welcome to Biogen's Fourth Quarter and Full Year 2025 Earnings Call. During this call, we will make forward-looking statements which involve risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. Provide a comprehensive list of risk factors in our SEC filings, which I encourage you to review. Our earnings release and other documents related to our results as well as reconciliations between GAAP and non-GAAP results discussed in this call can be found in the Investors section of biogen.com. We've also posted the slides to our website that we'll be using during the call. On today's call, I'm joined by our President and Chief Executive Officer, Christopher Viehbacher, Dr. Priya Singhal, Head of Development, and Robin Kramer, our Chief Financial Officer. We'll make some opening comments, and then we'll move to the Q&A session. And to allow us to get through as many questions as possible, kindly ask that you limit yourself to just one. And I'll now hand the call over to Christopher Viehbacher. Christopher Viehbacher: Thank you, Tim. Good morning, everybody, and welcome to Biogen's fourth quarter earnings. We finished the year strongly with a very good fourth quarter, and I think finished the year in a very satisfactory manner. We finished slightly above the upper end of our guidance. And I think as we look at the business here, we've principally focused on our growth products, and they generated $3.3 billion in fiscal 2025. That's up 19%. Now you notice we actually include VUMERITY now in our growth products. Tended to just look at MS as one group. But, when you look at the oral segment, VUMERITY is about the only branded medicine left in that. And we have found that actually with intelligent investments, we've been able to grow that brand very nicely. So we're including that in our growth products going forward. When you look at just the products we've launched since 2023, the four, Lekembi, Skyclaris, Xerxuve, and Calcadi, they are now generating over a billion dollars in revenue. And they have also grown very strongly. And in the MS business, actually, still generated $3 billion. So from a commercial performance point of view, I think Biogen is functioning and firing on all cylinders, and doing very well. I think the big story of 2025 is really the advance we've made in our pipeline. You know, Priya will show a chart later on our pipeline, and that chart has really expanded over the course of the year. In this year, we expect to see a number of key readouts that can be iClick, and I'll come back to that. That's under review in The US, Japan, and China, and US as you know, we got a priority review and have a PDUFA date of May 24. Lidofilumab, which is an important new medicine in lupus, has been granted FDA breakthrough designation for the cutaneous form of lupus. And, you know, we are actually starting to expand our early stage pipeline. We put a BTK degrader into the clinic early this year. I'd also point out the acquisition of Alcion Therapeutics, which will really, I think, improve the experience of patients who get injections. You know, I think SPINRAZA, in the eyes of many physicians I talk to has a high efficacy, but at some point patients do consider that the intrathecal is a problem. And this is an opportunity to replace the intrathecal with a much more convenient delivery mechanism. We also have been in business development. And in the fourth quarter, we had new collaboration with Vanqua and Dara Therapeutics. Go to the next slide. So Leukembi is still the market leader, and can to be the market leader with about over 60% of the anti-amyloid therapy market share. I would remind everybody that we tend to wanna look at new Rxs. As a measure of a launch. And this is one of those areas where that might not be the most appropriate thing to look at because the competitor product really is only in therapeutic use for a limited period of time. And only the can be actually has a maintenance indication. So I think in this case, actually, looking at total prescriptions is the most appropriate way, and that's where Lucanbi clearly continues to be the market leader. Now this year, we're gonna see the, hopefully, the approval of the iClick. We've had the iClick approved, for maintenance last year. Along with getting the maintenance indication. That's already important. We're seeing a lot of patients come to the end of the plaque removal phase. And the persistency data suggests that we have about a 70% persistency. So that's people who are continuing on with therapy even after the plaque removal position. The iClick was introduced in October, Now that's a Part D reimbursement, and we won't have that reimbursed fully until 01/01/1927. However, patients who want that are able to request formulary exemptions. And from what we've heard, that virtually everybody who has been asking for that seems to be getting that. We don't have obviously very clear data on that. Now the game changer could be really the iClick for induction. One of the competitive aspects of dananemab is that it has once monthly infusions where we have once every two week infusions. Once you move to a subcutaneous injection, now we're not talking about infusions at all anymore. And, you know, we're hearing certainly stories that, people want to travel and people don't necessarily are aren't always able to long drive long distances to infusion centers. So we think that the iClick could actually, act create a whole new opportunity and certainly reduce the burden for neurologists. Remember, there are about 500,000 new patients diagnosed every year with Alzheimer's, and only really 13,000, neurologists. So to the extent that we can make this care path more convenient for both the physician and the patient, We hope that that can increase the throughput. We're already seeing with the, increased use of blood-based diagnostics that those patients who have their diagnosis validated and who are actually eligible for therapy has actually increased from about 50% to 70%. So, you know, all of these things, I think, are moving in the right direction. Remind everybody that the, you know, the market has more than doubled, anti-amyloid therapy. And I think we're seeing a growing we're see we're certainly hearing a number of stories from the from the physicians that they're actually seeing benefit in patients. The CDR Sum of Boxes is really only used in clinical trials. And not in actual practice. And so let's say, I think, this all augurs well for continued growth in this business. And perhaps going into next year, we might even see an acceleration of that growth. Go to the next slide. So here's where, you know, what we've been trying to do really is build a bridge to growth. And really the growth we see in three different ways. The first is, you know, obviously to grow those, new medicines that we have. And you see them on the chart, that's the today. And, you know, when you actually look at this chart, with the exception of VUMERITY, all of these were not only first in class but also first ever treatments for diseases. So that's meant that we actually are going in with breakthrough medicines, but we also have to create those markets. AKINBI, we've talked about. SPINRAZA, we've been able to launch the high dose in Japan. Early signs from the Japanese market are that we're actually going ahead of expectations on adoption. And actually seeing some, switchbacks. You know, we look forward to seeing more data it comes along. Europe will be next up. And, of course, we have PDUFA date in April for high dose in The US. Xerxuve is really been a surprise to all of us. Again, we more than doubled sales in 2025. This is really I think, also, opening opening people's understanding to the real burden of postpartum depression. And we're seeing a number of prominent people, like Jennifer Lawrence, and we were just featured in surgery way was just featured in People Magazine. And this is not only leading to some commercial success, but I think really changing the perception of postpartum depression. This is still highly undiagnosed, approximately half a million mothers every year suffer from this, and only about 80,000 are diagnosed. And still fewer obviously treated on zirzube. There's a real opportunity to both grow this market, but I think also really make a real difference in postpartum depression. Skyclaris continues to grow. We saw approval in Brazil, this past year, and we're looking for launching that this year. We're now into launching this product pretty much everywhere around the world except in Asia, of course, where this disease doesn't really exist for genetic reasons. You know, we often are running ahead on the numbers that patients versus sales because we're providing the product through early access programs and then negotiating as we go along. So I think we'll continue to see, steady progress. You know, like SPINRAZA, these are medicines that tend to have a bit of a lumpy sales trajectory. Personally, I like to look at rolling four quarters of these. We're in the low volume, high value, products. If you take SPINRAZA, there are some countries who only ship once or twice to in the year. So, the timing of shipments is, can actual trends if you're just looking at a single quarter. But then, you know, now that we've got those growing and I just told you about how strong those products have been, we've got a whole next layer, next wave of potential growth with ladafilimab, the SLE data coming, hopefully, by the end of the year, velzartamab, will show data in AMR potentially next year. Zorvenirsen, our partner Stoke has indicated that they might be able to be, having a data readout in '27 as well. Dipirolizumab, we already have one positive phase three, and we're executing on a second phase three. Salineersen had, extremely interesting results, after phase two. We were administering the drug in children who had already had gene therapy, for example, in infancy. But at age four or five were still not able to sit or stand. And, you know, we saw some examples of that. Obviously, all of this has to be confirmed in a phase three study, which we have ongoing. And then the can be preclinical is also potentially a real game changer. You know? We all have to remember that this disease is really a silent disease for many, many years before people ever get symptoms. And throughout that period of time, people are losing neurons. And so it would seem to make sense that, treating patients earlier and being able to preserve a maximum number of neurons should have a benefit. And that's really what this clinical trial is designed to show is going into early stage patients, can we see that we can either prevent potentially ever getting symptoms or at least deferring the disease into much later into the future. That's a huge undertaking. We began recruiting for that study in 2020. It's been fully recruited, and we would expect see results in 2028. So you can see that this is gonna be a very rigorous study. It'll be a landmark study. The be not only important from a commercial point of view, but this is really groundbreaking science and will inform the entire neurology community. So And then, of course, we still are investing in earlier stage. We have a potential readouts for some high risk, high reward, projects like the LARC two and in, in Parkinson's. We have a new modality, which could be extremely interesting, which is the anti tau ASO that will also read out of phase two this year. And we're really focusing on on our research portfolio. I talked about some of the collaborations we've been doing. We've got the the DTK. We've got an a rack four for lupus going into the that went into the clinic. And we're looking to add more early stage BD deals, but I think we've also got a few more INDs that could come into the clinic over the eighteen months. So next slide, please. So what are we focusing on really in 2026? Obviously, you know, we have an important date with the LAKEMBY approval for the subcutaneous AI initiation coming up on May 24, and we'll, obviously hope to see that, get approved. We also have the, hopefully, the approval of the high dose regimen for SPINRAZA in The US that has a PDUFA date in April. We've got the two phase three studies in lislelizumab in and I wanna congratulate Priya because, there are about 55 other clinical trials ongoing in lupus, and Priya and her team were actually able to accelerate. Originally, this was not gonna read out until 2027. So for me, I always from a commercial point of view, I like to see accelerated development because it augurs well for for later stage commercial potential. And finally, you know, we're advancing that high risk high reward pre POC pipeline I would say today, we feel pretty good about where our late stage pipeline is, but we do need build up our earlier stage pipeline. And that's gonna lead to full year guidance on a non GAAP diluted EPS basis of about $15.25 to $16.25. So I think with that, I'm gonna be turning that over to Priya. Priya Singhal: Thank you, Chris. I'm really encouraged by the progress that we've made to rebuild and transform our development pipeline. As you can see from this slide, most of these late stage, high scientific conviction opportunities are new. Having been added in just the last twelve months. And as we announced last quarter, we have accelerated TOPAZ-two our second SLE study for litifolumab, which is now expected to read out by the end of this year. What you can also appreciate from this slide is that 2026 is an important year that begins a multiyear registrational data flow for over the next several years. And in just the next eighteen months, we could see data from nitifilumab for both SLE and CLE, and data from talsadimab in AMR. All of these being registrational readouts. Importantly, as you have seen, we recently announced securing priority review for the Chembi iClick initiation and received breakthrough therapy designation for litifolumab in CLE. It is very encouraging to see that these programs are also being recognized externally as potentially impactful. We also continue to demonstrate and emphasize scientific leadership. We recently presented new data across some of our key franchises at medical congresses including meetings hosted by the American Society of Nephrology, and the American Epilepsy Society. In December, we also presented at CTAD where we highlighted the importance of continued utilization of lukembi in a maintenance setting. And just this week, we published Pivotal Devote SPINRAZA high dose data in Nature Medicine. All of this put together reinforces our belief that our pipeline will continue to play a critical role in delivering the new Biogen. Turning now to our full development pipeline. Which we believe we have transformed into a more balanced portfolio across the risk reward spectrum. This is the result of a very deliberate process that we have carried out over the last few years to discontinue lower value projects and bring in new potentially higher value assets. Today, our late stage registration pipeline consists of high scientific conviction programs with significant commercial potential. This is different than the Biogen approach in the past. It is also balanced alongside our early stage pre POC pipeline with the high risk, high reward assets where we continue to follow the science to determine next steps. We remain focused on broadening our early stage pipeline from both internal research assets and potentially business development opportunities. Today, we continue to make progress by adding Big one forty five our BTK degrader into the clinic, having recently initiated a phase one study in normal healthy volunteers. And we continue to look to potentially add more INDs into our pipeline over the next several years and months. Turning to the future. And looking forward to the next eighteen months, I'm really encouraged by the number of expected data readouts and key milestones. And I would now like to highlight some of these. Starting with SMA, we now have SPINRAZA high dose approval in Europe and Japan, while we await a regulatory decision in April in The US. With salinersen, which we believe could transform the standard of care in SMA, we expect to present exciting follow-up phase one b data at the Muscular Dystrophy Association meeting next month. With ladifilumab and billing on our v breakthrough designation for CLE, we are now planning and preparing to share new data from the phase two portion of the phase two, three seamless amethyst CLE trial at a medical meeting hopefully, in the first half of this year. Excitingly for the Kembi, with priority review, we now expect to have an FDA for iClick initiation in May. Importantly, we also have regulatory filings underway both in Japan and China. We believe iClick is a differentiated important opportunity that could provide additional optionality for patients as this important market continues to grow. We also expect to have data from our pre POC pipeline for 122 in Parkinson's disease, and BIB eighty in early Alzheimer's disease sometime around mid year. These datasets will guide us in determining the further development for these assets. Most importantly, for 2026, we are looking forward to the ladufilumab phase three data in SLE. Expect expected at the end of this year. And we continue to be encouraged by the opportunity in CLE. Where we expect to see data around midyear next year And in a similar time frame, we'll start to see data reading out for fezartumab in AMR. In conclusion, I hope you can appreciate the increased momentum of our pipeline over the next eighteen months. And we believe this will drive our goal of delivering the new Biogen. I would now like to hand the call over to Robin for an update on our financial performance. Robin Kramer: I'd like to provide some key highlights about our strong fourth quarter and full year financial results. Unless otherwise noted, the comparisons I make during my remarks are versus 2024 and refer to non-GAAP unless otherwise stated. Starting with earnings, Our fourth quarter and full year 2025 non-GAAP EPS came in above our expectation. Fourth quarter non-GAAP diluted EPS was $1.99. Full year non-GAAP diluted EPS was $15.28. As expected, our Q4 2025 GAAP and non-GAAP results reflected $222 million of IPR and D charges. For our fourth quarter business development transactions including the license agreements with WANCA Bio, Dara Therapeutics and the acquisition of Alcion Therapeutics. This had a $1.26 impact on EPS. I'd like to point out that our GAAP operating income was impacted by approximately $180 million of one-time charges that occurred in the quarter relating to litigation and other matters. We achieved strong revenue performance for the year, Our growth products performed well. Generating over $800 million in Q4 2025 and $3.3 billion for the full year 2025. Up 69%, respectively, versus 2024. In addition, we continue to see resilient performance from our U.S. MS business. Total revenue for the full year 2025 was $9.9 billion up 2% versus 2024. Our strong commercial execution, combined with disciplined expense management, enabled robust cash flow generation. As a result, we delivered $2.1 billion in free cash flow for the year, exiting the year with $4.2 billion in cash and marketable securities. This further strengthened our balance sheet and provides us with flexibility as we continue to invest for growth. I'll now cover our Q4 revenue performance. In Q4, revenue from our growth products exceeded revenue from our MS business excluding VUMERITY, which we include in our growth products. Akembi continued to see steady sequential demand growth globally, with fourth quarter end market sales booked by Eisai of approximately $134 million up 1054% versus Q3 2025 and Q4 2024, respectively. But can be delivered steady sequential and year over year growth in The U.S. And internationally. Skyclaris saw sequential global patient demand growth with Q4 global revenue of $133 million representing 30% growth year over year. In The US, Q4 revenue was $89 million. This represents sequential growth of $14 million which benefited from approximately $9 million of favorable inventory dynamics. We expect this inventory build will be drawn down in Q1 2026. Outside The U.S, fourth quarter revenue of $44 million was impacted by approximately $12 million in net pricing adjustments. Looking forward, we are optimistic about the future growth as we bring on new markets. Global SPINRAZA revenue in the fourth quarter was $356 million. In The U.S, we were pleased to see SPINRAZA growth year over year. Where fourth quarter revenue was $169 million. Outside The U.S, fourth quarter revenue of $188 million was impacted by the timing of shipments. Overall, SPINRAZA continued to demonstrate resilience in a competitive market with full year revenue down 2% year over year. VUMERITY fourth quarter revenue was $181 million driven by steady year over year demand growth boosted by improved affordability in The US, with the IRA Part D redesign. Q4 U.S. Revenue was negatively impacted by timing of shipments associated with the favorable inventory build we discussed on our Q3 earnings call. For the full year, VUMERITY generated $747 million representing 19% year over year growth. And we are pleased to see strong performance from ZERZUVE and CALSADI, driven primarily by increased demand. For our remaining MS products, global TESARBRI revenue in the fourth quarter was $398 million demonstrating continued resilience. In The U.S, we generated $244 million of revenue. Ex U.S. Revenue was $153 million where the impact of biosimilar competition for the IV formulation in The EU was partially offset by continued demand growth for our subcutaneous formulation. TECFIDERA saw the expected acceleration of generic erosion in The EU, which we expect to continue in 2026. Revenue from our anti CD20 therapeutic programs was $521 million in Q4 2025. Up 12% year over year. This increase was driven largely by royalties from Ocrevus, which benefited from the subcutaneous launch. Now a few comments on the rest of the 6% Q4 2025 versus Q4 2024 and ten percent for the full year 'twenty five versus the full year '24, primarily driven by continued cost reduction measures realized in connection with our portfolio prioritization initiatives and our Fit for Growth program, offset in part by our investment in our Phase III clinical programs including selzartamab and litafilimab, which was funded in part by an R and D funding arrangement. 1% for Q4 and full year 2025 versus 2024. Driven primarily by planned prelaunch activity supporting lupus and nephrology and direct to consumer advertising for the Lekambi and VUMERITY. As I discussed earlier, our GAAP and non-GAAP results include a $1.26 impact from our Q4 business development transaction. Our GAAP and non-GAAP tax rates in the quarter benefited from the release of reserves upon the expiry of a statute of limitation. We are pleased with the quarter and our full year 2025 results. This strong commercial execution, coupled with disciplined financial management, drove continued robust cash flow performance for both Q4 and full year 2025 with free cash flow of $2.1 billion for the full year 2025. And turning to the balance sheet, as a result, we have further strengthened our financial position and closed the year with $4.2 billion in cash and marketable securities, and $2 billion of net debt. Financial strength provides us with flexibility to support strategic investments as we look to drive meaningful innovation for patients and long term value for our shareholders. Looking ahead, we believe the transformation activities we have taken so far have established a strong foundation to deliver on the vision of the new Biogen. A crucial element of realizing this vision is our commitment to strategically invest in prelaunch activities to support our lupus and nephrology portfolio. We are focused on ensuring that we are well positioned for the portfolio of the future while continuing to maintain our focus on financial discipline. With our first Phase III data expected at the end of this year for liticilimab and SLE, and next year for falzartamab and AMR, we are making critical investments now to position ourselves to launch these products successfully. And at the same time, we are expecting to keep our core OpEx in 2026 roughly consistent with 2025. Now turning to our outlook for 2026. We expect full year non-GAAP diluted EPS to be between $15.25 and $16.25 reflecting growth versus our full year 2025 results. Total revenue is expected to decline by a mid single digit percentage for 2026 compared to 2025. Competitive pressures in MS are partially offset by increased revenue from our growth products. We expect our full year revenue for our MS product excluding VUMERITY, to decline by a mid teen percentage versus 2025. We expect our full year contract manufacturing revenue to be roughly $300 million in each half of 2026. Moving to the P and L. We expect gross margin to be roughly consistent with 2025, And building on my comments regarding consistent OpEx for the year, we expect Q1 expense to be roughly 10% higher than Q1 of last year due to phasing us spend in 2026. Be sure to review this slide and our press release for other important guidance assumptions. Now I'll pass the call back to Tim for Q and A. Tim Power: Thanks, Robin. Let's go to our first question, please. Ruth: Thank you. If you're dialed in via the telephone and would like to ask a question, please signal by pressing star 1 on your telephone keypad. Again, that is star 1 to ask a question. Your first question comes from the line of Alex Hammond with Wolfe Research. Alex Hammond: Hey, guys. Thanks for taking the question. I guess one on Mackenzie. Can you walk us through how to think about the cadence of sales growth this year? We're really just trying to understand the timing and percent of patients likely to go on to maintenance and how that may impact revenue. You very much. Christopher Viehbacher: Sure. Thanks very much. So like I said, we don't really have clear data about how many patients actually go on to maintenance since we really only know how many vials we sell. But the data that we do have suggests that there is this persistency of about 70%. So that suggests that quite a number of people come to the end of the plaque removal period and go on to maintenance. Now the vast majority of those are still on the monthly infusion because you switch from a biweekly infusion during the plaque removal period once you go on to maintenance, that becomes once a month. Now we're also seeing a progressive take up of the subcutaneous pen, But, again, we don't have full reimbursement for that, so patients have to go through the formulary exemption process. So I think what you're gonna see is pretty much continued sequential quarter on quarter growth. There's increased use of blood-based diagnostics And that is, as I said earlier, helping to make sure that those patients who are eligible for treatment are actually getting to see the neurologist. An increasing number of neurologists, again, right now, our estimate is about 10 to fifteen percent, but that's expected to grow. Are using the blood-based diagnostics to validate the diagnosis. Which will hopefully reduce the number of PET scans and lumbar punctures. There's an economic reason for that too. A PET scan costs about $5,000. The cost of a test is, I think, somewhere around $140. So there'll be an economic reason to move to the blood-based diagnostic. Obviously, if we can get the pen for induction approved, that is a major benefit. I think we're also gonna see, though, that not everybody is going to immediately go to that. I think certainly, for those patients who are perhaps more rural based, and have a long drive to an infusion center, you might see a more rapid uptake. We've certainly heard some physicians talk about the desire to continue to have the patient come in at least in the early phase of plaque removal to monitor the potential for ARIA and do the MRIs. So, now what we do hope is that with the approval of the subcutaneous for induction, that as payers start to look at their formularies for 2027, I think there is a good chance that some payers will take the subcutaneous for both induction and maintenance. And that both of those become fully reimbursed on January 1. Now that's kind of an individual payer decision, and we won't know until they announce their formularies, in the fall of this year. So I think, you know, you're gonna continue to see as I said, that linear growth pattern. But, you know, I think we're also seeing some very strong response to direct to consumer advertising. So all of these factors are accumulating. We're certainly hearing anecdotal evidence that physicians seem to be appreciating the benefit that they see in their patients. So, you know, I think in the first half, it's probably continued linear growth. Sometime in the latter half of the year and certainly potentially going into '27, there's a potential for acceleration in that. But you know, I think we really need to see the full reimbursement to make sure we take full advantage of the subcutaneous pens. Thanks, Chris. Rose, can we get Ruth, beg your pardon. Could we go to the next question, please? Ruth: Yes. We'll go to Phil Nadeau with TD Cowen. Phil Nadeau: Chris, I think the number one thing investors are debating is when Biogen's top line could return to growth. What are your thoughts on that? When do you think the growth products could overtake the legacy franchises? And what role could business development have in Thanks. Christopher Viehbacher: Well, so far, the growth products in the last two years certainly last year, did outstrip the decline of EMS. Now this year, we'll see a full year of TECFIDERA generic erosion in Europe. We had about six months of that in 2025. I think we will see a little bit more erosion of the MS portfolio as a result of that. At the end of last year, we also saw the introduction of a biosimilar for Tysabri, It's early days yet, so we can't really determine the erosion. But I think we're reasonably optimistic that we can maintain a strong market share, for Tysabri brand. This is a there's a limited number of physicians who are very strongly, believers in the importance of Tysabri. So, you know, that's what we're gonna rely on. We also have an extraordinarily strong patient services organization in our US company. I think to really return to growth, I think there's two things really need to One is we do need to start seeing the positive Phase III results come out and the launch of products. So you know, if we assume that the phase three for ladafilumab is positive for SLE, know, that could be launching in '28. If we assume that the AMR data are positive, that could be a launch in 2028 as well. And I think particularly AMR could be a launch that takes off quite quickly. Just given the identified patient base that exists and the fact that there's no treatment. The other, of course, is BD, and we continue to look for potential acquisition opportunities. These are companies that are post phase III results and early or early stage in their commercialization. You know? And certainly no more than around the $5 billion ish 5 to $6 billion mark. But you know, the reality is is that it's hard to find things that actually generate value for our shareholders. There are certainly companies out there, but we haven't found one that we can acquire for a price that we think makes sense for our shareholders, but we continue to look. We are looking every day out there in the marketplace, and I think that's an opportunity. But equally, I would say, you know, we have some pretty high conviction in our late stage pipeline. Now nothing is ever given in research and development as we all know, But, you know, 10 phase three programs, that's a real achievement from over the past year because, you know, at the 2024, you know, we really only had ladifilumab. Now we, you know, we not only have those programs, but, you know, we've got, a potential know, let's see what happens with BIB 80 and the LARC two and we're starting to put programs into the clinic. So you know, we're continuing to look, but I think it's really seeing these products launch and if we can, find, find an acquisition. But otherwise, you know, I think we've been able to really again create that bridge to growth. We're generating cash. We're generating profits. And we're investing significantly in our growth brands. Tim Power: Thanks, Chris. Let's go to the next question, please. Ruth: Our next question comes from the line of Brian Skorney with Baird. Brian Skorney: With the BIB080 catalyst coming up, I was just wondering if maybe I can get a comment from Chris or Alicia if she's on the call. Obviously, you guys have been very successful SPINRAZA as an as an intrathecal injection even in the face of oral competition. But Leukembi has been much harder in Alzheimer's as an IV, which I think most would agree is an easier mode of administration. Than intrathecal. So I guess how would we be thinking about the commercial opportunity for 80? And what sort of clinical data is really needed Success over LeCambi? to kind of see the next level of commercial sec? Christopher Viehbacher: Well, I think we really wanna see the data. You know, what I can tell you is that the neurology community is gonna be also looking at these data very closely. Every Alzheimer's expert I talk to really thinks tau is an important target, and if you look at the severity of Alzheimer's, that's really related to the level of tau. So there is there's a logic there. And with BIB 80, we know we can actually reduce tau. The question will be how long do you have to reduce the tau for to move the needle on cognition. And, you know, I think you've seen from the GLP one data that it's quite hard to move that level of cognition. So I think we wanna see the data first, I think if there is, then you also wanna see what the side effect profile is. There's a belief that we're not going to have anything like ARIA. But, again, we need see those data. This is a phase two data that is really breakthrough science. Nobody knows. Nobody has been able to move the needle so far. Our belief is also that, you know, it's the intracellular tau that matters as opposed to the extracellular tau, which is why the antibodies haven't worked. I do think it's a complex disease, Alzheimer's, and most complex diseases require multiple modalities. And so from a commercial point of view, obviously, there's already a lot of speculation about what would be the sequencing of these treatments. Would you treat the tau first? Would you treat the abeta first? Are you put these in combination? And then there's also an opportunity once you see the data. Can you go into other tauopathies? So it's a little premature to say, but I can say that if it is positive, I think the neurology community is gonna be very excited about that. But I would also remind everybody that we would then have to go into a phase three program and anything in Alzheimer's doesn't happen on a very quick basis. This would take several years again, to be able to do that phase three and launch the product. Tim Power: Thanks, Chris. Let's go to the next question. Thanks, Ruth. Ruth: Yes. Our next question comes from the line of Michael Yee with UBS. Michael Yee: Hey, guys. Thanks for the question. Following up on Bib 80, which I think is gonna be really an important readout. I understand the primary endpoint is CDR some of the boxes after eighteen months, which is great. And I think the study is well designed. But how important is looking at subgroups for example, high tau versus low tau or any of those prespecified how important is the tau sub study where, obviously, PET tau imaging is gonna be critically important to see if we're actually doing Thank you. Christopher Viehbacher: Priya? Priya Singhal: Thanks, Michael. No. It's very important. I would say, I think as Chris just outlined, this is a very important test of the scientific hypotheses. So we'll be looking at tau PET. We'll be looking at fluid biomarkers. We'll be looking for trends and clinical data, and we'll be trying to triangulate all of that. And importantly, I think we've set it up well because we do have a tau sub study. And we are testing as I'll just remind everyone. We are testing three doses and two dosing regimens. And it is a randomized controlled trial. So all of that will be very informative. We believe this will be very important to assess. Yeah. All of it. Tim Power: Thanks, Priya. Let's go to the next question, please. Ruth: Yes. We will go to Salveen Richter with Goldman Sachs. Salveen Richter: Good morning. Thanks for taking my question. When I look at your late stage registrational pipeline, you've put that whole basket under high conviction here. And I just wanted to understand in the context of lixilimab, with these phase three trials reading out and the kind of mixed phase two datasets here and just the innate risk around lupus, what it is that leads you to believe that this is high you know, that you have high conviction here in the outcomes on the phase three? Priya Singhal: Thank you, Salveen. Well, I'll just start off by saying that we really believe that ladasolumab is a scientific conviction late stage program. And the reason for this is that it targets the b d c a two pathway, as you know. And we know that b d c a two is really a receptor that is expressed exclusively on what we know as the PDC cells, human plasma cytoid dendritic cells, which regulate immune response and then control the type one interferon signature pathway. And I think that what we've shown, and we have published this in the New England Journal of Medicine, both the parts of the LILAX study where in the first part of the study, we looked at systemic lupus, and in the second part, we looked at cutaneous lupus. And in both independently, we believe we had important data that we would classify as proof of concept. So I think we have designed the trials to really be assessing that and confirming that. Our primary endpoint is also similarly, you know, established as SRI four, which is the SLE responder index. And what's important about this primary endpoint is that it requires a more than a four point or greater reduction with no worsening. So really captures disease activity. And I think that because of the pathway, which is very relevant for skin and joints, we have targeted our inclusion in the litifilumab topaz one and topaz two trials to be really appropriate for the mechanism of action. So overall, we remain encouraged and optimistic. Of course, we have to wait for the readout. And, again, the readout for SLE is end of the year. And CLE will be sometime midyear next year. Tim Power: Thanks, Priya. Let's go to the next question, please. Ruth: Yes. We have a question from Umer Raffat with Evercore. Umer Raffat: Good morning, guys. Thanks for taking my question. Maybe I'll switch gears to selzardimab. For a quick second. How important is it for you to hit on the EGFR endpoint beyond the primary endpoint? And I'm asking because in back in phase two, it was hard to evaluate that endpoint given the massive imbalance on EGFR. And on this pelsartan map point two, I guess, do you think about limiting the scope of development to just kidney transplant AMR? Why not AMR and other organ transplants as well? Thank you very much. Priya Singhal: Thanks so much. So overall, I think it's a very important endpoint. I think, you know, as we've set it up, the primary endpoint is what we'll be focusing on, but we'll be definitely looking at all the secondary endpoints. And I think eventually, as is in most cases, the totality of data will matter. We remain really excited about it based on the proof concept. It was a small trial, but the magnitude of effect of greater than 80% that we saw in that small phase two trial, was really compelling. And I think that that's really the piece that is very encouraging. Now speaking of other transplants, thank you for that because we are ourselves evaluating the impact of the c d addressing the c d 38 autoantibodies in other transplants. So it remains an important area of internal evaluation and query. And, you know, obviously, we'll communicate more on that as this becomes important. I also wanted to call out that we have you know, we are in the process of initiating another sort of sister indication trial with the microvascular inflammation, which we think is going to be a very important aspect as we continue to, you know, think about what do patients and prescribers really need in the field of antibody mediated rejection. Christopher Viehbacher: Yeah. I think the only thing I would add is that we do we are aware of some physicians who are experimenting with CD38. I know of some physician, for example, in heart transplant, and we'll be monitoring, obviously, a lot of that activity. We're not sponsoring any of that, but certainly be looking to learn from whatever experience they have. Tim Power: Can we go to the next question, please? Ruth: Yes. Our next question comes from the line of Evan Seigerman from BMO Capital Markets. Evan Seigerman: Hi, guys. Thank you so much for taking my question. Want to touch on HD SPINRAZA With The Potential Approval In The U.S. Coming in April. Should we think about what that could do to your top line growth for 2026 in the rare disease business? Thank you. Christopher Viehbacher: So like I said before, the first country to approve this was Japan. And again, we are seeing higher results initially. I mean, we're the first few months of launch, so, it's difficult to draw definitive conclusions, but we're certainly, off to a better start than we even had expected. And it's not just, as I said, in terms of adoption, but it's also switchbacks. You know, we certainly have seen much higher levels of efficacy in the study, which suggests that there's an increased benefit to getting to a therapeutic level faster. I know in Europe, it is our teams are very excited about the launch, and they'll be next up, and we'll see results from that. And, you know, the feedback again is the community as everybody's been waiting for these data. So the big thing in the SMA market is really efficacy versus convenience. You know, most physicians I talk to, and I like to go and talk to physicians who prescribe SPINRAZA around the world. And if you ask them about efficacy, they will most of them believe that it's really SPINRAZA. But, you know, at some point, the convenience of the oral starts to attract patients. Now here, we're gonna be dramatically increasing, the level of efficacy, and I think the choice between oral and efficacy will be harder for some physicians and parents. Market research suggests that there could be, an increase in sales, but I think I would say there's no market research like actual sales. So I think there is an opportunity for upside here. How fast physicians will be willing to transition patients is something that I think we have to wait and see. For practical purposes. But it is an important launch. And, again, it's been highly looked, to toward from the part of the patient advocacy groups as well as the physician community. Tim Power: Ruth, can we go to the next question, please? Ruth: Yes. We will go to Brian Abrahams with RBC Capital Markets. Brian Abrahams: Hey. Good morning. Congrats on all the progress, and thanks for taking my question. So you have a slide detailing some of the prelaunch activities. And guess I was wondering if you could maybe talk through the on the ground process of pivoting and redeploying the existing commercial infrastructure ahead of the potential lupus nephrology launches and while sounds like cost structure won't change much this year, Broadly speaking, I guess, I'm wondering how you would expect commercial investments will need to evolve longer term in order to support the potential growth that you're bridging to? Like, do you have a long term margin target? Christopher Viehbacher: Well, the first thing is acquisition of experience and capability. Because we're going into areas where Biogen has not been present in the past. You know, with AMR, we'll be seeing transplant nephrologists. With IGAN, we'll be seeing nephrologists. With lupus, we're going to see rheumatologists. And, so in each of these, and, of course, outside of US, we're going to see epileptologists and neurologists. So we need to build capabilities. And there, you know, I think I'm extremely encouraged. Market research is always hard to do because it a little theoretical for physicians. So one of the surrogate markers I look for is the ability to attract pay talent. And we've brought in a number of people from companies who have already a strong presence in those areas. And, you know, when you're betting your career on a product, I think that's an important move for people. And so people who are joining Biogen are joining because they see potential in these products. So I'm already encouraged by that. But the interesting thing is, I remember when we were developing Dupixent, you know, all of the indications that DUPIXENT has today, are areas where Sanofi previously had no experience. And yet, actually, by recruiting really not very many people in medical and commercial. Sanofi's obviously made that a successful product. And the reality is is that you don't need to have the entire team necessarily have that experience. You need to have enough medical capability. And on the commercial side, at least the commercial leaders with that. So I don't foresee that this is gonna have a massive impact on our OpEx trajectory. But it is important that we have people who understand these spaces because as I always say, if you've launched one product, you've launched one product. There are so many differences, between physician types, the patient. We have to really understand the patient journey. So today, we're investing mostly actually in market research. We're gonna be obviously present in congress and presenting the data as they come along. But, it's more of a getting ready, at a global level and then progressively at a regional and local level, and we're not this stage really looking at seeing any major change in, as I say, in the actual level of investment. Robin Kramer: Yeah. Chris, what I would might add is that we look to the largest degree possible to reallocate resources from our legacy business towards our growth products, both in launch and those that are in the pipeline where we may have the opportunity to bring them to market. Tim Power: Let's go to our next question, please. Ruth: Our next question comes from the line of Jay Olson with Oppenheimer. Jay Olson: Congrats on the quarter. Thanks for taking the question. We have a financial question to follow-up on part of what Brian was asking. We're curious about the product margin for Lycanby. Can you talk about the level of expense that you're investing in Lycanby? How does it compare to where you would like it to be longer term? And what's the steady state target for Lakenby's product margin? Thank you. Robin Kramer: Yeah. So, we don't get into the specific product margin associated with the But as was the case with most launch products, as the launch progresses and we continue to make enhancements on the manufacturing processes, we would expect that we would see improved margins over the near to mid term. Christopher Viehbacher: Yeah. Like most products, I mean, this is really gonna be driven by revenue. Right? I mean, they we are certainly investing significantly still in r and d. We have the AHEAD three four five study. We've been developing the sub subcutaneous formulations, and all of those are extremely important for the development of the can be. From a commercial point of view, there's still a significant investment. This is an area, again, where we're having to create the market and educate. And so I wouldn't necessarily expect, though, to see the OpEx level totally to expand, but I would see if we're gonna see margin expansion it's gonna be because the revenue starts to grow into the OpEx level, if you like. So I would say we should see increasing margins time as long as the revenue increases. Tim Power: Thanks, Chris. Let's go to the next question, please, Ruth. Ruth: Our next question comes from the line of Eric Schmidt with Cantor. Eric Schmidt: Thanks. Maybe another one for Robin on capital redeployment. Your balance sheet is meaningfully stronger than it was. You're still creating a lot of cash flow. And Chris just asserted a lot of confidence in the pipeline, including the late stage pipeline. Is this the right time for a share buyback or otherwise a return of capital to shareholders? Thanks. Robin Kramer: Yeah. So as it relates to deployment of capital where we're focused on deploying capital in a manner that creates long term shareholder growth. As Chris mentioned, we are looking to deploy capital towards business development transactions. But we do think about capital deployment in a broad manner, and so it's not out of the question that we might consider share buyback. But at this point, we're primarily focused on growing that top line. Tim Power: Thanks, Robin. Let's go to the next question, please. Ruth: Yes. Our next question comes from Chris Schott with JPMorgan. Chris Schott: Great. Thanks so much for the question. Just a bigger picture one on the pipeline. Chris, I know one of your priorities when you joined was creating a more balanced pipeline Seems like you've clearly been doing that in the late stage. But on the earlier stage pipeline, just elaborate a little bit more on your priorities here. Should we just thinking about there being more of these kind of high risk, high reward type assets is that part of the pipeline we should think about that same kind of balancing out approach? Christopher Viehbacher: Playing out over time? No. I don't think we have the size as a company to be in the high risk, high reward business. So I think we do have a lot of capability and all Alzheimer's and ALS. So I think you know, ALS, I think we believe that we can still invest there without so much risk because for us, at least, the neurofilament is an important biomarker. And so we believe that we'll get an early read as to whether a molecule is working or not in ALS. And that makes it a whole lot less, high risk, but it's still a very high reward area, obviously, if you could do something for the sporadic ALS population. So we haven't abandoned that. In fact, we have several targets in preclinical that we're working on. Alzheimer's is an area that we believe is gonna be a core part of Biogen going forward. And beyond tau, we are working on some other areas and mechanisms. But that's pretty much the extent of our neuroscience. There's still MS, We are working on MS, but you know, the area of unmet need in MS is pretty narrow now. It's really progressive MS, and that's an extremely important area of unmet need, but it has equally been a very difficult target to hit. So there is some limited work on MS. But most everything else in the early stage really looking to immunology. And immunology is obviously a big space. And I would say, you know, if I'm in a five year time horizon, we're really sticking with this rare immunology, space as we've seen with elsartanib, for example, and, and other products. But as you get into earlier stage, then I think we can open up the aperture a lot more. And if you look at something like a Dera, or even the VANQUA, those are those both are opportunities to have a portfolio and a product. That's the really interesting thing about immunology. Is that as you follow these immune pathways, you're gonna have a principal target. But once you have derisked the safety of that, it's relatively cost efficient to be able to go and do, signal seeking studies in other areas. And so I think that's one of the areas we were looking for because it's a highly cost efficient area, for a company of our size. And most of I would say there's gonna be probably a lot more in immunology than neuroscience. But as I say, ALS and Alzheimer's and to a degree MS continue to be a target for us. Tim Power: Thanks, Chris. Let's go to our last question, please. Our next question comes from the line of Danielle Brill with Truist Securities. Danielle Brill: Hey, guys. Good morning. Thanks so much for the question. Maybe a couple modeling items here. You mentioned the one time reimbursement true up for Skyclaris What was the magnitude of that, and how should we be modeling the quarterly run rate in 'twenty six? And then additionally for XERZUVEY, how should we be thinking about the impact of the European rollout? Thank you. Robin Kramer: Yes. So in respect to Skyclaris, and the true up that was occurring in Ex US, that was $12 million. And I would look at that in relation to the occurring in the fourth quarter. Now it's Chris has mentioned in the past, as we go and launch Ex US, you have a situation where you have reimbursement occurring on a country by country basis, and so you have timing of booking to an until you get finalization of that reimbursement in place. And so periodically, you may see true ups or changes in estimates. But in respect to this, it related to two countries in Europe and it was a one time item in the fourth quarter. Christopher Viehbacher: But I think you're gonna continue to see nice steady growth of Friedreich's ataxia. We still see this as a major opportunity. There are a lot of patients in South America, and so I think the launch in Brazil will be particularly important for us. That'll be, initially in a private market, and then we'll progressively get, state reimbursement as well. You know, Xerxovay, XERZUVEY will be interesting in Europe. Initially, the pricing assessments were coming back such that it didn't make sense. But I think one of the things that we have seen from the success in The US is that some of that is translating into Europe as well. So I think we are gonna be doing a highly selective rollout in Europe. It's not gonna be, pan European, because of the pricing questions. But I think we're already seeing pricing levels that are actually enough to be able to launch. And obviously, we are very mindful of the MFN environment. And, you know, while we have not not one of the companies that signed an agreement, as you've seen, there are, demonstrations projects now that have been launched by the administration. And so as we launch new products, we are certainly looking at this from an MFN point of view. And that's that will mean that, it's probably a target of about three or four countries that we're gonna be starting with as opposed to the whole 27. Tim Power: Right. That concludes the call. Thanks, everybody, for your time today. If you've got more questions, just reach out to any of us on the IR team. Thank you. Ruth: This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Good day. And welcome to the Centene Corporation Fourth Quarter and Full Year 2025 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I would now like to turn the conference over to Jennifer Gilligan, Senior Vice President, Investor Relations. Please go ahead. Jennifer Gilligan: Thank you, Rocco, and good morning, everyone. Thank you for joining us on our fourth quarter and year-end 2025 earnings results conference call. Sarah London, Chief Executive Officer, and Drew Asher, Executive Vice President and Chief Financial Officer, of Centene will host this morning's call, which also can be accessed through our website at centene.com. Also, slides can be found on our website alongside the webcast. Any remarks that Centene may make about future expectations, plans, and prospects constitute forward-looking statements for the purpose of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Specifically, our commentary on 2026, including drivers of adjusted diluted earnings per share for 2026, are forward-looking statements. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our fourth quarter and year-end 2025 press release and 2026 guidance presentation filed this morning, and other public SEC filings, which are available on the company's website under the Investors section. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. We will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our fourth quarter and year-end 2025 press release and 2026 guidance presentation. With that, I would like to turn the call over to our CEO, Sarah London. Sarah? Sarah London: Thank you, Jen, and thanks everyone for joining us. This morning, we reported a fourth quarter adjusted diluted loss per share of $1.19, contributing to our full year 2025 adjusted diluted EPS of $2.08. While 2025 was undeniably challenging, disciplined execution enabled us to close the year slightly ahead of the expectations we outlined on our third quarter call. Medicaid profitability improved, strengthening the trajectory of our largest business. Underlying medical cost trend within marketplace and across the Medicare segment was in line to slightly favorable as we closed out Q4, and both segments delivered 2026 enrollment results consistent with our expectations, creating a solid foundation for next year's earnings power. As we look to 2026, we are positioned to deliver meaningful margin improvement and renewed adjusted EPS growth. We expect full year 2026 adjusted EPS to be greater than $3, representing more than 40% year-over-year growth and marking important progress toward restoring the enterprise's embedded earnings power. This outlook incorporates Medicaid margin stability, significant margin recovery within our marketplace business, and continued progress towards our goal of breakeven in Medicare Advantage. Now let's take a look at our business lines beginning with Medicaid. As an organization, we have been laser-focused on restoring our Medicaid business to sustainable profitability while maintaining our focus on quality outcomes for our members and the communities we serve. As a result of strong cross-enterprise execution, we demonstrated significant progress on this mission in the back half of 2025, with continued momentum through Q4. Our fourth quarter health benefits ratio of 93 was consistent with expectations we set for investors in October, representing 40 basis points of sequential improvement and 190 basis points of improvement from Q2 levels. While flu drove significant national media coverage, flu and influenza-related illness cost within were consistent with the elevated expectations we had incorporated into our financial outlook. Trend patterns remained largely consistent in Q4 compared to Q3, with behavioral health still driving roughly half of excess trend and both home health and high-cost drugs as secondary pressure points. As we head into 2026, we continue to organize around the key levers that will drive improvement in the Medicaid business, including optimizing our networks for cost and quality performance, thoughtful implementation of new and enhanced clinical programs, rate advocacy, and collaboration with our state partners on program reform, increasing vigilance in our detection and reduction of unnecessary utilization, and a more aggressive approach to fraud within the provider ecosystem in service of our mandate to protect Medicaid program integrity. Our applied behavioral analytics or ABA task force established in 2025 is a perfect example of how we have pulled critical levers to manage costs on behalf of our state partners while improving the quality of member care at the same time. Leveraging Centene's scale and reach, the team analyzed our ABA data across our 29-state footprint. What we found were consistent patterns of outlier providers with volume versus outcomes-driven care patterns, where the maximum number of hours are prescribed for every patient instead of an individualized care plan. We found children who had been in therapy for five to ten years, clinical evidence suggests the optimal duration is two to three years, as well as those enrolled in forty hours per week of therapy instead of balanced school-integrated care. And we saw a lack of appropriate board-certified oversight of behavior technicians. These dynamics drive cost in the system, but far more importantly, they are red flags relative to the quality of patient care for a very vulnerable population. Centene's approach has been data-driven and multi-pronged. We engage directly with providers on gaps we see and focus our network on providers who follow evidence-based best practices. We meet directly with our state partners to share data, inform program design, and reduce outlier payments. And we launched an ABA-specific engagement program to support members, their parents, and their providers. These programs are developed and led by PhD-level board-certified behavioral analysts who are still practicing. So this is not algorithmic or theoretical for us. It is about being responsible stewards of taxpayer dollars and transforming the health of the communities we serve one kiddo at a time. In this case, rates continued to be another powerful and important tool to ensure program sustainability. On this front, we closed 2025 with a composite rate adjustment of approximately 5.5% above 2024 levels, consistent with our prior commentary. One one final rates were in line with our expectation, and as the underlying data naturally rolls forward, we believe rate decisions will increasingly be made on data that reflects the acuity and trend dynamics we have experienced in Medicaid over the last two years. We will continue to be proactive in our engagement and data sharing as we move through 2026 and prepare for 2027 program changes. Standing here today, we have greater visibility into the drivers of our core business and command of the levers needed to drive earnings recovery in Medicaid over the next few years, while maintaining and improving the quality of our care our members receive. Turning to Marketplace. Fundamental medical cost trend for our Marketplace business came in slightly better than expectations in Q4. In December, we also received an updated view of the 2025 weekly data, which showed favorable development relative to our reserve. We experienced two out-of-period items in the quarter, including a 2023 CMS reconciliation and costs related to No Surprises Act disputes. This prompted us to add an accrual for further NSA development related to 2025 dates of service, which ultimately pushed the segment HBR up by a 100 basis points versus our original expectations. We have accounted for estimated 2026 MSA costs in our guidance. While the No Surprises Act was designed to protect consumers, it has increasingly become weaponized by market participants looking to extract profits from the system through the independent dispute resolutions or IDR process. We are vocal in advocating for NSA reform, and in the meantime, we'll be taking a more proactive litigious posture as necessary. As an example, earlier this week, we filed a multimillion-dollar lawsuit against a New York provider alleging fraudulent manipulation of in-network and out-of-network claims. We will continue to take aggressive action to protect the system from fraudulent and abusive exploitation of NSA loopholes. Turning to 2026, the Marketplace team executed incredibly well over the few months in a dynamic open enrollment period, investing in additional operational support to care for a customer base navigating significant change and uncertainty. In the absence of congressional intervention, enhanced advanced premium tax credits expired at the 2025. As a reminder, we accounted for this assumption and the impact it would have on the market risk pool and cost in our 2026 pricing. Ambetter membership developed in line with expectations, and we are on track for first-quarter ending membership of roughly 3,500,000 members as compared to our December membership of 5,000,000. While market sign-ups are being reported publicly, this isn't the most helpful indicator of true market dynamics. Now that we are into February, paid membership is the most important metric for planning and forecasting. Through the January, Ambetter paid rates, while below historical levels, are right in line with our expectations in a post-EAPTC environment. Relative to member demographics, our membership is more notably enrolled in bronze plans for 2026 compared to prior years, with many of those members still able to access $0 premium products. Bronze membership will represent a little over 30% of our marketplace enrollment this year compared to a range of 19 to 24% over the past four years. Age and gender demographics remain consistent with recent years. Risk adjustment was obviously a source of significant deviation from our financial plans last year. As you think about the expectations incorporated into our 2026 plan, we anticipate being in a meaningful payable position for the 2026 plan year at this time. Consistent with other years, we will reassess our risk adjustment position and assumptions as we move through the year and receive additional data. That end, in an effort to drive additional visibility at an industry level, we are pleased to have worked closely with Wakely, the independent actuarial firm, to support publication of a new report reflecting market-wide paid membership metallic peer distribution, and statewide average premium set to be released toward the '1 in order to help market participants better inform adjustment assumptions going forward. While 2025 was a difficult year for the Marketplace business, we believe the actions we took in the 2025 set us up to navigate 2026 with increased visibility and confidence. We continue to advocate for program reform that will drive affordability, and further stabilize the individual marketplace overall, as an alternative to employer-sponsored insurance and a solution for small business owners and other hardworking Americans and their families. Finally, Medicare. Our Medicare segment delivered strong results throughout 2025. Fourth quarter fundamental Medicare Advantage performance was in line with our expectations, setting us up with a solid jump-off point for 2026. We completed a review of our provider contract portfolio in the quarter and adjusted certain receivables accordingly, which drove the slightly elevated HBR compared to expectations. Overall, we continue to look for opportunities to position the business for improved profitability in 2026 on the way to our goal of breakeven Medicare Advantage results in 2027, an important enterprise milestone. Our Medicare Advantage product positioning yielded the intended results for 2026 membership, and we expect to end the first quarter with a decline in MA membership consistent with our strategy to refine our footprint and fine-tune our value proposition for Medicaid beneficiaries. EDP ended Q4 with some additional favorability, thanks to slightly moderating trend, and that team deserves a well-earned shout-out for having managed the business expertly through significant program changes. As we look ahead to 2026, Part D enrollment is tracking to high single-digit percentage growth at the end of the first quarter compared to year-end 2025, with member mix across the products aligning well with program and formulary design. This year provides an important to build on the meaningful progress we've made in Medicare Advantage and further strengthen the platform that will most effectively serve Medicare beneficiaries as well as dual-eligible membership. Continue to focus on STARS improvement, clinical engagement, and overall SG and A efficiencies. At the same time, we launched a redesigned duals operating model, leveraging insights from our deep experience managing complex populations to enhance our service and member experience for a decent member base that now accounts for roughly 40% of our Medicare Advantage business. Last week's 2027 advance notice, at least initially, suggests a more pressured view of rates than industry expectations, but it does not change our focus on returning our Medicare book to profitability. Aligning closely with our key Medicaid markets and continuing to invest in quality programs and benefits that support our core member base. We expect rates to be finalized in early April consistent with prior years. Taking a step back, our long-term goal across our businesses is to deliver industry-leading outcomes at an industry-leading cost structure. As we create the roadmap to harvest Centene's full potential earnings power, there is no question that data, technology, and artificial intelligence will be a critical lever and accelerant to this work. Over the last few years, we have been building the necessary data foundation systematically integrating AI into our operations. Resulting in proof points around accelerated prior authorization approvals, improved call center operations, enhanced member navigation and engagement experiences, and advanced analytics capabilities that support our medical economics work and our payment integrity operations. As an example of the latter, we currently score our claims data against 75 algorithms designed to triangulate potential fraud. Alerts are triggered and sent to a group of cross-functional experts for immediate review and intervention. As we step into 2026, we are closely tracking the inflection GenAI and accelerating our integration of AgenTek capabilities into our core operations to drive automation and efficiency and using it as a catalyst to reimagine and elevate the we deliver to our members, partners, and other stakeholders. You should expect to hear more on this in the quarters ahead. 2025 challenged us it also made us stronger. Amid continued landscape volatility and with the benefit of enhanced visibility across lines of business as we move through the back half of the year, we took the opportunity as an organization to reassess and refresh our views of both existing and emergent headwinds and tailwinds. We have prudently positioned our 2026 outlook incorporating an expectation that policy-related variability will continue to influence our core business lines. We are confident in our ability to execute against the outlook we have provided today building on the positive momentum we have generated in recent months. And we see continued opportunity for margin expansion in the months and years ahead while keeping our members at the center of everything we do. As I have said before and feel only more strongly after the year we have navigated, the Send team is an incredibly powerful engine. They are fired up and focused on the opportunity ahead, and committed to the hard work necessary to deliver margin that will power our mission. With that, I will turn it over to Drew to provide more details about the quarter and our view of 2026. Drew Asher: Thank you, Sarah. Today, we reported fourth quarter and full year 2025 results, including $174.6 billion in premium and service revenue, and adjusted diluted earnings per share of $2.08. The fourth quarter GAAP diluted loss per share of $2.24 includes a $389 million net loss prompted by a Q4 definitive agreement to divest the remaining Magellan business. Recall, we previously divested the Magellan Pharmacy and specialty businesses at Gaines over the past few years. From an adjusted earnings standpoint, we are pleased that the underlying fundamentals in Q4 are tracking our prior forecast full year adjusted diluted EPS of greater than $2, and this sets us up well for our 2026 guidance we'll cover in a minute. Starting with Medicaid. We saw continued progress and improvement in the HBR with Q4 improving to 93%. We have a lot further to go in Medicaid to achieve a reasonable HBR and margin, but 2025 was a good start with two consecutive quarters of HBR improvement. Our one-one net rates are supportive of our 2026 guidance of a stable Medicaid HBR with an assumed full year 2026 net rate impact of mid-fours and the corresponding mid-fours 2026 net trend expectation. As expected, we continue to see slight attrition in membership closing out 2025 at 12.5 million members. We continue to drive quality and affordability health care initiatives, and work with our state partners on the optimal programs structures and associated rates. While certain areas are still elevated, behavioral, home health, and high-cost drugs, we can see tangible progress in the business. Overall, this is another quarter of good progress in Medicaid. Our commercial segment HBR in Q4 was about a point higher than our forecast with a few items moving in both directions, but the elements that matter most for 2026 were positive. Importantly, the current period medical cost and trend were slightly better than our expectations in the fourth quarter. So we feel good about Q4 fundamentals as we turn the calendar into 2026. Another positive sign in the quarter was a favorable change in our view of 2025 relative morbidity or risk adjustment based upon the third round of weekly data. This was a couple hundred million worth of net P and L outperformance in the quarter which also bodes well for our 2026 pricing assumptions. So what more than offset this good news? Two items. 2023 membership recon revenue reconciliation with CMS has no bearing on 2026. And increases in cost and accruals related to the No Surprises Act that Sarah covered. Those two items drove the net 1% higher than planned H HBR in Q4 which otherwise would have been quite favorable. Consistent with our Q3 commentary and now bolstered by Q4 insights, we expect our marketplace pricing actions to adequately capture the 2025 and 2026 market shifts, 2026 trends, and policy changes in place during the open enrollment period all of which support meaningful pretax margin expansion in 2026 compared to losing approximately 1% in 2025. In our Medicare segment, we executed well in 2025, including the fourth quarter. In our growing PDP business, we delivered strong 2025 performance including Q4, despite the headwinds and uncertainties created by the Inflation Reduction Act. This is a testament to our experience, cost structure, and market positioning in PDP. In our Medicare Advantage business in 2025, we progressed nicely toward our goal of breakeven in 2027. Q4 fundamentals were on track. And the reported results include a write-off of some older provider receivables. As Sarah covered, we'd like our 2020 positioning as we wrapped up the annual enrollment period. We will provide CMS comments on the disappointing 2027 advance notice Medicare rate which will likely cut into seniors benefits and product selection. As we construct the 2027 bids over the next few months, we will do so with the same goal to solve for breakeven performance in 2027. Our Q4 adjusted and A expense ratio of 7.5% brings our full year 7.4% which is a 110 basis points lower than 2024. Reflecting continued discipline and scale. We ended the year with about $400 million of cash available for general corporate use. We reduced debt by $189 million in the quarter, and ended up with a debt to cap ratio of 46.5%. Our medical claims liability totaled $20.5 billion and represents forty-six days in claims payable, a decrease of two days. As compared to the 2025, driven by payouts of state-directed payments and the elimination which is corroboration of the Medicare premium deficiency reserve in Q4, of the progress we are making in Medicare Advantage for 2026. That's a wrap on 2025. A strong finish to a rough year. Let's move to 2026 and associated guidance elements including a few slides we posted on our website. We expect premium and service revenue of $170 to $174 billion. As you can see in the bridge, Medicaid premium revenue is down a couple billion, including some member attrition in 2026. Partially offset by rate increases. We expect Medicaid member months down five to 6% in 2026. We expect marketplace revenue to be down about $8 billion driven by policy and market impacts, including the expiration of the enhanced APTCs net of rate increases designed to increase yield and improve margin. Give you some membership magnitude as Sarah outlined, we expect around 3.5 million marketplace members as of the end of Q1, and slight attrition thereafter, though we are still on the payment grace periods, which could swing membership somewhat during Q1. We expect the Medicare segment to grow premium revenue approximately $7.5 billion driven by our Medicare PDP business the majority of which is from the premium yield increase which we'll touch on in a moment. Coupled with growth in membership, which sits at about 8.7 million coming out of open enrollment. Medicare Advantage revenue is projected to be essentially flat from 25 to 26 with membership down intentionally and yields up. The forecast to 2026 revenue split in the Medicare segment is approximately 41% Medicare Advantage and 59% PDP. We expect a consolidated HBR of 90.9% to 91.7% in 2026 at the midpoint down 60 basis points from 2025. That's driven by an expected recovery in marketplace as you can see in the bridge. Consistent with previous commentary, we initially expect a flat Medicaid segment HBR in 2026 compared to twenty twenty five's 93.7%, In the Medicare segment, we expect improvement in the Medicare Advantage and a higher PDP HBR driven by two things. One, we are initially assuming a 2026 pretax margin around 2% down from a good year in the threes, And two, there was a meaningful increase in the direct subsidy a $143 to $200 reflecting industry pricing for higher pharmacy trends due to the IRA. So think about a rise in premium and pharmacy expense, without any need to increase SG and A. This drives a higher mathematical HBR. That's factored into our initial 2% pretax margin forecast for PDP. You can see the other guidance elements, including stability in the SG and A rate, continued pay down of debt and associated impact on interest expense, reduced investment income from assumed Fed fund rate cuts, and adjusted tax rate of 26% to 27% slightly higher than a normal statutory rate given the mix and level of earnings forecasted for 2026. No share buyback reflected in guidance. We will continue to assess the field of capital deployment opportunities as we generate excess cash. With respect to seasonality of earnings, as we sit here today, we expect the majority of 2026 adjusted EPS in Q1 stepping down in Q2, and further to around breakeven in Q3 with a loss in Q4. This is driven by the seasonality and benefit design of marketplace and PD products, both with lower HBRs in the beginning of the year, and higher at the end of the year. Our EPS outlook of greater than $3 reflects a meaningful forecast to turnaround of marketplace margins Medicaid stabilization, continued Medicare Advantage progress, a prudent PDP margin assumption, and lower interest expense from continued deleveraging. I'm sure you are too, but we are pleased to turn the page on 2025 with 2026 one step towards restoration of earnings for Centene. Thank you for your interest in Centene. And, Rocco, please open it up for questions. Operator: Thank you. We will now begin the question and answer session. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. Please press star then 2. At this time, we'll pause for just a moment to assemble our roster. And today's first question comes from Ann Hynes at Mizuho. Please go ahead. Ann Hynes: On your rate of application for Medicaid for four and a half percent, I would think that would be higher just given trend has been so elevated over the past couple of years. Can you just give us more details what's happening on the state level and view that as conservative would you be able to get some midyear rate increases Any color would be great. Thank you. Sure. Thanks, Ann, for the question. So a couple of things. One, as we said throughout 2025, the conversation with our state partners continue to be constructive. We also have the benefit of the fact that as we step into this rate cycle, we have a full two years of both the acuity dynamics and the step up in trend encapsulated in the data. And We think that is important and helpful to inform rate decisions So again, we're starting with a prudent assumption around that 4.5% for 2026. I would point to the fact that our 2025 rates matured favorably from where we started at the beginning 2025 and ended with that composite rate at you know, roughly five and a half percent. And then balanced against that, obviously, is all of the work that we've done over the back half of '25 to really bend trend, which is what's driving the assumption of the flat HBR year over year. Operator: Thank you. Our next question today comes from Jessica Lake of Wolfe Research. Please go ahead. Jessica Lake: Thanks. I wanted to kinda follow-up on Anne's question here. First, you talked about trend in 4.5%. In 2026 for Medicaid. Curious what that trend was in 2025, and maybe can help us understand first half versus second half. Just to get the run rate kind of coming out of the year versus that 4.5% assumption next year. And then to Ann's question on the rates, your your rates were five and a half last year. Your rates are four and a half percent this year. I'm just curious how the states justify that given when you have your conversations with them given what's going on in the market, what's going on with Trend and Acuity, etcetera? And maybe you could just tell us how one one looks versus the four and a half one year. Thanks. Sarah London: Sure. Lots of pieces there. So so one one rates were consistent with expectations. Let's go back to trends. So 2025 trend was in that mid six which I think we we talked about on the Q3 call. And then the view of 2026 around mid-fours is really a net trend assumption. And so, again, important to think about the fact that We are jumping off of an elevated baseline that included that ninety-four nine in Q2. And all of the aggressive action that we took in the back half of the year, obviously, coming through Q4 with a 93. Equally important is sort of the assumption around the proof points that we have in terms of vending trend in the back half of the year. As well as bankable proof points around actions that we took in Q3 and Q4 four that don't take effect until 2026. That's part of what gives us a view of sort of that mid-fours net trend assumption. And then relative to rates, to your point, we ended the year with that composite of five and a half. We started the year lower than that, so believe that we've sort of taken a prudent view of rates in the mid-fours for 2026, and we'll continue to you know, work with the states as we have all along to make sure that they have the most recent trend data. Again, a full we have the benefit of that sort of trailing two years now, which we've been working our way up to. And then, you know, also talking to states about places where in the absence of feeling like they can push rate, they can also make program changes. And we've called out a a number of those, but if I just think about the 2025, we have proof points around states carving out high-cost drugs. They have clipped ABA outlier providers who are overbilling. We've seen PBM control and formulary control sort of shift further back to us. Guardrails around CCBHCs. So lots of, I think, thoughtful program decisions that are sort of a proxy for addressing trend without having to do it explicitly through rate. So just net net, you know, we're we're obviously calling for flat HBR year over year. And I will say, as I have said if that is all we deliver, I will be very disappointed, and I know the team will too. Thank you. Operator: Our next question today comes from Kevin Fischbeck with BIA. Kevin Fischbeck: Great. Thanks. I guess moving to the exchanges, can you talk a little bit about the confidence and the visibility? Obviously, the exchange members have changed dramatically. You gave a little bit of color there. But I guess, in particular, you know, you talked about the shift tier shifting. I kinda remember bronze not being a great plan historically. And and now it seems to be growing overall. So I just wanna make sure that, you know, we're not gonna be caught off sides by this know, metal tier shift that you're gonna be seeing next year. And then any other additional color you give about why you feel comfortable in margin improvement on exchanges this year? Thanks. Sarah London: Yeah. Thanks, Kevin. So let's go all the way back to Q3, as we kind of read and reacted to the 2025 weekly data and a much improved visibility over the baseline morbidity that we would be carrying into 2026 and just incredible execution by team demonstrating agility and depth of expertise to reprice and reposition the, you know, the entirety of the book in that short period of time and taking into account the baseline morbidity, trend assumptions, the risk pool impacts of both 2025 and anticipated 2020 program integrity measures as well as the expiration of the enhanced APCs, all of which netted out to that mid-30s percent rate, you know, pricing increase for 2026. So part of the confidence comes from, I think, the work that we did and sort of the assumptions that we made coming into the year. Then as we stepped into open enrollment, really watching membership progress through kind of effectuation and down into paid membership, where we sit here today in early February, we actually have a very good view of sort of that paid membership base. And given our history, a view of how that paid membership matures through the, you know, February, March time frame where there's still a little bit of administrative opportunity and sort of grace period to get worked out, and that's where we get to that 3,500,000, member estimate by the '1. So feel like standing here where we are today, feel like we have, pretty good visibility into how open enrollment played out, and then we'll you know, the tail of that will continue to shake out. To your point, the distribution of metal tiers is different this year than in past years. So we're a little over 30% in bronze, which is up from that 19 to 24% range we talked about in past years. We do see stability in core demographics around gender distribution and average age. Has not changed. And then to your question about how bronze has has operated historically, the bronze products operated differently pre EAPTCs than they did during the EAPTC period. And, again, one of the benefits of having been in the market for as long as we have is that we have all of that data, we had all of that data back in Q3 when we went through and sort of re underwrote all of our assumptions relative to 2026. We did that across metal tiers. And were thoughtful about what the impact might be. And I think what you would see year over year is also sort of a reduction in the footprint where we are a low-cost bronze player. So you know, again, just trying to leverage not just increased visibility that we had from the data, but just the depth of experience and data we have from sort of end to end the tenure of the program to give us a view of where we're sitting today and, also, I would just add, have the benefit of, you know, having set 2026 guidance with full visibility into how 2025 and the vast majority of open enrollment played out. So all of that goes into why we feel confident that we will be able to deliver meaningful margin improvement in this business in 2026. Operator: Thank you. Next question today comes from Steven Baxter of Wells Fargo. Please go ahead. Steven Baxter: I wanted to come back to the the Medicaid moving pieces. I guess I just love a little bit better of a sense of maybe how much incremental decline in membership. I think the membership months were guided down. Five or 6%, but I think a good deal of that would be explained by basically what you saw in 2025. And if you think about the Acuity impact, to the extent that you continue to see disenrollment at pace closer to what you saw this past quarter, so down, like, a percent and a half, does that place any weight on the acuity assumptions that you had in the guidance at this point in time? Thanks. Sarah London: Yeah. Thanks, Steven. I'll hit this at a high level and then ask Drew to add any color. So what we talked about member months, we talked about flight attrition in Q1, that there was an assumption for continued attrition consistent with what we've seen, for example, through 2025 in terms of states tightening the eligibility and normal reverification process coming out of COVID. And then we also have a couple of program changes that we know about, including, for example, the Florida CMS program rolling off tenone, as well as sort of a probability weighted bucket of member puts and takes that we track state by state If you were to unpack that, would find that we're pretty prudent in our assumptions around membership there with an eye to what the additional acuity impact might be, and all of that is sort of considered in guidance. I don't know if there's any other additional pieces you wanna call out. Drew Asher: Yeah. Right. The you mentioned, Steven, the five to 6% member months reduction through the year. The full year would be higher than that in terms of the membership attrition. And I think about it in two buckets, as Sarah indicated. One, would be sort of a you know, maybe a a little over a point, per quarter of continued attrition, and we saw that basically throughout 2025. And then the children's medical services, business that we expect to roll off ten one. And then as Sarah mentioned, sort of a pool of other sort of RFP related probability weighted membership items. The only other thing to think about is there's very few impacts of OB three in terms of membership in 2026. But one of those is I think, around seven one, then a subset of the New York essential plan will be rolling off know, due to sort of an o b three provision. That's about a 140,000 or so members for So that's also in the 88,000,000,000 midpoint of guidance, the 5% to 6% member months reduction and the little bit higher than that full year absolute membership attrition. Operator: Thank you. Our next question today comes from Sarah James of Cantor. Please go ahead. Sarah James: Thank you. Can you help us understand the mechanics of the actuarial soundness look back process? Like, how far back are they looking now? How long of a lag does that typically take to come to an agreement on what trends actually were. And as we move forward into continued periods, of disruption through work requirements or additional redeterminations. How are you thinking about being able to shorten that period or move forward to rate adjustments in a a faster pace? Yeah, thanks, Terry. It's a great question. The short answer is that we are very focused on trying to shorten the period and maximize the amount of most recent data that's being included in the actuarial process. But this is not a new thing. Right? That has that has really been what we have been working on since the 2024 as we started to see that dislocation between rates and acuity from redeterminations and then the step up in trend that we saw in 2025. And so as we've said, we continue to very proactively engage with states. We're obviously not alone in doing that, so our peers are also part of that conversation, bringing forward most recent data direct correlation to the program changes. If I take a step back, I think that perhaps the silver lining of, what has been bit of a painful process to watch these rates lag is the fact that we have now sort of proof points that you can actually have you know, a significant forward looking trend in ABA unlike anything the actuaries had ever seen before. We do have the proof point of states actually bringing forward more recent data and making your adjustments, again, the Florida CMS contract, Q3 of last year is a great example of that. That was a very quick turnaround time between observed behavior and rate correction. And so all of those lessons learned, we carry into the work that we're going to want to do in 2026 to try to preempt the changes that may come in 2027 and 2028 and make sure that we have appropriate rates as we think about what the impact of work requirements are going to be. It's also why I keep pointing back to the fact that as time rolls forward, our need to push for, you know, that more recent data of being included is just happening organically. And so now those those acuity shifts in '24, the rate the sorry. The trend impact in '25 is now basically sitting you know, in the middle of that two-year look-back period, which is probably the more conservative look-back period or standard starting point for the actuarial process. But it is it's a dynamic process. It's why it has been really important for us to build and continue to have really strong relationships with our states. And to lean in and help them as they're going through that process by bringing forward very specific data. And then the last thing I would say is just to go back to Justin's question, is the idea that in the absence of rates and the states are thinking about what budget pressures they may be facing, it's also a great moment to talk about where there are program refinement opportunities that get us back into sort a reasonable cost of care that doesn't just come through the rate. And so we're finding those conversations to be really productive and seeing, again, some of those bankable proof points in the 2025 that we think will bear fruit in 2026. Operator: Thank you. And our next question today comes from Josh Raskin of Nephron. Please go ahead. Josh Raskin: Could you just give a little more specifics on your actual segment margins that are in implied in the 2026 guidance and then maybe remind us what your long-term margin targets are by segment in case anything has changed there? And should I be reading into no PDR in Medicare Advantage, meaning that you may be closer to breakeven in 2026, you know, a little ahead of 2027? Sarah London: Yeah. So I think, obviously, a lot of stuff has changed across the business. So it's probably premature to talk about long-term margin targets for each business while policy is still shaking out. But the bottom line there is certainly that we do see opportunity for margin improvement in all lines of business and meaningful margin improvement across the enterprise over the next couple of years. But let me turn it over to Drew to walk through the specific margin assumptions by line of business in 2026 guidance. And then talk through the PDR? Drew Asher: Yeah. Sure. I'd express Medicaid, margins in terms of a stable HBR year over year the commercial segment, which is largely marketplace, we were at minus one last year. You could do the math on the HBR guidance slide. And get to something, you know, around 4%, pretax. For 2026 in marketplace. And then the Medicare segment, as I said in my remarks, PDP around 2% would be our target. We think that's a prudent starting place relative to, you know, well into the threes for 2025. And then Medicare Advantage within that segment, not quite a breakeven yet, but you're right to recognize no PDR in 2026. Means that on the margin, it's not losing money, but know, there are things that aren't incorporated in the accounting of the PDR such that it's still operating at a slight loss, on a fully allocated basis for 2026. Operator: Thank you. Our next question today comes from AJ Rice at UBS. Please go ahead. AJ Rice: Thanks. Hi, everybody. You know, we still are trying, and I still get this question a lot. Maybe an unfair one to ask you guys, but I'll do it anyway. If you look at your national peers in Medicaid, two are still forecasting pretty significant drops in margin in '26 versus twenty-five One who was more optimistic, is now sort of come in line with you with their comments today. And we all struggle to think about how can the company see such a different outlook. Do you think geographic footprint explains the or is there anything else there? And I specifically, in your case, wanted to ask, about the PBM contract because you haven't said a lot about it. But, your vendor, your PBM partner, has said that they had renegotiated your contract among a couple other big ones. And then it's a a drag to them this year, presumably, you're on the receiving end of that and benefiting. And I wondered if that might be accounting for some of the difference or maybe that's helping you in other, business lines. But any comment on that as well would be helpful. Sarah London: Yeah. Thanks, AJ. So let me hit Medicaid, and then I'll turn it over to Drew to talk about our bespoke contract, with our PBM partner. So sort of going all the way back to where we're starting, which I think is really important. So, again, it's important to remember that we are jumping off an elevated baseline. As you think about trying to foot relativity with peers, just absolute, we are dropping off that elevated baseline in 2025. We also have, again, proof points sort of Included a 94.9 in Q2. rates that matured favorably in 2025, so that's an important thing to think about relative to that mid-fours rate assumption. And then we have aggressive execution through the back half of the year, that played out, you know, with that sequential improvement in HBR in Q3 and in Q4, getting to that 93 as the jump off as we step into 2026. And so, that momentum, I think, is really important. And the fact that we laid out sort of the the key levers that we were going after, and again executed on those really well in Q3 and Q4, but also took action and influenced decisions in Q3 and Q4 that aren't effective, for example, until oneonetwenty six. And so just as a reminder, right, in some of those proof points, rate, obviously, an important one. The the, you know, favorable maturation of the 2025 can composite the fact that oneone came in line with our expectation, fact that we saw in year rate correction like Florida, Second biggest lever is network. And, again, you heard me talk about the ABA example, but really making sure that we focus our network on the highest performing, highest quality providers. The introduction of clinical management programs, you know, hitting transitions of care and member engagement, Program reform, I I talked about a bunch of those. Ongoing provider engagement, payment integrity, and really addressing opportunities where we're seeing pressure on coding from providers. And then again a more aggressive stance in fraud, waste, and abuse. And you heard us talk about a provider that we termed in New York back in Q3. Around ABA, but really leveraging that suspect list to go after bad actors. So a lot of proof points that did actually hit the P and L in the back half to '25 and are teed up for 2026. So that's where I think, you know, our view is that we've taken a prudent assumption around rates. That the net trend assumption of four and a half in 2026 takes into account sort of the work that we've done relative to trend vendors and being able to see additional actions bear additional fruit in 2026. And I will say it again because I will just keep saying it both internally and externally. If all we do is deliver a 93.7 in Medicaid, I will be very disappointed. But with that, I will let Drew talk about, our PBM relationship. Drew Asher: Yeah. AJ, thanks for the question. Over the last, really, decade plus, we've had a tailored, transparent, and flexible contract with like, our current PBM, even our predecessor PBM. So we had those provisions before they were cool and before they were legislatively legislatively dictated. Think we benefit by having $60 billion of pharmacy spend and not owning our own PBM. In other words, every ounce of the economic benefit of that PBM arrangement and how we collaborate with our partner to go to the market together. Whether it's pharma or network or other decisioning around formulary benefit plan designs, we've got immense flexibility in how we work with our partner. That goes into the cost structure of our products, and our margin targets. So all of that is captured in our insurance risk business in our three segments. And, pleased with, you know, pleased with what we talked about last quarter. In terms of the continued collaboration with our partner. And we will continue to to fight for affordability in health care, you know, including other parts of the ecosystem that have margins including what I saw on CNBC the other day boasting about a 40% margin in his pharma business. So we we we will continue to drive affordability on behalf of our low income and medically complex members alongside with our PBM partner. Operator: Thank you. Our next question today comes from Scott Fidel with Goldman Sachs. Please go ahead. Scott Fidel: Hi, thanks. Good morning. Was that helpful if you maybe just sort of drill in a little bit more into Part D and and walk us through the book in terms of some of the dynamics, Drew, around the LIS versus the non-LIS populations and what you're seeing. In the market trends. Obviously, your book of business heavily weighted towards the LIS. And in particular, just, you know, some of the underlying inputs like risk scores and and '25 and and expect continue to do that in '26. Thanks. Drew Asher: Yeah. Really good question and special questions especially around the impact of the IRA in '25, which there were, you know, shifting sands. So the good news in '25 is the industry we had that expanded or more protective risk corridor that then reverted in '26 back to the statutory risk corridor been in place since the inception of the Part D program. But that gave us some, let's say, breathing room in terms of navigating pretty severe non-low-income specialty trend when the maximum out of pocket dropped. To $2,000. And so we got through that, really well. That's in the rearview mirror. And now we and the rest of the industry had that data going into the bids in the '25 as we set them for 2026. With, you know, eyes wide open in terms of the impact of the IRA on that non-low-income population that, you know, was availing themselves of a much lower maximum out of pocket. So we can look at our January data you're right. We're growing, you know, the the revenue growth is largely driven by that yield increase because the direct subsidy increase, but we're still growing membership from about 8.1 to around 8.7 million. Across both the low-income population or the auto assigns and the non-low-income population. So feel pretty good about the mix of business we got We like both populations. You can have earnings on both populations. And provide a really great value proposition for the senior giving them access to, you know, to a great drug program. So that in conjunction with the answer to the last question in terms of, you know, cost structure is an important leg of the stool. The underwriting acumen, having great actuaries, to support, and business teams to support that product, which is now know, a $26 billion product for us. With a, with a good margin as well. So we're we're pretty pleased with that business, our positioning. And and maybe most importantly, what we're able to do for seniors to have an affordable product, in the open market. Operator: Thank you. Our next question today comes from Lance Wilkes with First Please go ahead. Lance Wilkes: Great. Thanks. Wanna talk a little on Medicaid and if you could, could you walk through Medicaid trends kinda 25 contrast with 26 in a couple different ways? Because so many different moving elements. So I was interested in your views as to how much risk shift had impacted '25 and if you saw any continued impacts in '26 with that. And whether you're seeing any impacts, either negative or positive from states making benefit, design changes. And then I'm kind of assuming that the remainder would be sort of core trend. And so then if in core trend, could kind of describe, oh, what's your your experience with categories, you know, inpatient, outpatient, and or units and and cost inflation. And maybe as a tag onto that, if you could just talk a little bit about what you're seeing as far as competitive dynamics in states given the margin pressures in Medicaid. Are you seeing any issues with small plans not being able to fulfill obligations or any, lack of folks stepping back up to try to renew, contracts? Thanks. Sarah London: Yeah. Thanks, Lance. I'll I'll hit that at a high level and, have Drew chime in as well. So as we said, we did continue to see sort of a low level of continued membership attrition through 2025 as states were getting tighter with their eligibility criteria, which I think naturally put some pressure on, on trend relative to core trend. The the drivers were really consistent with what we called out throughout, you know, Q2 and rolling forward in terms of behavioral health, home health, and high-cost drugs, those did not materially shift over the course of the last 350% of that excess trend, ABA being sort of a primary underpinning of that. Home health and home and community-based services being another, and then those high-cost drugs. Relative to impact, those you know, particularly the those excess trend areas were kind of how we chalked the field in terms of organizing and and looking to to mitigate that trend. And so lots of proof points in the back half of 2025 in terms of actually being able to intervene, and help moderate that trend, which is what contributed at least in part to ending the year at a 93%. So again, feel feel good where we stand today in terms of having really solid visibility into the various forms of trend that are influencing the business and being organized around the levers that impact them. Relative to competitive dynamics, we are seeing continued rate pressure is having an impact on different markets and certainly some of the the smaller, nonprofit plans. And, frankly, that's that is an important input into states thinking about making sure that they're funding the programs to sufficiently so that they have a competitive marketplace and that members have the quality of services that they that they want and they deserve. And and I think over time, you know, it it's something that we would watch relative to potential membership growth, if competitors choose to exit any of those geographies. Drew Asher: Yeah. Just two quick things to add to that. Interesting facts relative to your question, Lance. Inpatient looks good. In Medicaid. And then if you isolate our TANF population, the continuous TANF population, which is, like, 5 million members, so it's a statistically valid cohort. And you set aside behavioral health, that trend looks fine. Looks normal, like it would historically. So that enables us to sort of zero in on, as Sarah said, both those areas that we started talking about and recognizing in '25 as well as policy, and product and benefit changes with our state partners to really you know, zero in on what we need to do to pull those levers. Operator: Thank you. And our next question today comes from Andrew Mok at Barclays. Please go ahead. Andrew Mok: Hi, good morning. When I look at the segment MLR components embedded in guidance, the ACA improvement and Medicaid stability look consistent with prior commentary, but the guide seems to imply incremental pressure within Medicare Advantage beyond the PDP reset. So first, is that correct? And second, can you help us understand the sources of that pressure and what that means for your target to achieve breakeven in 2027? Thanks. Drew Asher: Yeah. I think you'd have to understand bifurcating under Medicare, we absolutely expect progression in Medicare Advantage, meaning in improvement, in that HBR PDP, yes, there's a piece of going from, you know, well into the threes pretax margin to 2%, and that's HBR related. But also think about the math on the direct subsidy going from a $143 to 200, And as I said in my script, you know, roll that through a p and l and the yield impact where you need zero incremental admin for that. So you're increasing premium revenue. You're increasing medical cost. That has a mathematical impact on the HBR. That's embedded in that 35 basis points segment impact on the consolidated HBR as well. So I think that might be the missing piece Andrew, of what you're trying to achieve. Operator: Thank you. Our final question today comes from David Windley at Jefferies. Please go ahead. David Windley: Thanks for squeezing me in. I wanted to come back to exchange Bronze, I think bronze margins have been a little more volatile or MLRs have been more volatile in the past. You're you're seeing trade down as I think a lot of people expected. I'm wondering if you have enough data, so far to see whether the utilization patterns of those, those you know, buy down bronze members are meeting your expectations. Are they you know, is their gross medical cost declining because the individual bears more of the cost in bronze, things like that. I'm just wondering what that trade down profile looks like. Thank you. Sarah London: Yeah. Thanks, Dave. So I would say, in general, sort of the the what we're seeing in terms of trade down again, sort of largely consistent with what we would have expected. We expect that it's probably a market dynamic as well. And, you know, with contemplated as we thought about overall pricing. And then taking into account not just how the bronze products have operated over the last you know, five years, but what they did pre-COVID and making or sorry, pre-EAPTCs and pre-COVID, and making sure that that was part of the calculus. It's obviously very, very early. We have not closed January yet, but I would say based on a a very early look, nothing alarming relative to utilization patterns. Operator: Thank you. Concludes our question and answer session. I'd like to turn the conference back over to Sarah London for closing remarks. Sarah London: Thanks, Rocco. Thank you all for your time and interest this morning. Despite the challenges of 2025, we entered 2026 with increased visibility and important momentum. I believe that we are well positioned to drive margin improvement in 2026 and over the next few years. While ensuring access to high-quality affordable health care for the members and communities we serve. Finally, to my son team colleagues, just wanna say thank you for your incredible resilience and commitment. I am excited to see what we can deliver this year. And in the words of my legendary hometown quarterback, let's go. Back to you, Rocco. Operator: Thank you. Everyone, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
Operator: Good day, and thank you for standing by. Welcome to the Philip Morris International Inc. 2025 Fourth Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, James Bushnell, VP of Investor Relations and Financial Communication. Please go ahead. James Bushnell: Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2025 fourth quarter and full year results. Emmanuel Babeau: The press release is available on our website at pmi.com. A glossary of terms including the definition for smoke-free products as well as adjustments, other calculations, and reconciliations to the most directly comparable US GAAP measures for non-GAAP financial measures cited in this presentation are available in the company's Form 8-K dated today's date and on our IR website. Remarks contain forward-looking statements and projections of future results. I direct your attention to the forward-looking and cautionary statements disclosure in today's presentation and press release for a review of the various factors that could cause actual results to differ materially from projected projections or forward-looking statements. I'm joined today by Jacek Olczak, Group CEO of PMI, and Emmanuel Babeau, Chief Financial Officer. Over to you, James Bushnell: Thank you, James, and welcome, everyone. 2025 was another outstanding year for PMI. Jacek Olczak: The shift of adult smokers to better alternatives is a lasting structural movement, one that we continue to lead and from which we are generating strong sustained growth. Our leading global position in smoke-free products enables us to deliver a fifth consecutive year of positive volumes with rapid top-line progress and significant margin expansion. We grew our smoke-free products volumes by an excellent 12.8% with the increasing profitability of the portfolio, reflecting inorganic smoke-free gross profit growth of 18.7%. IQOS remains the core driver with both shipments and adjusted IMS growing around 11%. This includes an impressive acceleration in the fourth quarter with a return to strong double-digit growth in Italy, and a very promising start in Taiwan, just two examples of the broad growth across geographies. This performance also reflects the success of our multi-category strategy with Bonsin, ex Nordics, and Viiv more than doubling shipment volumes in international markets. Our strong brand offering, which includes high-quality science-backed products in all three smoke-free products categories, allows us to better serve consumers and enhance our financial performance. While the nicotine pouch category remains nascent in most geographies, Zen gained significant international share as we expanded the product portfolio and market reach. The more established e-vapor category VIVE is the fastest-growing brand of any major player in international closed pots and holds the number one position in eight markets with a substantial increase in gross profit. Although our performance continues to be fueled by the international business, we generated the vast majority of total PMI organic net revenue growth led by SFPs. We have a substantial opportunity in the US where ZYN grew shipment by 37% despite supply constraints in the first half, a significant price premium, and competitive portfolio gaps. Our Aspire Wellness Business also grew organic net strongly. Combustibles delivered robust top and bottom-line performance, notwithstanding a more normalized industry volume decline and supply chain issues in Turkey. We accomplished this through strong pricing, portfolio resilience, and disciplined execution, with Marlborough reaching a historic high share. Managing this business responsibly enables us to invest boldly in better alternatives and sustain our smoke-free momentum. Together, these factors enabled us to deliver 15% adjusted diluted EPS growth in dollar terms, the strongest growth since 2011, excluding the pandemic recovery year of 2021. This reflects currency-neutral growth of 14%, well above our expectations at the start of the year, and the second year of mid-teens progress. Indeed, we have successfully achieved our three-year CAGR targets for organic OI and currency-neutral EPS in two years. With another strong performance expected in 2026 despite some transitory headwinds, we are today renewing these growth targets for the next three years, further validating our best-in-class growth profile within consumer packaged goods. Importantly, this is accompanied by strong and increasing cash generation, and we target the leverage ratio of close to 2x by 2026 at prevailing exchange rates. With our dividend payout now close to our objective of around 75% of adjusted diluted EPS, this provides capacity for strong returns to shareholders. Before I turn it over to Emmanuel, I would like to highlight the achievement of several important milestones as we entered the second decade of our smoke-free journey. Our total net revenues reached over $40 billion in 2025, with 41.5% or close to $17 billion generated by our smoke-free business. Even more impressive is the smoke-free gross contribution, which has essentially doubled in five years to 43% of total PMI. Our adjusted operating margin also returned to above 40% this year as our transformation expands profitably. Our business is increasingly smoke-free, with 27 markets exceeding the 50% net revenue milestone, including South Korea, Poland, Italy, Romania, and, of course, the US, which is also one of eight markets exceeding 75%. In 2025, the Europe region also surpassed 50%, making three out of four regional segments majority smoke-free. We continued to scale our global smoke-free presence, reaching 106 markets, 52 of which have already deployed the category strategy, which is a critical accelerator of consumer adoption and long-term growth. As adult nicotine consumers search for better alternatives to smoking, we continue to lead the broader industry transformation. A prime example is Japan, where the heat-not-burn category crossed the 50% total threshold in December, driven by the undiminished trend of 106 smoke-free markets, our double-digit adjusted IMS volume growth continues to outpace the industry, demonstrating the collective strength of our leading brands. While we are proud of what we have accomplished so far, our focus remains sharply on the future. With an exciting pipeline of initiatives and innovations over the next three years, this is supported by increasing digitalization and our new organizational model. With that, I will hand over to Emmanuel to discuss our results and outlook in more detail, and I will come back at the end of this presentation. Emmanuel Babeau: Thank you, Yatzek. I will begin with the headline financials for the year, which were indeed impressive. Organic top-line and operating income growth were in line with our forecast ranges set at the 2025, and currency-neutral adjusted diluted EPS growth exceeded with expectation by 1.7 points. Positive shipment volume, strong smoke-free category mix, and pricing drove organic top-line growth of plus 6.5% or plus 7.9% excluding the technical Indonesia impact, positioning us at the high end of our plus six to plus 8% midterm CAGR targets. We delivered another year of double-digit organic operating income growth at plus 10.6%, above our midterm target range and reflecting plus 140 basis points of organic margin expansion. In dollar terms, adjusted operating income grew by plus 11.8% to $16.4 billion. Excellent currency-neutral adjusted diluted EPS growth of plus 14.2% was ahead of our expectation. This was driven by strong underlying business performance, notably in international multi-category and in combustible, coupled with a more favorable effective tax rate and lower net financing cost. In dollar terms, adjusted diluted EPS of $7.54 was at the high end of our last guidance range. Despite a lower than expected currency tailwind of 4¢ due to nonrecurring transactional losses in Q4 largely related to the Russian ruble, and the Swiss franc. Robust cash generation enabled us to deliver operating cash flow of $12.2 billion, matching the record delivery of 2024. Now looking at Q4 specifically, while growth rates were below the overall year, partly due to the shipment and phasing factors was ahead of our expectation outlined last quarter. Underlying performance This enabled us to deliver almost plus 10% in diluted earnings per share growth, to $1.70 or plus 9% excluding a 1¢ currency tailwind. I will now cover our 2025 performance in more detail, starting with volumes. As Jacek mentioned, we delivered our fifth consecutive year of positive volumes total shipment growth of plus 1.4%. This was driven by the continued dynamism of our smoke-free business, which generated more than a 100 billion incremental units over the past five years, combined with a very resilient cigarette performance. In 2025, smoke-free shipments grew plus 12.8% or plus 20 billion units to 179 billion, more than offsetting the 1.5% decline in cigarette shipments. All smoke-free categories grew strongly with IQOS h shipment growth of plus 11% to 155 billion units, This plus 102% to 3.3 billion equivalent units, and oral smoke-free product plus 18.5% to 20.7 billion units. Notably, this includes plus 37% growth from US ZYN to 11.9 billion pouches, making up close to 7% of total smoke-free product volumes. As expected, adjusted IMS growth for IQOS HTU accelerated in Q4 to plus 12%, while shipment volumes were impacted by the dynamic flagged last quarter and grew by plus 7.5%. Notwithstanding this impact, total Q4 smoke-free product volume increased by a healthy plus 8.5%. The full-year cigarette volume decline of 1.5% was slightly better than our expectation of around 2%, with our category share performance in the second half proving resilient in several markets, including Egypt and India. The total international cigarette industry, excluding China, declined by an estimated 1.1%, with continued divergence between markets where smoke-free products are available which declined by around 3%, and market where smoke-free products are not permitted still at low level of penetration which were broadly flat. The composition of our 2025 top-line performance was extremely consistent with the five-year average of each key component demonstrating the sustainability of this dynamic drivers. Continued volume growth is the first pillar of our growth model. The second is pricing, which contributed plus 4.1 points. The 2025 impact reflect plus 7.6% pricing from combustible and low single-digit pricing on IQOS, partly offset by the H2 normalization of US zine promotional activities. The third pillar of growth is smoke-free mix, which contributed plus 3.5 points in 2025. Combustible geographic mix and other factors had an unfavorable impact of 1.1 points, whereas currency and scope effect added plus 0.8 Breaking down now our full-year performance by category. Both smoke-free and combustible contributed to our strong net revenue and gross profit delivery, with gross margin expanding organically by plus 220 basis points to over 67%. Smokefree net revenue grew organically by plus 14.1%, while gross profit advanced by plus 18.7%. As a result, adjusted gross margin increased by 270 basis points to reach 69.5%. Further widening the gap to combustible to four points for the year. IQOS was, again, the primary driver of this performance, combining global top-line momentum with increasing scale and cost efficiencies. This improving profitability also contributed positively and while the normalization of U. In commercial activity in H2 had a dilutive year-over-year impact, its gross margins remained best in class Above the average of our IQOS business, including in Q4. As mentioned last quarter, we expect this to be an enduring positive mix driver. Combustible performed well in 2025 with low single-digit top-line growth and low to mid-single-digit gross profit growth, a proxy of what we expect this business to deliver over time. Strong pricing more than offset volume decline and unfavorable mix with disciplined cost management supporting gross margin expansion of plus 160 basis points to reach 65.5%. Moving to operating margins. We delivered full-year organic expansion of plus 140 basis points and plus 160 basis points in the last year to reach adjusted operating income margin of 40.4%. We achieved this in a year of strong investment in commercial marketing and brand building, behind our smoke-free portfolio. Including international multi-category deployments and US ZYN. We also continue to invest in expanding our US capabilities to capture the substantial growth opportunities ahead. This performance was supported by a relentless focus on both cost of goods sold and back-office efficiency, enabling meaningful margin expansion even as we continue to invest for growth. We have delivered around $1.5 billion in growth cost savings since 2024, placing us firmly on track to achieve our $2 billion objective the 2426 period. Focusing now on our smoke-free business. Where all categories have an important role to play. Our global presence continues to grow with PMI smoke-free product now available in 106 markets. This includes the recent launch of ZYN in Argentina and IQOS In Taiwan. We increased the number of markets with all three categories to 26, compared with nine markets two years ago. We continue to outpace the smoke-free market. Measured in the categories where we are present across these 100 markets, we delivered over plus 12% estimated in market sales volume growth for the year, compared to over 9% for the industry. We estimate our volume share of smoke-free product on this basis is around 60%, and our 2025 share of category growth is over 70%. With our portfolio of leading premium brands, our share of smoke-free in value term is notably higher than 60%. As we expanded our portfolio and geographic reach, the number of legal age consumers of our smoke-free product reached an estimated 43.5 million as of December 31, an increase of around 10 million users in two years with broad-based growth across categories. IQOS adjusted IMS growth accelerated to an outstanding plus 12% in the fourth quarter, reflecting strong momentum across the globe and a presence now in 79 markets. All regions contributed as illustrated by exceptional performance in key cities such as Mexico City, Manila, Riyadh, Rome, London, Madrid, and Munich. You can find further key city and European shared data in the appendix to this slide. This enabled us to achieve full-year growth of plus 10.5% within our target range. Annual adjusted IMS again increased by around 15 billion units despite the continued headwind of the EU characterizing flavor ban, and a step up in competitive intensity. Our global share of the hypnot band category remains increasingly resilient at approximately 76%. This is supported by brand engagement initiatives, and continuous innovation across devices and consumables, including the continued introduction of Illumina I to reach a total of 55 markets. Importantly, ICO's profitability continued to increase significantly, driven by pricing scale and productivity improvement on consumables and device cost. This is illustrated by a substantial increase in product contribution over time. Turning to nicotine pouches, ZYN is the global number one brand with a 2025 PMI category share of around 40% in pouch terms. The US represents approximately two-thirds of the category today, while international markets though still relatively small, are growing rapidly. We made excellent progress this year, expanding ZYN's presence by plus 19 markets to 56 and delivering plus 36% shipment growth to 13.6 billion pouches or 880 million CAN, achieving our 2026 target one year early. US shipments grew plus 37%, while international volume grew plus 31% or plus 112% excluding the more mature Nordic market, where Q4 performance was impacted by a demanding shipment comparison. We are focused on the future growth of the category, broadening our portfolio to address the need of legal aid smokers looking to switch. This includes new strengths and flavor variants, including zinc, x low 1.5 milligram, which was successfully rolled out to around two-thirds of the zinc market. Driving a significant improvement in first experience acceptance among adult nicotine consumers. While we are in the early stage of developing the category, which makes up only a low single-digit share of total nicotine in most markets, it's very encouraging to see ZYN share of international purchase excluding The Nordics, rise by around plus 60% in 2025, to reach 16% following the launches and relaunches of the past one to two years. Jacek Olczak: In e-vapor, this is the fastest-growing international vape brand of any major player within Close Pods. The pod segment is growing rapidly as disposables decline, and Vive is gaining significant volume share in the fragmented landscape, sourcing primarily from legal age consumers of other vaping products and adult smokers. As I covered earlier, shipments doubled for the year with a meaningful improvement in profitability. These is now present in 47 markets, and grew notably well in Italy, Romania, Greece, The UK, Germany, and Indonesia. Reviewing the smoke-free portfolio now by geography, starting with Europe, where as Yatzek mentioned, smoke-free products now represent more than 50% of regional net revenue. Total IQOS, ZYN, and V volume grew by an impressive plus 13% for the year with significant further growth potential given the overall penetration of SSP remained low compared to Japan or The US. IQOS delivered another strong quarter with an acceleration in adjusted IMS growth to plus 10.3%. This was led by an exceptional performance in Italy, where we successfully navigated the impact of the flavor ban supported by recent innovation. With an acceleration through the 2025 to deliver double-digit in-market sales growth for the year, quarterly market share passed 20% for the first time. Other notable call outs strong double-digit growth include Bulgaria, Germany, Greece, Spain, and Romania. Zinc pouch shipment volumes grew plus 9% for the year, and while The Nordics make up close to 60% of regional volume, shipments more than doubled elsewhere with good progress in The UK, Poland, Italy, and Austria. As noted earlier, excellent V momentum continued with shipment growth of plus 110%. Emmanuel Babeau: In Japan, we reached an impressive milestone in December as the heat and urban category surpassed 50% of total industry offtake volumes driven by the continued strength of 250% has not been linear, and following two years of very strong expansion in '23 and '24. Category growth moderated in 2025. The adjusted in-market growth of IQOS HTUs has reflected this trend with a healthy plus 7% in 2025 representing very robust absolute growth. In Q4, the Japanese nicotine industry and the heat not burn category grew slightly below the full-year trend with some impact from inflationary pressures on consumer purchasing power. Jacek Olczak: Nonetheless, ICO's HTU adjusted IMS grew plus 5.8% while Q4 adjusted share grew plus two points, year on year to 32.6%. While competitive intensity increased markedly this year, IQOS category share was broadly stable with most movement occurring among other players. We are encouraged by early signs that the increase in category activity is generating higher interest among more traditional adult smokers, a positive indicator for category growth. Looking forward, the upcoming excise tax increases on heat not burn in April and October make 2026 an atypical year. As discussed at the Morgan Stanley conference in December, the level of person makes this a headwind for the category representing about 50 to 100 Japanese yen per pack, which translates to two to 10 to 20% of current retail prices. With the greatest impact for products at lower price points. As announced recently, we have submitted an application to increase our prices in April. We anticipate these price increases will impact category growth and volume for 2026, despite the fact that heat not burn consumers have demonstrated higher price resilience than cigarette smokers in the past. Shipment volatility in 2026 is also possible driven by in-market sales trends around the April and October excise increase. Importantly, we do not expect the underlying category growth trend to change and we target substantial further growth from IQOS in Japan in the years to come. We are also pleased to report ZYN's successful pilot launch in Tokyo. Outside of The US, Japan, and Europe, all three of our small free categories are delivering strong broad-based growth with full-year shipment up plus 17%. This includes ICO's strong start in Taiwan during Q4, where we exited the year with around 4% of tech share, and rapid progress in markets such as South Korea, Malaysia, and The Philippines. ZYN momentum was notably strong in Pakistan and Mexico. In e-vapor, we've achieved excellent results, particularly in Asia. Our global travel retail business further supports all three brands, and continues to deliver impressive multi-category performance, serving as a powerful platform to showcase our portfolio. Turning now to The U. S. Which made up around 7% of our global net revenues, and around 8% of our adjusted operating income in 2025. Nicotine pouches remain the fastest-growing US segment, representing a high single-digit percentage of total nicotine industry volume. Despite supply constraints, commercial normalization, and portfolio gaps, ZYN continued to lead the category in 2025, with its premium offer capturing around 50% of category growth 61.5% can volume share, and a value share of over 67%. ZYN offtake volume also grew strongly by plus 25% for the year as estimated by Nielsen. Shipment grew by plus 37% or 230 million can, to 794 million. The gap between shipment and offtake reflects a net channel inventory rebuild and we estimate the underlying 2025 shipment base corresponding to consumer offtake was around 740 to 750 million cans. This was notably concentrated in the 2025, and we estimate the underlying shipment base by quarter for 2025 was around 160 million can in Q1, one hundred and eighty million CAN in Q2, two zero five million in Q3, And 200 million in Q4. Indeed, Q4 saw a lower than expected destocking of about 5 million can, as we deploy promotion, limited time offers, and announced a generalist price increase of 10¢ per can in December. Looking ahead to 2026, we expect ZYN shipment volume to broadly reflect offtake growth from this underlying base, before any further channel inventory movement. We estimate there remain around 25 million cans of surplus inventory the downstream supply chain, which we assume will normalize in due course most likely in the first quarter. The level of offtake growth for XIN in 2026 will be influenced by three key factors in which we are investing. The most critical over the mid to long term is ZYN's brand equity, we strengthen marketing in a responsible manner, enhance point of sale visibility, and deepen the connection with our legal edge consumers. Accessing all segments of The US nicotine pouch category, will require us to navigate a dynamic and uncertain regulatory environment. We have developed and are preparing to launch innovation to address a broad spectrum of consumer preferences. We have a number of pending gene submissions before the FDA, including ZYN Ultra, which is included in FDA's pilot program. ZYN ULTRA offers higher strength and an expected range of adult-oriented flavors. Are taking steps to prepare for the launch of ZYN Ultra as soon as possible pending FDA action. Also believe ICOS ILUMA strong application and demonstrated track record, converting smokers to better alternative warrants expeditious FDA action. We also continue to optimize ZYN's premium price position. Despite elevated promotional intensity across the category, ZYN remained the leading premium brand by a clear margin, fully aligned with our strategy for sustainable long-term growth. We have a comprehensive commercial program plan for 2026, And as a reminder, commercial activities, including promotions, were unusually low in the 2025. As I mentioned before, we continue to expect ZYN to deliver best-in-class gross margin within PMI above the average of IQOS. We are very excited about the significant growth potential the brand over the coming years, which fully justify the above-mentioned investment. One example of our enhanced brand building effort is the recently announced global partnership between ZYN and Ferrari, which recognize our long-standing heritage in Formula one. We smoke-free product now at the forefront. Formula one's overwhelmingly adult audience provides a highly impactful platform to engage consumers responsibly and reinforce ZYN's premium equity. Finally, moving to combustible, which delivered another robust year of pricing of plus 7.6%, including plus 6.8% in Q4, and very good growth profit growth. Our full-year cigarette share declined by 0.2 points to 25.3% mainly due to Turkey, was otherwise stable including record high for Marlboro, both for the full year and in Q4, where its share reached 11% of the international category excluding China. For 2026, we forecast a convertible pricing variance of around plus 6%, reflecting continued dynamic performance. With that, I will now hand it back to Yatzek. Jacek Olczak: Thank you, Emmanuel. This brings me to our outlook for 2026, where we expect another year of strong and profitable growth despite several transitory headwinds. Starting with volumes, we expect continued strong underlying momentum in our smoke-free business for all three categories. Both shipments and adjusted IMS volumes are projected to grow in a high single digit after factoring in the headwinds from Japan excise taxes and US zinc inventory comparisons described earlier. For combustibles, we forecast a cigarette decline of around 3% with weaker industry volumes in India and Mexico following the recent excise tax increases and our own recovery in Turkey likely to impact comparisons in the first half. Altogether, this results in a broadly stable outlook for total shipment growth subject to the usual variability in shipment timing and trade inventory movement as compared to a forecast total industry decline of around 2% for cigarettes and HDUs. led by combustibles We expect another strong year overall for price notwithstanding the impact of US first half comparisons. And for continued positive smoke-free mix. Taking all these elements into account, we forecast 2026 organic net revenue growth of five to 7%. We expect the same factors in addition to operating leverage and ongoing cost efficiencies to drive further robust margin expansion with projected organic operating income growth of seven to 9%. This includes continued strong investment behind our smoke-free portfolio. We are forecasting currency-neutral adjusted diluted EPS growth of 7.5% to 9.5% factoring in broadly stable net finance cost and an effective corporate tax rate approximately in line with 2025 at around 21.5%. Including an estimated 28 pen currency benefit at prevailing exchange rate, This translates to 11.3 to 13.3% growth to a range of $8.09 to $8.54. Which would mark another year of double-digit EPS growth in dollar terms. We expect a significant acceleration in operating cash flow growth at around €13.5 billion at prevailing exchange rates and is subject to year-end working capital requirement. The strong cash generation is expected to support further meaningful deleveraging in 2026 which I will come back to shortly. On a quarterly basis, we expect the first quarter to be the softest quarter of the year, reflecting demanding year-on-year comparison and investment phases. We expect first-quarter combustible volumes to decline by up to 5% as the lap a prior year quarter of volume growth whilst having the highest expected impact of the dynamics in Turkey, India, and Mexico, which I mentioned, for the full year. Smoke-free product shipments will also be by the US ZYN shipment dynamics explained by Emmanuel and the strong HDO comparator. With low levels of commercial activity on ZIM in prior year impacting the net revenue per car per can comparison and a higher quarter of investment globally behind our smoke-free due to phasing we anticipate broadly flat year-on-year first-quarter organic net revenue and operating income. We forecast high single-digit adjusted diluted EPS growth of $1.80 to $1.85 including a 14¢ tailwind at prevailing grades. Supported by a favorable comparison to transactional currency impact in the prior year. As I mentioned earlier, we have delivered dollar freer CAGR targets on operating income and EPS in just two years. Combining our 2026 forecast with the strong results of 2024 and 2025, we expect to meet up or exceed all of our 2024-2026 CAGR targets presented at our 2023 Investors Day. This is especially the case for operating income and EPS growth despite our algorithm assuming a more favorable corporate tax rate. In addition, our expected adjusted EPS CAGR in dollar terms to represent a strong double-digit delivery. This brings me the 2026-2028 outlook where we are renewing our medium-term growth targets in the next three years. We continue to target positive total shipment volume with the growth of smoke-free products more than offsetting cigarette volume decline. While our 2026 forecast ranges are marginally lower due to the specific factors we explained for the three-year period to 2028 we continue to target compound annual growth rate of six to 8% in organic net revenues eight to 10% in organic operating income as margins expand and 9% to 11% in adjusted diluted EPS constant currency. This renewed target reflects our confidence in sustaining the strong pace of top and bottom-line growth over time. They also reaffirm our best-in-class growth profile within the large-cap consumer packaged goods sector. We target smoke-free product shipment and adjusted IMS volume growth of high single digits to low teens. Our multi-category strategy in international markets will continue to be the dominant driver of smoke-free products growth further amplified by the substantial opportunity in The US. As we progress through the period, we expect this to be both by the new market openings and an active innovation pipeline. The US launch of icosiloma is included in this target including initial commercial investment with the precise cut in subject to the timing of launch. Meanwhile, the resilience of our combustible portfolio provides a critical backbone providing the infrastructure financial firepower, and consumer connection to accelerate smoke-free growth. We look forward to sharing more with you on this topic at the Cognex conference on February 18. We remain a highly cash-generative business which is based on the strength of our brand and reinforced by disciplined management of cost and cash. This gives us the financial capacity to invest strongly behind our smoke-free business Product. Alongside superior business results, we are committed to delivering superior shareholder value. Having essentially reached our target dividend payout ratio of around 75% of adjusted diluted EPS We have the capacity to pursue dividend growth closer to the level of earnings growth as demonstrated by the 8.9% increase announced in September. Strong cash flow and EBITDA growth enable us deleveraging. Closed 2025 with an adjusted leverage ratio of 2.5 x, reflecting solid progress despite the unfavorable impact of year-end currency movements in our net debt. We expect further improvements in 2026 targeting close to the 2x by year-end at prevailing exchange rate. Providing increased flexibility for capital allocation. In summary, our full-year performance under strength and the momentum of our global smoke-free business supported by investment in our premium brands and continued resilience of combustible ibles. Despite the complex operating environment, shaped by economic uncertainty, geopolitical tensions, and evolving regulations, we continued to make significant progress towards our vision of a small free future. As we delivered consistent best-in-class growth we are reinvesting in our leading brands innovation, and the critical capabilities which support long-term performance. This allows us to generate significant value for our shareholders, including the largest dividend increase in over a decade. We look forward with confidence to 2026 and beyond. Thank you. Emmanuel, and I will be happy now to answer your questions. As a reminder, to ask a question, please press 11 on your telephone. And your name will be announced. Emmanuel Babeau: To withdraw your question, please press 11 again. Our first question comes from Matt Smith with Stifel. Your line is open. Matt Smith: Hi. Thank you, Yasek and Emmanuel, for taking my question. Good morning, Matt. Starting with the new medium-term targets that you provided today, can you expand on the reacceleration in smoke-free volume growth compared to the 2026 growth guidance? And you called out The U. S. As a new market in the outlook How are other currently closed markets and the opportunity to expand platforms into existing IQOS markets considered? Thank you. Jacek Olczak: Yes. So the acceleration in, of BEYOND '26 is the at this stage, we mainly see coming from all the implementations of the tax changes, which of price or excise driven price changes in Japan you may recall, Japan has the multi-step excise tobacco nicotine product, the excise tax changes. It starts with the asymmetry of heated tobacco products increasing the taxes first. And then I followed by the cigarette price increases as of '27. So I believe I will believe at this stage, will be some headwinds on maybe some headwinds on the category growth And, obviously, IQOS growth in a '26, but once we start moving to the '27 and beyond, more symmetry with regard to the fiscal policy and treatment between a cigarette and heat not burn, I mean, IQOS of the category should be returning or resuming a growth. So that's the one factor. And second factor, obviously, is that you know, as we highlighted in our remarks, I mean, there is a highly, you know, competitive environment in The US, and despite, you know, US in the total smoke-free volumes, may doesn't have that much of a weight, but for a growth, it's very opportunities, and the growth is very important to us. There are some asymmetries on the portfolio. Versus what is, presumably the most dynamic part in the total market, and we believe we've pending authorization with FDA once we will start moving hopefully, through '26, but definitely '27, etcetera. We're gonna put the portfolio into the symmetry of whether the consumer market expectations. Now, obviously, the other fact which we mentioned, they are more on the combustible side. I mean, I'm not gonna small free product. I mean, that we mentioned India, Mexico, couple other smaller places which have some quite outsized, I would characterize, I increases, which obviously will drive the quite outsized, the normal price increases. So I believe once we will we don't think it's gonna be recurring, type of events, 2728. So we can come back and resume the the strong top bottom line growth in the outer years? I think I just highlighted the the the key drivers. There was obviously the factor of innovations, but you know, you will ask me the questions what exactly is the innovation for competitive reason. Will not be able to discuss. But this will be the main drivers coming or or starting from a '26. The excise Japan, Xi is in a few other places, and the ZYN portfolio asymmetry and bringing this to the symmetry. Matt Smith: Very clear. Thank you for that. I look forward to seeing you at the CAGNY conference, and pass it on. Okay. Thank you. Our next question comes from Eric Sarota with Morgan Stanley. Your line is open. Eric Sarota: Great. Thanks so much. Jacek Olczak: Guide for 26 Good morning, Eric. Oh, good morning. Terms of the 26 guide for Emmanuel Babeau: smoke-free volumes up in that, you know, high single digits to low teens range. How are you thinking broad strokes? I know you're not guiding specifically, but how are you thinking in terms of ICOS, HTU, shipments, and IMS. Obviously, there's the, some of the specific headwinds you you called out in terms of, the excise in Japan, And then you know, in terms of the competitive environment in Japan, I believe it sort of started to step up around the second quarter of year with some competitor product launches. How has that been kind of evolving on a sequential sequential basis, particularly heading in now to the season where you know, competitors have have filed with the finance ministry for their for their price increases. Jacek Olczak: Yeah. So I start maybe with the the the the second part of the second question. I mean, yes, there is a this year and the year before, there was an increase competitive activity in the in Japan. Judging by how strongly IQOS holds the share in Japan and continuing its growth, I think it all goes well. I think, look, we have a ten year of IQOS brand built in Japan, and you know, number of steps of smaller, but also the big innovations, including icosiloma. So I think, you know, IQOS is entering this a bit challenging from a price perspective, period to to, I think, you know, relatively strong. Now, I think there are very legitimate questions how we see IQOS in Japan, but we know we try to stand away from giving a very precise volume and other outlooks for the ones with specific geographies that, you know, you will appreciate. There was a you know, there was a competition, and we don't don't want to highlight too much. To reveal, you know, whatever plans with regards to the price and you know, share expectations, the volume expectations. But when we come up with their guidance for the total smoke-free product volume evolution next year, I mean, all of these factors baked in, if you like. And maybe, Eric, on your first question globally on the IQOS outlook among this high single-digit growth for our s p SFP volume in in '26 We're very pleased with the growth of IQOS. Mean, we finished '25 very strongly, more than 12% adjusted in market sales growth. Yes. Japan has been slowing down a bit as we as we mentioned, but the number of markets reaccelerated. Italy is one of them. Europe is showing a number of markets which are I would say, accelerating, like Germany, like Spain, you still have markets such as Romania, Bulgaria that are very nice complement to the growth. So the picture is is very nice for for IQOS. And, of course, we continue or we expect that to continue in in '26. And then you have all these new markets in in new economies that are being very successful. We have we we have Emmanuel Babeau: Indonesia, Philippines, The Gulf, mixed I mean, you have plenty of markets where IQOS is accelerating. And, last but not least, we are super pleased with the launch in Taiwan. I mean, 4% in only a few weeks, It's quite an achievement. And we're excited about, about the outlook. So that is globally giving a nice picture for the continuation of a of a of a very good growth for IQOS in '26. Eric Sarota: Great. And just one clarification question just to be explicit in terms of the the midterm or twenty six to twenty eight guidance, Is '26 correct me if I'm wrong, but '26 does not include anything for Oluma in The US. But there is something included for the you know, sort of 2728 time frame? Is that fair? Or, correct me if I'm wrong, please. Jacek Olczak: It is it is the other case is broadly fair. Well, I don't know. I'll pass it on. No. No. No. No. On a serious note. Sorry. On serious note, you know, we've had a number of discussions over the last two years with regards to the, you know, estimated or expected timing of, you know, this long overdue authorization from FDA, but we have somehow made the assumptions for IQOS entering The US market in a planned period. But I don't think the algorithm which will lay down in front of you today is heavily or material dependent on the IQOS, on the IQOS in The US. But IQOS is including their both from the investment that some expected volumes. Eric Sarota: Got it. Thanks so much. I'll pass it on. Thank you, Ike. Emmanuel Babeau: Thank you. James Bushnell: Thank you. Our next question comes from Bonnie Herzog with Jacek Olczak: Goldman Sachs. Your line is open. Bonnie Herzog: Alright. Thank you. Hi, everyone. Emmanuel Babeau: I am Bonnie Herzog: wanted to follow-up on, you know, Japan and the excise tax situation. As you mentioned, we've known or seen that you're applying or you did apply for a price increase on top of the TAC So hoping you could talk a little bit more about the elasticities you're expecting, you know, with volumes I assume being pretty negatively impacted? And then I guess, will the leverage on the incremental pricing you're hoping to get be enough to drive margin expansion and income growth in the region? Jacek Olczak: Yeah. It's. Okay. The price consumer will be will start being impacted. They will start seeing the prices as of April 1. Right? So this is still a a little bit in front of us. There obviously will be some IMS shipment type of distortions, you know, consumers can do some buying their head or maybe not. I mean, all of these things will somehow wash out for the year. Now there are two steps of excise increases for heated tobacco products in in 2026, one which, again, will kick the sorry, will hit the consumers in April 1. And the number in October. Okay? The amount or the size of the excise may not immediately warrant that will I don't want to now talk about the pricing strategy, etcetera. May not immediately warrant depends on which strategy is at play on the margin expansion, but I do believe, you know, what is our approach to passing on prices and continuously working on the margin expansion. I think over a bit longer period of time, we will get where we want to to get. But I cannot comment more Bonnie, for for Got it. Emmanuel Babeau: Reasons. Yes. Bonnie Herzog: I figured I just alright. That would still help. I appreciate it. And then I did wanna just maybe ask a high-level question on your guidance this year. Could you maybe frame for us or touch on the key growth drivers that really will allow you to deliver on your top and bottom-line guidance and possibly beat it, considering, you know, you're laughing. Several strong years of growth. I think that's been a key question just given, you know, the momentum. So it'd be helpful just to kind have you kinda frame for us, you know, what are kind of the key drivers of this And then in the context of that, I did wanna just make sure to understand how much of an increase or not. Your guidance assumes in terms of planned investment spend this year. Versus last? And I guess, again, I'm asking, thinking about everything that you're planning on rolling out, of course, depending on the FDA. Thank you. Jacek Olczak: Look. I mean, obviously, there is some degree of assumptions with we're taking on FDA. And okay, let me answer this if not. If we talk specifically about the ZYN and the ZYN Ultra our pending application. Which is very much in the higher nicotine strength obviously, moist version, you know, some flavors, etcetera. We have a readiness to launch the product essentially as well, essentially as we speak. So it all depends now how quickly can get an answer from FDA, and I will stay from any fortune telling you by the way. About precise timing of FDA. I mean, I didn't have a great track record of forecasting FDA in the past, so I I have to okay, validate with this. But I think it's gonna happen. Okay? Summer this year, I think the plan is well balanced. And, obviously, we will be mean, I sorry. ZYN is growing in The US, but it not growing at our expectations You know, if you measure the category growth versus then growth, at least the recently, etcetera, I mean, this will have to other this will have to be addressed. Cycles, and I said it's somehow baked in the plans. And the way we did this, algorithm provides a good balance between timing, volume expectations, and and, you know, investment. Now we need to remember that you know, when we talk about the ZYN and v for example, on international, mean, these two product categories are vastly enjoying the infrastructure, which we have built over time on IQOS. And I believe the longer we wait also in The US, we will we may end up in the similar, but reverse thing. It is a Zen energy infrastructure, back office capabilities, etcetera, which you know, will start being later on shared for IQOS. So you know, I I remember you always were asking these questions about how much was the interest behind the IQOS, but everything depends about what other investments until this date we have been making and so on. Obviously, there will be some variable investment. You need to build awareness and so on. But these are not, that heavy, maybe structural, long-lasting investments, which are already built because we we we we continue investing behind Emmanuel Babeau: But it just to to maybe complement there is no rupture in '26 versus the trend of the past years. So the fundamental drivers remain exactly the same. You have a powerful smoke-free portfolio, which is continued to be dynamic. Yes. You have this Japanese situation, which is a one-off. You have, the high base of comparison in The US, which will have an impact in term of growth versus what is real underlying growth. So that is something we are taking into account. But fundamentally, the dynamism is there. With a very nice positive mix impact on the margin, and that is playing. And on combustible, we have this resilient business model Yes. In '26, we are expecting slightly more decrease, which is coming from first of all, Turkey, where we still have an each one of comparison even if things are gradually improving. But mainly two markets, India and Mexico, where you have massive excise duty that are going to happen. In India, you talk about 40% plus price increase for the consumers. We're gonna have huge impact on the market. So this is impacting the volume. But even with that, we are targeting to have this resilient model where with a decline in volume, we believe we can grow low single digit the revenue and low to mid-single digit the growth profit. So as you can see, the 26 objective is not very far from the CAGR of the midterm growth algorithm. Fundamental remain exactly the same. We have a couple of special events we're going to to to to overcome and offset, and that is really what is driving the difference. But fundamentally, the powerful dynamic behind the business remain exactly the same. Bonnie Herzog: Alright. Very helpful. Thank you. I'll pass it on. James Bushnell: Our next question comes from Faham Baig with UBS. Your line is open. Good morning, guys. Thanks for taking the the question. I've got a couple as as as well. Faham Baig: I do wanna push you on innovation a bit as we approach the five-year mark since since the launch of ICOS ILUMA. We look forward to the next evolution, what technical or functional do you see could could further improve consumer can conversion, particularly, in in in the emerging markets. And the second question goes back to Zinn. We've observed a notable absence of of ZYN promotions. Over the last two months, in in in The US. Can you can you clarify, is this is this a deliberate shift as you await the the the offer of Zen Ultra, which is a higher moist product, which you which you mentioned, or or or is there a shift between how aggressive you want to currently drive trial versus looking to capture the 50% category growth you've you've alluded to historically? Jacek Olczak: Okay. So, yeah, it's like I take the I take the question. Okay. Starting with your first question. I'm very pleased and I honor this you know, representative of PMI that you're tracking the innovation engine of PMI. You're absolutely right with plus minus in the plan period approaching the five years of icosilumab. So I think your predictions are pretty good, but I will not answer second part of that question, what the denervation's gonna be for the reasons which I guess understandable. Now when it comes to promotions, I actually think is the two months. There was obviously the difference in what promotions and intensity of repromotions US market Has deployed in Q3 and Q4. There were a couple of schemes which we didn't repeated for you know, that was our decisions. But I wouldn't just conclude that, from a, you know, shorter period of time about the promotional promotional intensity of activity. We have it in a plan. We cannot, you know, again, talk about this. But the way to look at this, and I think we've been a very transparent in our remarks, there are three aspects of what will make, long-term success of a our pouch business in The US. And we're repeating what we always were doing on so far on the international. One is the brand, and the world has there has to be quite a degree of the support from a brand building activity. There is obviously the component of a portfolio, which is meeting at least the current trends. We can have a separate con conversations which of the trends we think may be longer lasting, which of can be longer lasting. But the fact is that, you know, ZYN is doing okay within a day group of a three six milligram. But clearly, it's missing a higher nicotine strength Okay. Particularly, maybe nine, maybe others. Okay? So that's the thing which we'll have to address, and here we need to deal a work with FDA. And there is a third component into into this thing, which is obviously price. And a price premium, which you know, consumer is willing to pay for them in exchange for having a reputable, vibrant, dynamic brand and the right product. So there will be element of it's almost like we're going to the to the, you know, textbook of, old, maybe forgotten marketing mix. And to have the right price, right product, right place, right promotions. And we will be diligently deploying all of these components to get I hope I answer at least partially your question. Faham Baig: No. That's that's very helpful. Given my first question wasn't answered, can I can I squeeze in an an another one for Emmanuel? Jacek Olczak: Sure. Sure. Yeah. Sure. Sure. Emmanuel, Faham Baig: the the currency guidance for the year was significantly better than the three estimates. Could you maybe share the key drivers why that could have been? And and also provide the hedge rates for the year for the key currencies would be really helpful. Emmanuel Babeau: Yeah. So probably the I mean, the reason why is that we are going to benefit from some significant negative transactional impact in 2025, which are not going to repeat. Based on the current Forex in 2026. So when I look at the 27¢ guidance, you have twothree that is coming from translation, but around onethree is coming from a a transaction. So I believe that is probably what the street doesn't have, of course, because it's difficult to to to have. I'm not going to share precisely the hedging, but yes, we continue to have some hedging that are helping us a little bit notably on the yen because the euro has been going up. So the hedging on on the euro are no longer making a big difference. So we still enjoy a slightly better rate than the the spot you can see on on your screen. And that is limiting a little bit the negative impact. But let's be clear, in '25 the yen had a negative impact, and we are expecting in '26 another negative impact coming from the Japanese yen. Faham Baig: Thank you. Appreciate it. Thank you. James Bushnell: Thank you. Our next question comes from Gerald Pascarelli with Needham and Company. Emmanuel Babeau: Your line is open. Gerald Pascarelli: Thanks. Thank you very much for the question. Hi, Gerald. Jacek Olczak: How you doing? I I just have one. I'd love to get your thoughts But last month, it was reported that New York is considering a significant excise tax increase on nicotine pouches. So I'm just would love to get your thoughts when you consider the obvious potential for other states to maybe adopt similar proposals. And then maybe the impact you believe that this could have a promotional environment or the competitive landscape. Jacek Olczak: Thanks. Yeah. We're aware of obviously, we're aware of this proposal. I mean, the comment I can make at this stage that this is counterproductive to the health benefit for nicotinals smokers this product provides. So I think the legislator there is taking everything in the consideration. Like, states, in The US you know, very well, all driven by their own thinking, process and not necessary one state actions are translating to other state actions. But let's see how that's gonna you know, unfold. Again, I repeat because for me for us, it's very important that know, shortsighted approach to the exercise and the products which are vastly better than cigarettes undermines undermines real public health, objectives. So I think it's just it's just the wrong idea. Emmanuel Babeau: Thank you. James Bushnell: Thank you. Our final question comes from Damian McNeil with Deutsche Bank. Your line is open. Damian McNeil: Hi. Thank you. Hi, Daniel. Jacek Olczak: Hi. Damian McNeil: Thank you. Just one question for me, really. Just Emmanuel Babeau: just on costs. You've indicated that you're on track to deliver GBP 2 billion of cost savings by the end of this year. Just wondering whether you're in a position to quantify whether we should expect a similar level of cost savings, for the medium-term guidance at the '28. And what scope AI may have to accelerate cost savings, please? Jacek Olczak: Well, so it's not part of the guidance we we providing today, but we certainly ambition to continue to be very efficient Emmanuel Babeau: on our cost Roughly speaking, you know, not going to give precisely the speed, but it's around 60% on on COGS and and the rest is on the our notably back-office cost and G and A. It is clear that we are targeting to build efficiency in the future coming from AI. Again, that that's that's a topic that is quite sensitive. You know, if you start to say what to invest and what to expect from AI, but you should certainly expect that AI is gonna be an engine for more efficiency and and and for cost performance in the future. Absolutely. Damian McNeil: Okay. Thank you. Emmanuel Babeau: Thank you. Damian McNeil: Thank you. I'm showing no further questions at this time. I would now like to turn it back to management Jacek Olczak: for closing remarks. So I have a last remark and this is just the best proof that we're leaving in the know, in the environment when we have a digital AI and the human. Both of us were human, and this is not that AI was hallucinating I think I misread one number when it comes to the guidance of the zero. Emmanuel corrected the number in terms of a currency impact going into the 2026. The number which you had on the slide, the number which you had on the release, and the number which Emmanuel has quoted at the right numbers. Apologies. For this inconvenience, but this is the best proof that it was a lie. Conference, not a digital conference. See you all at Cognizant. Thank you very much. You soon. Thank you for your time. Thank you. Operator: Thank you for joining us. Please do contact the investor relations team if you have any follow-up and have a good day. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, and welcome to the Piper Sandler Companies Fourth Quarter and Full Year 2025 Earnings Conference Call. Today's call is being recorded and will include remarks by Piper Sandler management followed by a question and answer session. I'll begin by turning the call over to Kate Winslow, Please go ahead. Kate Winslow: Thank you, operator. Good morning, and thank you for joining the Piper Sandler Companies Fourth Quarter and Full Year 2025 Earnings Conference Call. Hosting the call today are Chairman and CEO, Chad Abraham, our President, Debbra Schoneman, and CFO, Katherine Patricia Clune. Earlier this morning, we issued a press release announcing Piper Sandler's fourth quarter and full year 2025 financial results which is available on our website at pipersandler.com/earnings. Today's discussion of the results is complementary to the press release. A replay of this call will also be available at that same website later today. Before we begin, let me remind you that remarks made on today's call may contain forward-looking statements that are not historical or current facts including statements about beliefs and expectations, and involve inherent risks and uncertainties. Factors that could cause actual results to differ materially from those anticipated are identified in the company's reports on file with the SEC which are available on our website at pipersandler.com and on the SEC website at sec.gov. Today's discussion also includes statements regarding certain non-GAAP financial measures that management believes are meaningful when evaluating the company's performance. Katherine Patricia Clune: The non-GAAP measures should be considered in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is provided in our earnings release issued today. I will now turn the call over to Chad. Chad Abraham: Thank you, Kate. Good morning, everyone. Thank you for joining us. Our business performed well during 2025 driven by strong execution and improving market conditions. We had a strong finish to the year with record adjusted net revenues of $635 million in the fourth quarter, a 27.2% operating margin, and adjusted EPS of $6.88. On a full-year basis, adjusted net revenues were $1.9 billion, achieving a 21.9% operating margin and adjusted EPS of $17.74. There are a number of highlights from 2025. Adjusted net revenues grew 22% with contributions from all businesses, resulting in a 39% increase in adjusted net income compared to 2024. We delivered a record year in advisory, with over $1 billion of revenues representing 55% of total net revenues. We grew our Investment Banking MD headcount to 187 managing directors and meaningfully increased productivity per banker. We completed the acquisition of G2, complementing other key hires to expand and strengthen our technology investment banking practice. We generated record revenues in equity brokerage and recorded our second-best year in both public finance and fixed income brokerage. We returned $239 million to shareholders through share repurchases and dividends. 2025 marks another successful year for Piper Sandler. We have now achieved nine consecutive quarters of year-over-year growth, underscoring our strong execution and sustained momentum. This progress is supported by our ongoing investments in the business, the diversification of our sector and product capabilities, and an improving market backdrop. 2025 also marked our firm's 130th anniversary. The foundation of our success is serving the best interests of clients, employees, shareholders, and the communities where we live and work. I'd like to thank my employee partners for their continued hard work and dedication to providing best-in-class service to our clients. Turning now to corporate investment banking. During the fourth quarter, we generated $469 million of revenues, up meaningfully over the prior year driven by robust M&A activity as well as solid debt capital markets advisory activity. For the year, Corporate Investment Banking revenues totaled $1.3 billion, representing a 28% increase from the prior year. Sector contributions were diverse, as five out of seven industry teams grew revenues versus 2024. Within corporate investment banking, advisory revenues for the quarter were $403 million, up 44% year-over-year. Our Financial Services and Services and Industrial teams led sector performance. For the year, advisory services generated $1 billion in revenues, up 28% from 2024 and exceeded our previous high watermark from 2021. This reflected a strong relative performance compared to a 7% growth rate in overall M&A activity in the middle market. During 2025, we completed 135 advisory transactions, 16% more than the prior year and earned higher average fees. Advisory revenues from both corporate and sponsor clients were up meaningfully year-over-year. We were ranked as the number two adviser based on the number of announced U.S. M&A deals under $1 billion. In addition, non-M&A advisory generated another record year and increasingly constitutes a meaningful amount of our total advisory revenues. Industry team contributions were led by financial services followed by a record year from Services and Industrials and solid contributions from our healthcare, energy, power and infrastructure, consumer sectors. Our performance within financial services was led by depositories, where a more accommodating regulatory environment bolstered a resurgence in bank M&A activity. We were the number one adviser in U.S. Bank M&A based on the number of announced transactions during 2025. Additionally, we saw solid contributions from our insurance, asset management, and specialty finance subsectors. Record performance from our services and industrials team in 2025 was driven by larger transactions generating higher average fees. These results reflect investments we've made in this sector developing and recruiting exceptional bankers with deep client relationships particularly with the financial sponsors community. In addition, our non-M&A advisory teams have been a key driver of performance. In recent years, we have made substantial investments in these capabilities to expand client offerings and increase market share, especially with private equity. The most meaningful components of our non-M&A advisory revenues are debt capital markets advisory, private capital advisory, and restructuring. Non-M&A revenues have outpaced the growth of our M&A revenues for several years and exceeded 25% of total advisory revenues in 2025. Our debt capital markets advisory business has been a significant contributor to this growth as it recorded its third consecutive year of record revenues, benefiting from higher average fees as well as a broader and more diversified client base. We also have significant opportunities within our private capital advisory group to leverage our sponsor relationships and sector expertise to further grow market share. Looking ahead, while several larger advisory transactions closed in the last week of 2025, our pipeline of engagement mandates is building, and we expect to see another strong year of advisory revenue in 2026. Corporate financing markets were solid throughout the quarter, and we generated $67 million of revenues. We completed 31 financings, raising $15 billion for corporate clients, with activity centered in healthcare and depository sectors. For the year, corporate financing revenues of $217 million increased 25% from 2024 driven by a strong second half of the year. During 2025, we completed 122 equity debt and preferred financings raising $48 billion for corporate clients. Sector contributions for the year were again led by our healthcare team, which served as book runner on 37 of the 38 equity deals they priced during 2025. And we participated in all six MedTech IPOs that priced in the market. Our financial services team also contributed a strong underwriting performance in 2025, pricing 65 transactions that raised $19 billion in capital for our clients. As we look ahead, January financing activity has been strong. Our pipeline of new issues is healthy, and we are seeing strong demand from institutional investors looking to deploy capital across sectors. Shifting to talent. We finished the year with 187 investment banking managing directors. While our net MD headcount increased modestly from 2024 levels, we strengthened our talent base and improved productivity helping to drive profitability in the business. Over the last ten years, we have grown MD headcount at a 10% CAGR. We're consistently looking for talented partners who strengthen the platform and position us for growth in our product and sector teams, expand our geographic reach, or add additional capabilities to support our clients. Overall, our 2025 results were strong. And we're pleased with our performance. The combination of improved activity levels, strong execution across business lines, and a constructive market environment resulted in excellent financial returns. We've entered 2026 with good momentum, strong client engagement, and an accommodative regulatory environment and meaningful opportunities to gain share. Before handing it off to Deb, I'd like to highlight a recent leadership announcement. In January, we named J.P. Peltier as co-head of investment banking and capital markets. JP will co-head the group alongside Mike Dillehunt and James Baker, who have served together as global heads of investment banking and capital markets since 2021. JP is a 25-year veteran of Piper Sandler, an exceptional banker, and growth-oriented team builder. He recently served as co-head of the healthcare investment banking group where his leadership helped build a market-leading franchise. I'm confident that JP, Mike, and James will successfully lead our corporate investment banking business to accomplish the medium-term goal of growing annual revenues to $2 billion plus in the coming years. With that, I will turn the call over to Deb to discuss our public finance and brokerage business. Debbra Schoneman: Thanks, Chad. I'll begin with an update on our public finance business, where market conditions remained favorable with record issuance levels driven by funding needs for infrastructure upgrades, and strong investor demand. We generated $39 million of municipal financing revenues for the quarter, flat sequentially and down 5% compared to the strong prior year quarter. For 2025, we generated $146 million of municipal financing revenues, our second strongest year on record. These results reflect the diversification of our business and strong relative performance. Our revenues increased 19% over last year, exceeding the municipal negotiated market issuance growth of 12%. We underwrote 555 negotiated transactions during 2025 raising $19 billion of par value for our clients. Additionally, we maintained our position as the number two underwriter based on the number of transactions. Activity was solid across both our governmental and specialty businesses reflective of our client and geographic reach. Performance was broad-based with strong results in Texas, California, Oregon, and the Midwest, as well as our special district healthcare and hospitality sectors. In addition to revenue growth, we focused on local market relationships and knowledge to strengthen our market leadership in our core sectors. Our special district team has 50% market share in the states in which they compete, and we ranked number two nationally in K-12 education by number of issues and par amount. In terms of outlook for 2026, we anticipate public finance market conditions to remain favorable with similar issuance volumes to 2025 albeit back to the more normalized seasonality. Our equity brokerage business finished 2025 at record highs, following a year with strong volumes and volatility. Fourth quarter 2025 equity brokerage revenues of $64 million, a quarterly record, led to record revenues of $230 million for the full year. These results demonstrate successful collaboration and the integration of products and investments across our platform. The strength of our platform attracted approximately 1,700 unique clients, and we traded 11 billion shares on their behalf in 2025. As we look forward to 2026, we expect our equity brokerage revenues to be similar to 2025. And last, we generated $48 million fixed income revenues for the fourth quarter down from both a strong third quarter and year-ago period. For 2025, we generated $203 million of fixed income revenues, up 9% from the prior year. Driven by robust activity with our depository clients. The increase in bank M&A activity during the year along with depository clients adjusting to the changing rate environment, provided more opportunities to advise on balance sheet repositioning. We also experienced healthy growth across other client verticals including asset managers and public entities. From a product perspective, both municipal and taxable fixed income showed significant growth year-over-year. We continued to elevate the platform by investing in talent that expands our product expertise and enhances client relationships, allowing us to provide differentiated advice. In our municipal franchise, we have established ourselves as a trusted advisor with a specialized sales force able to find liquidity for our institutional clients. In the taxable space, we have expanded our expertise in structured products, experienced talent, and leadership. As we look to 2026, we expect clients to be more active in anticipation of further rate cuts and anticipate additional work stemming from a robust M&A environment. Now, I will turn the call over to Kate to review our financial results and provide an update on capital use. Katherine Patricia Clune: Thanks, Deb. My comments will address our adjusted non-GAAP financial results which should be considered in addition to and not a substitute for the corresponding GAAP financial measures. For the 2025, we generated net revenues of $635 million, operating income of $172 million, and an operating margin of 27.2%. Net income totaled $123 million and diluted EPS was $6.88. For 2025, net revenues totaled $1.9 billion, operating income was $411 million, and our operating margin was 21.9%. We generated $318 million of net income, and $17.74 of diluted EPS. Net revenues for the 2025 increased 39% from the sequential quarter and grew 27% over the fourth quarter of last year. This growth was driven by robust advisory revenues, the second strongest quarter on record. For the year, net revenues increased 22% compared to 2024, powered by a 28% growth in advisory revenues as well as strong performance across the rest of our businesses. Turning to expenses. We reported a compensation ratio of 60.1% for the 2025 and 61.4% for the full year. Both ratios improved from the comparable periods of 2024 driven by increased net revenues and continued operating discipline. We continue to drive leverage where possible while balancing employee retention and strategic investment opportunities. We expect our 2026 compensation ratio to be similar to 2025. For the 2025, non-compensation expenses excluding reimbursed deal costs, were $67 million. Including reimbursed deal expenses, non-compensation costs were $81 million or 12.7% of net revenues. This ratio improved 440 basis points from the third quarter, and 270 basis points from the fourth quarter of last year. Non-compensation costs for 2025 excluding reimbursed deal expenses, were $271 million. An increase of 8% compared to last year. The increase in expenses was driven by three factors: increased business activity, relocating our Minneapolis headquarters office, and investments in the business, including technology and related consulting fees. Including reimbursed deal costs, non-compensation expenses were $315 million for the year and our non-compensation ratio was 16.7%. An improvement of 160 basis points versus 2024. Looking ahead to 2026, we anticipate a modest increase to non-compensation expenses, with the most notable driver being the relocation of our New York office. Our diligent management of the fixed controllable costs, continues to be a key driver of leverage. Going forward, we expect our full-year non-compensation expense ratio to be similar to the 2025 level with some variability across quarters depending on the timing of expenses. Moving to income tax expense. Our income tax rate for the fourth quarter was 28.5%. For the year, income tax expense was reduced by $30 million of tax benefits related to the vesting of restricted stock awards. Which resulted in an income tax rate of 22.6%. Excluding the $30 million benefits, our effective tax rate was 29.8% for 2025. We continue to expect our full-year tax rate to be around 30% excluding the impact from the vesting of restricted stock awards. Now finishing with capital. During the quarter, we returned an aggregate of $35 million of capital to our shareholders through stock repurchases and quarterly dividends paid. In 2025, we returned an aggregate $239 million to shareholders, which includes: repurchases of approximately 421,000 shares of our common stock or $125 million related to employee tax withholding on the vesting of restricted stock awards as well as in the open market. These repurchases offset the share count dilution for this year's annual grant. It also includes an aggregate of $114 million or $5.7 per share in dividends paid to shareholders during 2025 through our quarterly and special cash dividends. Given our level of earnings, today the Board approved a special cash dividend of $5 per share related to our full-year 2025 results. Including this special cash dividend and our quarterly dividends paid, our total dividend for 2025 equals $7.7 per share common stock, or a payout ratio of 43% of adjusted net income. In addition, the Board approved a quarterly cash dividend of $0.70 per share. Both the special and the quarterly cash dividends will be paid on March 13, to shareholders of record as of the close of business on March 3. Lastly, as part of our ongoing commitment to delivering shareholder value, I'm pleased to announce that the Board has approved a four-for-one forward split of our common stock to increase liquidity, and help make our stock more acceptable to a wider range of investors. The split will be accompanied by a proportionate increase in the number of shares of our authorized common stock. Our common stock will begin trading on a split-adjusted basis at the start of trading on March 24, 2026. 2025 marked another successful year for Piper Sandler. We grew revenues and profitability while furthering the strategic expansion of our businesses. Looking ahead, we remain focused on executing on our strategic priorities, to drive continued growth and strong returns for our shareholders. With that, we can open up the call for questions. Operator: Thank you. If you'd like to ask a question, please signal. If you are using a speakerphone, please make sure your mute function is turned off till buyers signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Devin Ryan with Citizens Bank. Devin Ryan: Great. Good morning, everyone. How are you? Hi, Devin. Hey. I want to start on the advisory business. Obviously, I think terrific results on the year. Revenues up 28% even though we had quite a bit of volatility earlier in the year and then sponsors, seem like they're they're just starting to to really come back and reengage in a more meaningful and at the same time, your bank M&A is really picking up. So be great to just maybe talk through kind of those two components, like, how much more activity you're seeing with sponsored clients today relative to maybe six months ago? And then the other piece we get, you know, questions from investors around is, like, order of magnitude in a more functioning bank consolidation backdrop. Like, how much incremental revenue could that be for Piper relative to maybe what you were doing previously? I know they're couple $100 million on top, or or just any ways to kinda think that piece through? Thanks. Chad Abraham: Yeah. Thanks, Devin. Yeah. Maybe just to step back relative to the 28% growth, you know, 2024, you know, was a pretty good year for us, but on relative performance, you know, we were a little probably off where we wanted to be in in financial services and healthcare. Obviously, if those are your two biggest businesses, you know, that has a big impact. They both those teams had very good years in in 2025, which know, given our concentration in those sectors, that, you know, leads to outperformance when that happens. Would say relative to the sponsor business, I do think we outperformed. I think it's been frankly, a pretty good market for a good six months here relative to deals we're getting done, deals we we're getting closed. And I think that's really just emphasized by probably the team that had you know, like, the the biggest year, not in total revenues, but just in sort of step functions was our diversified services and industrials team, which is pretty much entirely a private equity sponsor business. And then relative to bank M&A, you know, obviously, that was a big contributor for us both in M&A, starting to refinance the balance sheets, We see that a continued pace. There's obviously a big deal recently announced, but I I always do have to sort to sort of stress you know, it's part of our advisory business, which is part of the total, and depositories is only half of our financial services. So while it's a while it's important, it's a big part of the business. It's hard for just depository to move the top line in in any meaningful meaningful way. Devin Ryan: Got it. Thanks, Chad. Appreciate it. And then just a follow-up on, it's kind of capital allocation, but also kind of M&A opportunities for the firm. You obviously generating a lot of capital right now. Potentially accelerating. Can you talk about potentially appetite to, I guess, one, buy back more stock in this environment, particularly with the stock being more liquid and creating more capital. the years on the M&A side. You've been able to And then two, as an outlet, you've been very active do some really nice tuck ins. What are you seeing on that front right now? And is that another kind of good use of capital? And could we potentially see some bigger deals in 2026? Just curious kind of how that fits in as you're thinking about capital allocation into 2026? Chad Abraham: Yes. And I would say relative capital, I think for the last few years, we've been pretty consistent. We we sorta need all the tools in the toolbox with the sorta cash we're generating and sort of not not much of a need for on on new capital sort of besides investing in growth. And acquisitions. You know, obviously, it's sort of in this order. We're always focused on the quarterly dividend. I do think as our liquidity is improved as many of these acquisitions have matured, it's it's also helped our float obviously, with the stock split. So I think there'll be a chance for us to probably lean into the buyback a little more than we have in the past just because we've always been conscious of of that float. But I would say we we really need all of those tools. And then, you know, number one is just we've delivered great returns in terms of the and deals. We've done And I think we're in a really good environment for that from the perspective of we're doing really well, we've added a lot of products. I think the platforms appealing. But also, some of these relationships we build over a few years and the time to transact those transactions, you know, while sometimes partners have to transact when things are tougher, they don't really choose to do that either. And so now that some of the boutiques and sectors we're seeing are seeing a bit of a recovery, think there's a lot more interest on the sell side. So I'm pretty optimistic about the pipeline there. Devin Ryan: Okay. Sounds good. Thank you very much. I'll hop back in the queue. Appreciate it. Operator: We'll go next to James Yaro with Goldman Sachs. James Yaro: Good morning, and thanks for taking the questions. Chad, you've had a lot of success adding new businesses in in for example, non-M&A advisory. And that's been a combination of organic and inorganic growth. As Are there any other businesses you're looking at and that you're interested in potentially exploring or expanding into? And, would you have to use the inorganic route to to get into those businesses? Chad Abraham: Yeah. I I think you're obviously mostly talking about products we've added, I would say, of certain products ebb and flow and then there's more and more interest. I would say right now relative to the product side, we've added quite a bit in terms of the last five years, restructuring, private capital advisory, obviously longer than that ten plus years ago, we added debt capital advisory. I think we're mostly focused right now on we've got a lot of runway in those products and sort of the collaboration. We've, you know, we've recently done some analysis in some of those products in terms of how many of our bankers have used the various products in and there's there's just still a lot of upside there. So I think we're we're pretty focused on continuing you know, that that penetration. But in some of our other businesses, obviously in equities, we added some of the private stock trading. So I always think we're evaluating that the bigger, stronger, the the platform gets, you know, the those opportunities become available. James Yaro: Okay. Great. So you delivered quite healthy corporate financing results this quarter. But the equity markets are clearly struggling. Could you help us think through the puts and takes on the equity capital markets backdrop from here? Chad Abraham: Yes. No. And I've been doing this a long time, so I'm always reminded how quick and humbling the equity capital markets can be to to your financing business. For us, the big key is just to be diversified across those sectors. Obviously, healthcare is a big part of our equity capital markets. I would say relative to the recent sell-off, healthcare has performed quite a bit better. You know, this is obviously what we're in now is really led by a tech and software sell-off. So I I you know, obviously, those financings are gonna be impacted and and, you know, I don't know if you say we're one week or two weeks or three weeks into this, but we're we're pretty into it. But I've seen enough markets where it only takes a couple weeks and then it impacts the whole market and then accounts sort of shut down on on new issues. But we had a a a very good January for ECM. But I think you're you're right to say we we just don't spend a lot of time trying to predict more than a few weeks out what the the market environment's gonna be for new financings and ECM. James Yaro: That's really clear. Thanks a lot. Operator: We'll go next to Brendan O'Brien with Wolfe Research. Brendan O'Brien: I guess to start, I just wanted to touch on sponsors. And get a sense as to how you would characterize the conversations that you're having with your sponsored clients at the moment and just specifically, you know, whether there's been any notable shifts the tenor of these discussions following the recent moves in equity markets that might further delay the acceleration in activity that everybody is hoping for in 2026? Chad Abraham: Yeah. And and I feel I feel like I've been reasonably on this. I mean, for us, it's it's you know, the last couple years have just been a steady march of, you know, improvement, sort of nothing gangbusters, but more and more sponsors, you know, trying to get liquidity on their one or two top things. I think, you know, we we had a really good kinda last summer, fall sort of pitch calendar, which, obviously, led to a really good end of the year and, you know, end some of that trickles in. But I would also say just relative to market conditions, unlike ECM, the sponsor of the A markets like turning the the Titanic. It it turns slow. We've been on that sort of slow improvement. And sort of weekly jolts to, you know, interest rates or what's going on in the equity capital markets doesn't usually impact that. So I feel like we're just still getting slow, steady improvement and know, that's really coming across in lots of products, you know, not just our sponsor M&A business, but we had a record year in our debt capital advisory business, and that's a heavy sponsor business. And, you know, we we've added resources sort of in our private capital advisory business and the continuation vehicles, and while we saw some success kind of in our first full year last year. You know, we're we're we're now really positioned in that business. For 2026. Brendan O'Brien: Great. That's a excellent segue to my follow-up question, which is on your debt capital advisory and PCA businesses. Comments on the strong growth over the last couple of years definitely caught my attention. But just given the constructive outlook for M&A, I just wanted to get a sense to whether you think these businesses can keep continue to keep pace with the growth in your M&A platform, and what do you see that growth potential, for the PCA and debt capital markets advisory business in particular? Chad Abraham: Yes. I mean, we've this is the first time we've sort of disclosed what that mix of business on an annual basis is just to give people a flavor of sort of the size and scale for the last several years it has outpaced. Now some of that has been we're also adding adding products, and there's, you know, a lot of runway in PCA. I think, you know, part part of why we disclosed that is is, you know, that provides some diversification from various M&A markets. Honestly, do I think, you know, my my guess is that over time it continues to outpace the M&A market. But in a very strong M&A market, I'd be super happy if M&A outpaced that business. So some puts and takes. I think we're just trying to make the point that that many of those products have become a scaled, and frankly a lot of them line up with the M&A business. Many times, the debt capital advisory business is is tied to a M&A transaction. Brendan O'Brien: Great. Thank you for taking my questions. Operator: Go next to Daniel Cucchiara with Bank of America. Daniel Cucchiara: Hi. Good morning. Your 2026 was just dominated by the large cap M&A. I was just hoping you could give us a current mark to market on deals under $1 billion. And if you've seen any momentum in this cohort towards the 2025? And if the momentum is kind of carried over into the first month '26. Thank you. Chad Abraham: Yes. I would say, I mean, obviously, we get that question. People they just look at M&A volume, total volume, and sort of forget that sometimes that's driven by whatever the top five, six, 10 transactions, especially if there is some large ones. So, yeah, we're we're much more focused on volume in the middle market. I think in our release, we talked about some of the data we had that that grew high single digits. Obviously, with our advisory business, we outpaced that I do feel like the M&A market in that sort of middle market range, which for, you know, a lot of for a lot of our stuff, you know, north of 50% is is sponsor based. I do feel like we think that, you know, accelerated in the back half of the year. You know? But but we'll have to watch that mix. That mix is is very important to us. I mean, get our fair share of large transactions, but the vast majority of our volume is in that middle market. Operator: We'll go next to Mike Grondahl with Northland Securities. Mike Grondahl: Hey. Congrats. On a on a very strong finish to the year. And on that note, Chad, could you just talk a little bit about the pipeline or backlog on the advisory side? And I think you mentioned a couple larger transactions happened near year end. How does that affect your thinking about like first half 2026 versus second half 2026? Just trying to think through the cadence as we kind of get into '26 here. Chad Abraham: Yes. I mean that is a funny, I've been doing this a long time. Sometimes, we're always lining up the planes for last couple of weeks. And some years, we land most of them and some some years, we have a handful that slip. I mean, I think we made the comment, we we landed a lot in the last week of December. So that obviously always has a bit of an impact on January. You know, January is never a huge month for new announcements, so it's sort of always hard to tell, but would say our backlogs are good. Our seasonality is fairly typical. You know, Q1 is always our toughest quarter to predict. So we'll have to see that seasonality. Mike Grondahl: Got it. And and then Deb, on the municipal side, and sort of trading side, how are you feeling about the environment and just sort of you know, approaching priorities for '26. Debbra Schoneman: Yeah. So if I take that broadly across municipals from our financing standpoint, we continue to see and feel like the market will remain solid here, similar trends to what was coming out of 'twenty five. I mean, part of that is we need to look at both the supply and demand side of that equation. So rates definitely matter there. I mean, to the extent we see rates coming down, it could burst more refinancing opportunities, which just haven't been there yet. We also just continue to watch the fund flows as those continue to be again, solid, watching that particularly in high yield, that's going to help support the municipal financing business. On the trading side, I would say holistically, this is true for municipals as well as taxable products as spreads are really tight and so it's just causing a little bit of a pause for investors as they, you know, look to see what might happen there and a little nervous to step in too strongly because of that. So watching spreads on the fixed income is going be an important part for you to try to see what's happening with our business. And and I guess the other thing I would just say relative to twenty six, is as we see bank M&A improved here in '25. We saw the repositioning of balance sheet that we're able to do as part of that. You know, continue, and that's something we see going into 2026 as being likely to continue to be strong along with the bank M&A environment. Mike Grondahl: Great. Hey. Thanks a lot, and good luck in '26. Chad Abraham: Thanks. Bye. Operator: At this time, there are no further questions. I'd like to turn the call back to Chad for any additional or closing remarks. Chad Abraham: Okay. Thank you, operator, and thanks, everyone, that joined us this morning. We look forward to updating you on our first quarter results in a few months. Have a great day. Operator: This does conclude today's conference. We thank you for your participation.