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Operator: Good morning, ladies and gentlemen. Please remain on the line. Your conference will begin in just a few moments. Greetings. Welcome to AudioCodes Ltd. Fourth Quarter and Full Year 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please note this conference is being recorded. I will now turn the conference over to your host Roger Chuchen, Vice President of Investor Relations. You may begin. Roger Chuchen: Thank you, operator. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer, and Niran Baruch, Vice President of Finance and Chief Financial Officer. Before we begin, I'd like to remind you that the information provided during this call may contain forward-looking statements relating to AudioCodes Ltd.'s business outlook, future economic performance, product introductions, plans, and objectives. Related thereto, and statements concerning assumptions made or expectations as any future events, conditions, performance, or other factors are forward-looking statements as the term is defined under U.S. Federal securities law. Forward-looking statements are subject to various risks, uncertainties, and other factors that could cause actual results to differ materially from those stated in such statements. These risks, uncertainties, and factors include, but are not limited to, the following: the effect of global economic conditions in general and conditions in AudioCodes Ltd.'s industry and target markets in particular, including governmental undertakings to address such conditions. Shifts in supply and demand, market acceptance of new products, the demand for existing products, the impact of competitive products and pricing on AudioCodes Ltd. and its customers' products and markets, timely product and technology development, upgrades, the advent of artificial intelligence, and the ability to manage changes in market conditions and evolving regulatory regimes as applicable. Possible need for additional financing, ability to satisfy covenants in AudioCodes Ltd.'s financing agreements, possible impacts and disruptions from AudioCodes Ltd.'s acquisitions, including the ability of AudioCodes Ltd. to successfully integrate the products and operations of acquired companies into AudioCodes Ltd.'s business, possible adverse impacts attributable to any pandemic or other public health crisis on our business and results of operations, the effects of the current and any future hostilities involving Israel, including in the regions in which we or our counterparties operate, which may affect our operations and may limit our ability to produce and sell our solutions. Any disruption in our operations by the obligations of our personnel to perform military service as a result of current or future military actions involving Israel and any other factors described in AudioCodes Ltd.'s filings made with the U.S. Securities and Exchange Commission from time to time. AudioCodes Ltd. assumes no obligation to update the information. In addition, during the call, AudioCodes Ltd. will refer to non-GAAP net income and net income per share. AudioCodes Ltd. has provided a full reconciliation of the non-GAAP net income and net income per share to this net income and net income per share according to GAAP in the press release that is posted on its website. Before I turn the call over to management, I'd like to remind everyone that this call is being recorded. An archived webcast will be made available on the Investor Relations section of the company's website at the conclusion of the call. With all that said, I'd like to turn the call over to Shabtai. Shabtai, please go ahead. Shabtai Adlersberg: Thank you, Roger. Good morning, and good afternoon, everybody. I would like to welcome all to our fourth quarter full year 2025 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance of AudioCodes Ltd. Niran will start off by presenting a financial overview of the core. I will then review the business highlights and summary for the core, and discuss trends and developments in our business and industry. We will then turn it into the Q&A session. Niran? Niran Baruch: Revenues for the fourth quarter were $62.6 million, an increase of 1.7% over the $61.6 million reported in the fourth quarter of last year. Full year 2025 revenues were $245.6 million, an increase of 1.4% over the $242.2 million reported in 2024. Services revenues for the fourth quarter were $34.6 million, an increase of 1% over the year-ago period. Services revenues in the fourth quarter accounted for 55.3% of total revenues. On an annual basis, service revenues were $130.7 million, an increase of 0.4% over the $130.2 million reported in 2024. Revenues by geographical region for the quarter were split as follows: North America, 47%; EMEA, 35%; Asia Pacific, 13%; and Central and Latin America, 5%. Our top 15 customers represented an aggregate of 58% of our revenues in the fourth quarter, of which 41% was attributed to our 10 largest distributors. The amount of deferred revenues that sold as of 12/31/2025, was $84.2 million compared to $84.4 million as of 12/31/2024. GAAP results are as follows. Gross margin for the quarter was 65.6% compared to 66.2% in Q4 2024. Operating income for the fourth quarter was $3.7 million or 6% of revenues compared to operating income of $4.1 million or 6.7% of revenues in Q4 2024. Full year 2025 operating income was $14 million compared to operating income of $17.2 million in 2024. Net income for the quarter was $1.9 million or $0.07 per diluted share. Compared to net income of $6.8 million or $0.22 per diluted share for Q4 2024. Full year 2025 net income was $9 million or $0.31 per diluted share compared to $15.3 million or $0.15 per diluted share in 2024. Non-GAAP results are as follows: Non-GAAP gross margin for the quarter was 65.9%, compared to 66.5% in Q4 2024. Non-GAAP operating income for the fourth quarter was $5.4 million or 8.6% of revenues. Compared to $7.5 million or 12.2% of revenues in Q4 2024. Full year 2025 non-GAAP operating income was $21 million compared to non-GAAP operating income of $28 million in Q3 in 2024. Non-GAAP net income for the fourth quarter was $4.5 million or $0.16 per diluted share compared to $11.6 million or $0.37 per diluted share in Q4 2024. Full year 2025 non-GAAP net income was $18.1 million or $0.61 per diluted share, compared to $27.3 million or $0.87 per diluted share in 2024. At the December 2025, cash, cash equivalents, bank deposits, marketable securities, and financial investments totaled $75.7 million. Net cash provided by operating activities was $4.1 million for the 2025, and $29.4 million for the year 2025. Day sales outstanding as of 12/31/2025 were 117 days. In October 2025, we received court approval in Israel to purchase up to an aggregate amount of $25 million of additional ordinary shares. The court approval also permits us to declare a dividend of any part of this amount. The approval is valid through 04/27/2026. During the quarter, we acquired 667,000 of our ordinary shares a total consideration of approximately $6.1 million. Earlier this morning, we also declared a cash dividend of $0.20 per share. The aggregate amount of the dividend is approximately $5.4 million. The dividend will be paid on 03/06/2026, all of our shareholders of record at the close of trading of 02/20/2026. Our guidance for the full year 2026 is as follows: We expect revenues in the range of $247 million to $255 million and non-GAAP earnings per share diluted earnings per share of $0.60 to $0.75. I will now turn the call over to Shabtai. Shabtai Adlersberg: I'm pleased to report another quarter of solid top-line growth in full quarter '25. This performance shows our focus progress towards becoming an AI-driven hybrid cloud software and services company. 2025 marked a period of stabilization and growth for our company. After facing economic challenges in 2023 and 2024 that affected our legacy and hardware business lines, and have led to a decline in revenue in past years. We saw 2025 a recovery of our connectivity business. Over the course of 2025, we saw promising signs of top-line growth inflection. The rate of decline in legacy business has moderated and we saw the newly invested Voice AI strategic areas maintaining their robust upward trajectory. This momentum in our strategic business has been driven by our two primary growth engines, our live managed services and the emerging voice AI business. Combined, these two units contributed to $79 million annual recurring revenue exit 2025. Representing growth of 22% year over year. While holding the line in our connectivity business, we executed well on our Voice AI initiative. Growing revenues by 35% year over year. The transition in overall company business trajectory is a result of deliberate actions. Reallocating our product development investments and efforts to high market potential areas and investing in sales and marketing to build market awareness to these innovative solutions. Looking ahead to 2026, plan to maintain this formula for success. Improving revenue growth, driving steady margin expansion, and strengthening our leadership in voice AI-driven business application for the UCaaS and CX markets. Now to highlight so far our business performance in first quarter twenty five and full year 2025. Fourth quarter total revenue grew as Niran mentioned, 1.7% year over year. As we have continued to build on the strength of our connectivity business and successfully leverage our enterprise customer base, installed base to drive cross-sell of GenAI business voice applications that make up our conversational AI operations. As discussed earlier, our solid fourth quarter results were marked again by strong traction in our dual growth engines. Lab services delivery for UCaaS and CX and Conversational AI. Business lines. Specifically, in all the years of a previous quarter, our conversational AI business increased in over 50% year over year for both the first quarter twenty five and also for the second half two thousand twenty five. Full year 2025 Conversational AI revenues reached nearly $17 million and accounted for 7% of total revenues. As a result, we're growing ever more optimistic about the continued stronger near recurring revenues momentum. For coming years. This conviction is further reinforced by the growing backlog of live and managed services that we convert to revenues in coming quarters. Exit 2025, our backlog for live services reached a level of $75 million compared to $69 million at the end of 2024. Now let me provide more of a visibility into how we operate so that our overall company financial results are better understood. As stated in previous course, we are now in transition in a transition period from our main focus on connectivity solution to expand and build a new AI-first voice AI-led business application operations for enterprises. I believe this will also provide more clarity into our financials too. At this stage, business can be generally broke down into two business units. Long established and running connectivity business provides for about 93 of the company revenue. It is a mature, profitable business, which runs steadily over the past five years, and which has delivered operating margin of above 14% in 2025. On a on a longer term basis, we target these businesses to deliver 16% to 18% operating margin. Relying on our success in these meetings along the past ten years, we are confident in our ability to continue and drive long term stable growth as we are the front runner in this connectivity business for both the UCaaS and the CX markets. The second business, the Voice AI business, focusing on software as a service recurring business model provided at the 2025 about 7% of the company revenue, growing from $12 million plus in 2024 to close to $17 million exit 2025, yielding revenue growth of about 35% year over year. Now that several product lines reached maturity and started to produce growing annual revenue, we are confident in our ability to keep growing this business line at a rate of 40 to 50% annually in coming years. And we plan to reach a revenue level of $50 million in 2028. Need to say, that we rely extensively using the Chennai technology in the solution to provide business voice application. For the UCaaS and CX enterprise market. It is important to note, though, that the Voice AI business is in investment mode currently. And generates an annual budget burn of about $9 to $10 million a year. With the 50% annual revenue growth plan for this business line, we believe we should reach breakeven two years from today. Before turning to detailed business line discussion, let quickly shift into the fourth core profitability metrics. As mentioned before, full score total revenue grew 1.7%, Our non-GAAP gross margin for the quarter of 65.9% is within our long-term target range of 65 to 68%. And a slight improvement sequentially from 65.8% last quarter. Fourth quarter rate related cost headwinds accounted to $600,000 and aggregated to $2.7 million for the full year 2025. We expect tariff-based impact to approximately get to $2.3 million in 2026. Fourth quarter non-GAAP operating expense of $35.8 million compared to $34.7 million in the third quarter and $33.4 million from the year-ago period. On a year-over-year basis, the higher expenses are attributable to targeted investment in marketing and sales tied to the Voice AI business. Allowing it to grow further and impact from the weakening US dollars against the euro in the full score. Full year 2025 non-GAAP operating expense decreased point two versus the year-ago period for the same reasons. In terms of workforce, concluded 2025 with 981 employees, representing an increase from 961, the previous score, and 946 at the end of 2024. Adjusted EBITDA for the fourth quarter was $6.5 million reflecting a 10.4% margin compared to 6.9 or 11.2% in the prior quarter. For the full year, adjusted EBITDA reached $24.8 million or 10.1% margin. Non-GAAP EPS was $0.16 in line with our plans, in the year-ago quarter. Net cash provided by operating activities was $4.1 million for the quarter, and $29.4 million for the full year 2025. On the guidance on the guidance front, we expect 2026 to be a gross year. We expect 02/2026 revenues of 200 I'm sorry, of $247 million to $255 million in the year and non-GAAP EPS of 60 to 75¢. This projection assumes continued strong growth of 40 to 50% in the voice AI business. And a stable connectivity outlook assuming no significant changes in the macroeconomic landscape. Our overall annual recurring revenues, which encompasses our managed services for connectivity plus conversational AI is expected to grow from 79 exit 25 growing 20% in 2026 and reaching a range of $92 to $98 million. In '26. Now let's move to the actual business line. Let let's talk first about Microsoft. During the fourth quarter, Microsoft business saw a sequential increase of 7%. This growth was largely driven by the continued strength of the connectivity franchise and rising attach rate for AI first Evocus EAC, which is our team certified CCaaS solution. The total contract value signed at the full score remained consistent with previous scores. On an annual basis, total contract value grew by 5% year over year reflecting steady progress. The Microsoft Teams Voice ecosystem continues to demonstrate very healthy situation. Recently, it was disclosed that the number of PSTN users reached 26 million, up from 20 million stated in April 2024. Which indicates an annual growth rate of 16 to 17%. Although Teams phone users represent less than 10% over the total team's monthly active worldwide user, which is estimated at 320 million seats, there's potential of total of 80 to 100 million prelicensing five users creating immediate large addressable market. Looking ahead to 2026, we anticipate an additional increase of three to 4 million users supporting the evolution towards an AI-powered workplaces. Stated by Microsoft. One notable win was a 30 win in the quarter was a thirty-six month contract signed with AT and T to support the large public university. Igorand provides for a comprehensive range of services including managed gateway, SBC, and calling plans, as well as IP phones. Facilitating the migration to Teams' words from Cisco. Another key contract was a sixty-month deal with an international equipment manufacturer based in Europe engagement began with the live premium managed service for initial phase of 2,000 users. Marking the start of a full migration to Teams Voice from Cisco. Upon completion of migration, the focus will shift to cross-selling additional business voice applications such as VocaC AC. In the fourth score, we actually we have been engaged in the other front extending and expanding our, efforts in The US market. So all the UCaaS front yesterday, we announced that we now offer an end-to-end push portfolio of certified voice solution for Cisco Webex calling. From CloudConnect PSTN connectivity analog gateways and desk phones. Webex calling is Cisco cloud phone system, a cloud PBX that provides enterprise telephony business calling features and PSTN connectivity, delivered and managed through Webex cloud. For 2025, Cisco publicly stated in November that Webex Calling serves now more than 18 million users worldwide. So for us, this new evolving cooperation with Cisco represents a major new opportunity in expanding our connectivity and devices business for UCaaS in coming years. Now to our conversational AI activity. In the last eighteen months, conversational AI moved from experimentation to expectation. In both UCaaS and customer experience, buyers are no longer asking should we use AI. They are asking, which AI? Where does it run? Who controls the data, and how fast can we scale it? That is exactly why we have been investing in past years in developing a rich portfolio of solutions. Across UCaaS, is about turning conversation into business assets meeting into decision, and voice interactions into actions. Across CX, it is about moving from basic cell service bots to real automation, voice agents that can resolve route, summarize, comply, and improve over time. Pivoting towards a more intelligent enterprise, our conversational AI portfolio is already built for this reality. Our solution namely Voice AI Connect, Live Hub, LocustCIC, Meeting Insights Cloud Edition, Meeting Insights on prem, and more. Are all designed to connect voice and conversation enterprise systems and to support multiple models and deployment options. But let me challenge one assumption. I see here in the market that AI value comes from the model. True. The large language model matters. However, is a durable value that comes from orchestration security, integration, and governance. So combining our vast telephony technology base, with our conversational AI portfolio, towards bring your own AI approach to deploying solution in various UCaaS and CX environments. It's our way to meet customers with the AR, make adoption faster, reduce risk, and expand what partners can deliver. To summarize the quarter, as mentioned earlier, fourth quarter, twenty five, Conversational AI revenue grew over 50% year over year. Now let's start with, the leading line which is the Voice AI Connect Live Hub line. This discussion focuses and revolves around the conversational AI platform market and the emerging voice AI agent sector, which gained significant traction over the past two years. Leading research firms estimate that the market for Voice AI agent will reach between $8 billion to $15 billion by 2028, with expectation that it will double by 2030. Regarding our business activities, both Voltia Connect and the Live Lab business delivered robust results in the 2025. For the full year, this segment achieved growth exceeding 50% compared to 2024, This strong performance was driven by consistent acquisition of new clients across The US Europe, and APAC as well as considerable expansion within our existing customer base. Live Hub service or Voice CPaaS self-service cloud platform empowering voice board developers to build solutions such as conversational IVR, voice agents, agent assist, and real-time translation services. In late third quarter two thousand twenty five, we announced enhancement to the live app voice CPaaS offering notably the integration of newly developed voice AI agents. By year end two thousand twenty five, Live App experienced substantial increase in both number of developers and platform usage in minutes, while monthly recurring revenue approached a 150% increase compared to the fourth quarter in 2024. Notably, many existing VoiceThera Connect Live Hub customers have accelerated their consumption rates beyond the initial projections, reinforcing our belief that the adoption of Gen AI enabled virtual agent virtual an agent assist application is entering a phase of rapid growth. A significant achievement in full score '25 was securing an initial order with a tier one international carrier adopting our voice and eye connect service to support their call summarization solution. The deployment initially targets enterprise fixed line customers, with plans to expand to the entire mobile consumer and enterprise user base in late two thousand twenty six. We view this contract as an important entry point with substantial potential for further expansion as the service is scaled across current clients new use cases are developed. Shabtai Adlersberg: Now to Vocacy, I see. 1,000 agent range, recorded another quarter of strong revenue growth for both fourth quarter and full year. Revenue for the year grew over 55% compared to previous year. Thousand twenty five was very proactive in terms of progress in the VOCA business line. During the year, we have developed cooperation with regional channel channel partners as well as with global system integrators. Activity has been fairly positive. By now, VOCA CIC has more than 200 enterprise customers worldwide We saw extremely success. We are extremely successful in the education space. Especially in North America, UK, and other regions where Microsoft Teams is dominant in the vertical. We have now more than 15 universities accounts acquired in 2025. We have introduced new out of the box practical AI experiences such as agent insights, then AI receptionist, some of which extends beyond the Microsoft Teams installed base. We have productized an on prem survival version of Vocus AIC, to act as a backup in case of cloud outage. Key for quarter highlights include, extending our momentum in higher education market, not only in The US, but also outside The US. We can talk about a large university in South Africa. Selected CIC contact center as part of their overall Microsoft Teams UCCX deployment. Success. Another major win is successful launch scale enterprise deployment with a top five global BPO provider. During the call, we issued a press release highlighting the deployment of Vocus EC with Aptento on a deal one in the Pricor. The new conversational AI voice solution supports more than 500 concurrent AI voice agent for a large healthcare organization. And was delivered in just few weeks compared to typical three to six month deployment timeline for project of this scale. New product was introduced, Agent Insights, as discussed earlier, Ascor, we recently launched Agent Insights, which brings GenAI into the Vocus AIC platform. Agent insight provides contact center with customer customer customizable AI summaries, sentiment analysis, and one click CRM updates. Built natively in agent workflows. Looking ahead, we expect 2026 to be another year of strong revenue growth driven by continued traction in both direct sales and channel partnerships. Moving on to Meeting Insights Cloud Edition. Meeting Insights Cloud Edition maintained impressive momentum throughout this quarter. Seeing consistent increases in new customer acquisitions. Record numbers again achieved in metrics such as total meetings and unique active users, leading to substantial year over year monthly recurring revenue growth as of December 2025. This strong performance was driven by continued product innovation boosting demand both across wider markets and within custom workflow solution designed for specific verticals such as higher education, local governments, HR, finance, and more. Meeting Insights now works independently of any particular UC systems. Expanding its flexibility. In fourth quarter two thousand twenty five, support was added for Google Meet. And we do expect integration with Cisco Webex in the current quarter. That adding to the existing compatibility we have with Microsoft Teams and Zoom. These updates enable GenAI meeting summaries for interactions on a major UC platform so I'll listen in person. Meetings. Beyond allowing customers to customize prompts, for their precise requirements, the platform now offers prebuilt templates created for specific enterprise roles and persona. Including those in legal and HR. This feature is expected to further streamline how efficiently customers can extract useful insights from meetings. Additionally, the platform's mobile app enables on demand recording, action item management, meeting preparations, and chat based search of meeting records. Its features make the meeting user mobile app essential for daily office operations. Now to another derivative of the meeting inside solution, which we call mia OP, mia on prem. Let's talk first about the cloud repatriation trends emerging. The proportion of businesses planning to retain users on premise jumped from 5% to 15% over two years. Driven primarily by data sovereignty concerns in European markets. And regulated sectors such as legal, finance, and defense. Even cloud committed enterprise now scrutinize where data is hosted and processed. This trend validates hybrid deployment capabilities and position data read residency controls as competitive differentiators. Countering pure cloud narrative that dominate previous market cycles. In fourth quarter twenty five, we continue to make good progress with the newly introduced MiaOP solution. With growing number of wins in the government and defense market in Israel. Positioning the business line to account for a growth in our conversational AI segment in 2026. Following last quarter, Israeli Nimbus contract award which streamlines procurement to form meeting intelligence services for all Israeli government ministries and agencies. We have already signed one first deal, and currently, I have several more additional proof of concept engagements across various ministries. We also received Nimbus care five approval, certifying that our solution meets the highest standard of security and compliance standards under the NIMBUS Israel and NIMBUS framework. We expect this designation to expand both the number of agencies we can serve and the range of services we can provide. The MeLP solution supports currently the English and The US English and Hebrew languages. We expect to substantially grow that number of supposed languages to tens basically, already in this first quarter. So we we expect deployment of MeiLP in more countries already in the second quarter and beyond. So to wrap up my presentation, we exit 2025 good operational momentum. The connectivity business has stabilized in second half of the year. Voice AI business grew 35% on a yearly basis. And about 50% in the second half of the year. With the continued pace of investment in our life managed services activity, and in the voice AI area, we expect continued momentum in 2026 and beyond. And I'd like to move over the call to the Q&A session. Operator: Thank you. Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is 1 to ask a question. One moment, please, while we poll for questions. Your first question for today is from Joshua Reilly with Needham and Company. Joshua Reilly: Hey, there. Thanks for taking my questions. Maybe just starting off on the updated financial targets for conversational AI growth through 2028. Is the 40 to 50%, annual growth, is that intended to be a CAGR growth rate? Through 2028. And then along with that, should we think about the primary driver being customer growth or higher spend per customer driving that conversational AI growth. So you expect to get a lot more new customers, or sell more of the new conversational AI products to existing customers? Shabtai Adlersberg: Right. Thank you, Joshua. Yeah. Actually, we're looking for both. You know, as I've mentioned before, several of our conversational AI, you know, this voice application rich mature rich maturity in 2025, which really says that we we just started out with, you know, you know, few hundreds of of customers. We expect that this number will grow substantially as we adding more capabilities and more features. And, also, investing our sales operations. You know, I would say that in 2025, our sales ability was was a bit restrained simply because we didn't want to move too quickly into the cells phase without having a more mature, more complete product. Now we feel fairly confident with you know? And and we get the feedback from customers. So, yes, the number of potential customers should grow I would say I'll use the word using usually. It will grow dramatically, I expect. In certain areas. Also, you know, do you to the addition of new capabilities and new features, we do expect that per customer you know, expand on our solution will grow simply because we intend bring more capability. So, yeah, growth should come from both. And and I'll tell you that I'm talking now about 50% growth, but as as we talk, you know, there are new application popping up you know, on a weekly basis talking to customers. And, again, our ability to combine our vast telephony capabilities with the very large investments we made in, conversational AI. Just to give you a data point, You know, we we are known to be a company that investing, you know, rich in R&D out of about thousand employees. We have 350 employees, doing R&D work. We are moving fastly into moving, you know, big portion of that R&D force into Voice AI. So while we when we started out back in 2010, we had only about 40 to 50 employees on this line. Now we have a 150 out of those 350 employees. So all in all, big investment. We see success. That gives us all the reason to continue to invest and and and believe in growth such as you know, 50%, and it could be more. Joshua Reilly: Gotcha. And then you mentioned there's been a shift in market expectations around AI. Can you just help us understand how is that maybe positively impacted your pipeline visibility and size now that we're moving past the kind of a testing phase for customers with some of these voice AI products and now moving into broader adoption. Do you feel that your pipeline visibility and size, is improving and increasing? Shabtai Adlersberg: Yes. As I've mentioned, you know, we are increasing our sales force. We're spreading our operation into more countries. Some of these application are fairly you know, easy to use, you know, SaaS application that you know, a company can test, do a proof of concept for thirty to sixty days and then moving into production. And with some of the more complaint compelling capabilities we're bringing to the game, we do have better visibility compared to take networking deals or connectivity deals is you you know, being being larger, but still, you know, usually takes essentially more time could turn to be anywhere between three months to nine months. Joshua Reilly: Gotcha. And then last question for me is, how should we think about any impact from tariffs to the 2026 financials and gross margin and any other items to be considering regarding tariffs in 2026? Thank you. Shabtai Adlersberg: Right. Right. So gross margin, we believe, will step up simply because our products you know, mix of products will turn substantially more into software and services. We do expect to keep that range of 65 to 68%, you know, operating margin. I'm sorry, gross margins. And yeah, gross margin. And then I'm sorry. What was the second one? Yeah. The tariff was about $2.7 million in 2025. We currently estimate it to be a bit lower, you know, probably around $2.3 million in '26. Joshua Reilly: Thank you. Shabtai Adlersberg: Sure. Operator: As a reminder, if you would like to ask a question, please press 1 on your telephone keypad. We have reached the end of the question and answer session. And I will now turn it over to Shabtai for closing remarks. Shabtai Adlersberg: Thank you, operator. I'd like to thank everyone who attended our conference call today. With continuing good business momentum in our live managed services operations, continuing growth in our voice AI business. We believe we are on track to grow revenue profitability next coming years. We look forward to your participation in our next quarterly conference call. Thank you all. Have a nice day. Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Ruth: Good morning. My name is Ruth, and I will be your conference facilitator. At this time, I would like to welcome everyone to Two Harbors Investment Corp.'s Fourth Quarter 2025 Financial Results Call. All participants are in a listen-only mode. After the speakers' remarks, there will be a question and answer period. I would now like to turn the call over to Margaret Field Karr. Margaret Field Karr: Good morning, everyone. And welcome to our call to discuss Two Harbors Investment Corp.'s Fourth Quarter 2025 Financial Results. With me on the call this morning are William Ross Greenberg, our President and Chief Executive Officer, Nicholas Letica, our Chief Investment Officer, and William Dellal, our Chief Financial Officer. The earnings press release and presentation associated with today's call have been filed with the SEC and are available on the SEC's website as well as the Investor Relations page of our website at 2inv.com. In our earnings release and presentation, we have provided reconciliations of GAAP to non-GAAP financial measures, and we urge you to review this information in conjunction with today's call. As a reminder, our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are described on page two of the presentation and in our Form 10-Ks and subsequent reports filed with the SEC. Except as may be required by law, Two Harbors Investment Corp. does not update forward-looking statements and disclaims any obligation to do so. I will now turn the call over to William Ross Greenberg. William Ross Greenberg: Thank you, Maggie. Good morning, everyone, and welcome to our fourth quarter earnings call. I'm very excited to be able to speak to you all publicly for the first time about our recently announced merger with United Wholesale Mortgage. The rationale for this transaction should be familiar to most mortgage market participants and observers and was especially fitting given our own history as a company. So let me take a step back and describe why I say that. We are one of the first, if not the first, mortgage REIT to invest in MSR as part of our asset mix. Obtaining our GSE approvals and state licenses to own and manage MSR and then buying our first pool in 2013. We started out using third-party subservicers to service the assets. As our servicing portfolio grew to a certain scale, it became clear to us that we can extract even more value from the asset and increase returns by bringing the servicing in-house. Which we did in 2023 through our acquisition of Roundpoint. The last several years, really post-COVID, have highlighted the need for investors to be able to protect their MSR portfolio by providing recapture capabilities. Hence, we spun up a direct-to-consumer lending platform in 2024. However, in 2025, the mortgage finance landscape shifted again, scale becoming more important than ever. It became clear to us that in order to succeed and compete effectively, our origination effort needed to be much, much bigger. This merger brings us together with the number one mortgage originator in the country in UWM and doubles the size of the MSR portfolio to a pro forma $400 billion. UWM, in turn, also benefits from our expertise in capital markets and asset management, and they can leverage Roundpoint's best-in-class and low-cost servicing capabilities. In many ways, this transaction is the culmination of the business plan that we've been aiming at for some time. And it creates, I believe, a very powerful strategic alignment and positions the combined company for accelerated growth and enhanced outcomes. Which should deliver meaningful upside to shareholders. Now please just turn to slide three. Our investment portfolio performed well as mortgage assets significantly outperformed their hedges, and our low coupon MSR continued to behave as it was designed to do. Earning its carry. For the fourth quarter, we generated total economic return of positive 3.9%. For the full calendar year 2025, we generated a total economic return on book value of negative 12.6%. So if you exclude the previously recorded litigation settlement expense of $3.50 per share, we returned a positive 12.1%. Mortgage assets have thus far continued to outperform into the first quarter. Driven in part by increased GSE buying and announcements from the administration committing to buying significant sizes of MBS. In situations like this, we take the administration's clear desire for lower mortgage rates at face value. And we recognize the possibility that they will ultimately succeed and create increased mortgage and origination activity in 2026. One question that we've heard from investors is around our securities portfolio. And if, following the merger, we intend to liquidate the portfolio. In the short term, the answer is that we intend to manage our business in the ordinary course. Looking further out, I would say that while no decisions have been made yet, we will be thoughtful about how we proceed. There are some paths that lead to selling some or all of these assets over time, and there are other paths where the combined company will need many or even more than our existing TBA and specified pool positions. These are still early days with respect to the merger, so when those details are more clear, we will be sure to update you. Please turn to slide four. Performance across fixed income was positive in the fourth quarter. The release of major conventional economic indicators was severely interrupted by the federal government shutdown. Leaving the Fed and market participants without key data often used to assess the economy. Despite this and in line with market expectations seen in figure one, the Fed still delivered two twenty-five basis point cuts in October and December. As a result, and as you can see in figure two, the yield curve steepened with two-year treasury yields down 14 basis points to 3.47%. While ten-year treasury yields rose by two basis points to 4.17%. Returning the yield curve to its steepest level since January 2022. Equity markets continue to react positively to the Fed cuts, with the S&P 500 up by 2.3% at quarter end. After setting all-time record highs earlier in the quarter. Please turn to slide five. We settled on the sale of an additional $10 billion of MSR out of our portfolio. Increasing our total third-party subservicing to $40 billion at year end, compared to $30 billion at the end of the third quarter. While reducing our total owned servicing to approximately $162 billion from $176 billion in the prior quarter. Despite its small size, our DTC platform is punching above its weight and had a record quarter funding $94 million in first and second liens. A 90% increase from the third quarter. At quarter end, we had an additional $38 million in our pipeline, also brokered $58.5 million in second liens in the quarter which is nearly unchanged quarter over quarter. Looking ahead, we are confident that the partnership with UWM will bring the benefits we have envisioned from increased scale. And we believe this merger is extraordinarily positive for our company and for our shareholders. Now I'd like to hand the call over to William Dellal to discuss our financial results. William Dellal: Thank you, William. Please turn to slide six. Our book value increased to $11.13 per share at December 31, compared to $11.04 per share at September 30. Including the 34¢ common stock dividend, this resulted in a positive 3.9% quarterly economic return. Please turn to slide seven. The company generated comprehensive income of $50.4 million or 48¢ per share. Net interest and servicing income, which is the sum of GAAP net interest expense and net servicing income operating costs, decreased as a result of MSR sales and lower float income. Float income decreased largely as a result of lower interest rates, and end of year seasonals that lowered balances. The net overall decline in portfolio asset yields was offset by lower financing costs. Mark to market gains and losses were lower in the fourth quarter by $15.5 million due to MSR portfolio runoff and the both steepening in rates. You can see the individual components of net interest and servicing income and mark to market gains and losses on appendix slide 20. Please turn to Slide eight. On the left-hand side of this slide, you can see a breakdown of our balance sheet at quarter end. We ended the quarter with over $800 million of cash on the balance sheet. And in accordance with our previously disclosed plans, we repaid our convertible senior notes of $261.9 million in full on their 01/15/2026 maturity date. RMBS funding markets remain stable and available throughout the quarter, with repurchase spreads at around SOFR plus 23 basis points. At quarter end, our weighted average days to maturity for agency RMBS repo was fifty-four days. As a reminder, our days to maturity are typically lower at December 31, as we intentionally roll repos in the third quarter past year end to avoid any disruption in funding that can sometimes occur. We finance our MSR including the MSR assets and related servicing advance obligations, across five lenders. With $1.6 billion of outstanding borrowings under bilateral facilities. We ended the quarter with a total of $1.1 billion in unused MSR asset financing capacity. We have $71.5 million drawn on our servicing advances facility. With an additional $78.5 million of available capacity. I will now turn the call over to Nicholas Letica. Nicholas Letica: Thank you, William. Please turn to Slide nine. Our portfolio performed well in the fourth quarter as both MSR and RMBS returns benefited from the decline of interest rate volatility. Together with strong demand for spread assets. At December 31, the portfolio was $13.2 billion including $9 billion in settled positions and $4.2 billion in TBAs. Our primary risk metrics quarter over quarter were not materially different. Our economic debt to equity was slightly lower at seven times. And our portfolio sensitivity to spread changes marginally increased from 2.3% to 3.7% if spreads were to tighten by 25 basis points. We kept interest rate risks low in aggregate and across the yield curve. You can see more details on our risk exposures on appendix slide 17. Please turn to slide 10, The trend of lower interest rate volatility continued throughout the fourth quarter. Resulting in the one-month realized volatility of ten-year swap rates falling into the bottom fifth percentile over the past decade. Dragging implied volatility down as well. As you can see in figure one, two-year options on ten-year swap rates shown by the green line closed the quarter at 79 basis points. Four basis points below its average level over the past ten years. RMBS spreads responded very positively to decline in volatility, the steepening of the yield curve, and the prospect of strong demand in 2026 primarily from banks, REITs, and the GSEs. The nominal spread for current coupon RMBS tightened by 30 basis points to a 114 basis points of the swap curve. While option adjusted spreads relative to SOFR finished 23 basis points tighter at 45 basis points. As shown by the purple and blue lines respectively. This decline in current coupon nominal spreads brought mortgages to their tightest level since the 2022. Figure one includes data up to January 29, and as you can see, spreads have continued to tighten further into this quarter. It wasn't just current coupon mortgages that outperformed. Spreads across the coupon stack, both on a static and option adjusted basis, shifted lower as you can see in figure two. Please turn to slide 11 to review our Agency RMBS and specified pools we owned throughout this quarter. Figure one shows the performance of TBAs Hedged RMBS performance was positive across the thirty-year coupon stack. With the best performance in 4.55% coupons, where we have our largest pool exposures. Notably, the hedge performance of RMBS was aided by the widening of swap spreads. Which have made up over 75% of our hedges. To give a sense of magnitude, ten-year swap spreads widened by 13 basis points to an eighteen-month high. Our pass-through position was largely stable quarter over quarter. However, although we continue to like the sector and the carefully selected prepayment protected collateral behind our bonds, we reduced our inverse IO position by almost 50% to reduce our exposure to higher coupons. Primary mortgage rates drifted a little lower over the quarter, stabilizing around 6.25%. The share of the universe of thirty-year loans eligible for refinance returned to nearly 20% for the first time in years, And as we had anticipated, speeds for refinanceable coupons continued to increase. The prepayment s-curve steepened back to a more regular shape associated with periods when a larger share of mortgages are refinanceable. Such as in late 2019. Figure two on the bottom right shows our specified pool prepayment speeds by coupon. Which on aggregate increased only very slightly to 8.6% from 8.3% CPR coming from increases in speeds from five and a half coupons and higher. That said, the CPR increases on our pools were small and in line with our expectations, evidencing the value of careful pool selection. Please turn to slide 12. You can see in figure one the volume of MSR available in 2025 declined from prior years. The market continues to be well subscribed with strong demand from originators as well as bank and non-bank portfolios competing for greater scale in MSRs. Indeed, as William said, scale has become increasingly important for mortgage companies to compete in the MSR market. The merger of Two Harbors Investment Corp. and UWM will result in a combined company that is positioned for accelerated growth and has the ability to compete effectively in this market. Figure two shows that with mortgage rates at their current level of around 6.25%, only about 3% of our 5%, the portion of our portfolio in the money would rise to about 9%. Given that the current administration in Washington is focused on policies to stimulate the housing market and increase homeownership, we anticipate that home prices will continue to rise and housing turnover will trend higher from its current historically low levels. Please turn to slide 13. Where we will discuss our MSR portfolio. Figure one is an overview of our portfolio at quarter end. Further details of which can be found in appendix slide 23. In the fourth quarter, we settled about $400 million UPB of MSR from flow acquisitions and recapture. And we sold $9.6 billion UPB on a servicing retained basis. The price multiple of our MSR was consistent quarter over quarter at 5.8 times and sixty-plus day delinquency remained low at under 1%. Figure two compares CPRs across those implied security coupons in our portfolio of MSR versus TBAs. Quarter over quarter, our MSR portfolio experienced a minor 0.4 percentage point pickup in prepayment rates to 6.4%. Importantly, prepays have remained below our projections for the majority of our portfolio, which has been a positive tailwind for returns. Finally, please turn to Slide 14, our return potential and outlook slide. This is a forward-looking projection of our expected portfolio returns, which takes into account the repayment of the $262 million of convertible notes that occurred in January. We estimate that about 65% of our capital allocated to servicing with a static return projection of 10 to 13%. The remaining capital is allocated to securities with a static return estimate of 10 to 14%. With our portfolio allocation shown in the top half of the table and after expenses, the static return estimate for our portfolio would be between 6.9% to 10.2% before applying any capital structural leverage to the portfolio. After giving effect to our unsecured notes and preferred stock, we believe that the potential static return on common equity falls in the range of 5.8% to 11.1%, or a prospective quarterly static return per share of $0.16 to $0.31. The reduction in return potential to quarter over quarter is driven primarily by the large tightening of RMBS spreads and the sales of inverse IOs. Since quarter end, the announcement of explicit support for MBS spreads from the FHFA director has led to more spread tightening. Spreads for agency RMBS have now fully retraced their widening over the past three-plus years leaving spreads historically rich on some measures, like treasury-based OAS, for example. To fair versus swaps in periods when the GSEs have been active. As RMBS spreads have normalized, the potential for more tightening resulting book value benefit of holding RMBS has been significantly reduced. That said, continued GSE buying and or other future policy aimed at supporting mortgage spreads could keep spreads tight and limit their widening and risk-off scenarios. Given all that, we believe that this environment favors our paired portfolio construction of MSR and Agency RMBS, which has less exposure to fluctuations in mortgage spreads. We expect that demand for MSR will remain strong among the origination and communities. Though RMBS spreads have tightened, the paired construction of our low mortgage rate MSR with RMBS generates attractive risk-adjusted returns, with lower expected volatility than a portfolio of RMBS hedged with rates. Thank you very much for joining us today, and now I'll be happy to take any questions you might have. 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. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. We'll pause for just a moment. We'll go first to Richard Barry Shane with JPMorgan. Richard Barry Shane: Thanks, guys, for taking my questions. And congratulations on the announcement. I am curious as we sort of move through this period tactically how you think about portfolio construction. I realize that you guys continue to and need to, from a governance perspective, operate as an independent company. But obviously, there are strategic reasons for the acquisition. Is that shifting your tactical allocation of capital in any way as you construct the portfolio? Into year-end? Is that one of the other factors that's impacting your static return outlook? William Ross Greenberg: Yeah. Good morning, Rick. Thanks for the question. No. I think you put your finger on it. We're as an independent company. We're managing our portfolio as we normally would in the ordinary course. You know, the changes you've seen in the portfolio have been in response to market assessments of risk and reward. And we're continuing to manage the portfolio as we ordinarily would and do. And the investment decisions that we're making are in line with the way that we have always historically managed the portfolio. Richard Barry Shane: Got it. Okay. Thank you. And then I must have gotten up especially early today because I'm first in queue. I don't think I heard you talk about an update on book value, but I get to ask the question this time if so where is book value most recent mark? Nicholas Letica: Hey, Rick. This is Nick. You know, it's good that you got the opportunity to ask that question this quarter. We are up about 1.5% to 2% as of Friday, January 30. Richard Barry Shane: Terrific. Thank you, guys. William Ross Greenberg: Thanks, Rick. Ruth: We'll go next to Douglas Michael Harter with UBS. Douglas Michael Harter: Thanks, and good morning. Hoping you could just talk about, you know, how you're thinking about leverage, Nick, given your comments around kind of the MBS market, and just how interested you would be in continuing to kind of add at these spreads, given the crosscurrents that you mentioned and just overall, you know, your view on risk-reward? Nicholas Letica: Hey, Doug. Sure. As you alluded to from my comments, the, you know, the administration has made it pretty clear that they want to do what they can to try to tighten spreads in this environment. And potentially as well reduce mortgage rates. So, you know, we have become a little more defensive quarter as a result of that and then just the general movement in spreads. If you look at where spreads are now, historically, I think you can say that they are, you know, at, you know, I think you definitely say there's symmetric, you know, in terms of risks. You might even say they're asymmetric in terms of the amount of, you know, widening versus tightening in here. You know, that being said, there is, you know, there are things that the administration can do that have been, you know, have been widely discussed, for example, raising the caps that the GSEs have on their portfolio, which they can do without, you know, congressional input and other measures to continue to drive the mortgage spread tighter or just limit it from a risk perspective of widening. So it is very much of a dual-edged sword. We have decided, and our portfolio construction being what it is, we do like the paired construction overall, as you know, and it depends less on betting on which way spreads are gonna go and more about just putting together a hedged portfolio that extracts the spread of the combined assets. So that's what we're really focused on. But we have reduced our leverage a little bit this quarter and as well as our mortgage risk. Douglas Michael Harter: Appreciate it. Thank you. Ruth: We'll go next to Bose Thomas George with KBW. Bose Thomas George: Hey, guys. Good morning. Actually, what do you think are the chances of an LLPA, you know, guaranteed fee reduction at the GSEs? And, yeah, how is the agency market kind of viewing that possibility? Nicholas Letica: Hey, Bose. I think there's a reasonable reduction. There'll be some reasonable chance that there will be some changes on the LLPA grid. And I think it's somewhat priced into the market, but not entirely. There are a lot of, there's a lot of optionality, I think, now in terms of the policy actions that could be done. And, you know, it's a lot for the market to digest. So it's hard consequently to fully understand whether just an LLPA change is being baked in or not. But I think there has been some amount of discounting of that. Bose Thomas George: Okay. Great. And then, actually, in terms of the MSR market, have you seen any changes in sort of bank interest or activity just given it looks like the capital rules there, you know, might make it a little more favorable for them to hold on to MSRs? Nicholas Letica: I can't say that we've seen anything notable about that. Overall, all I can say is that the interest in the MSR market continues to be rock solid and strong. So from our perspective, we haven't seen anything particularly new that we have not seen in the past, you know, year or two. Bose Thomas George: Oh, okay. Great. Thanks. Ruth: We'll go next to Trevor John Cranston with Citizens JMP. Trevor John Cranston: Hey. Thanks. A question on the perspective return outlook. Could you maybe give us an update on kind of where you would see those levels today subsequent to the additional spread tightening that we've seen in January? And maybe comment on if there's any kind of near-term read-through from where you're seeing perspective returns to sort of how you're thinking about the appropriate dividend level in the near term? Thanks. Nicholas Letica: I'll talk about the hey, Trevor. Thank you for the question. I will talk about your first part and I'll let William discuss the dividend part of it. Yes, so spreads are tighter since we published this at the December. So it would be reasonable to expect that our dividend levels would be in a little marginally from where they were back then on the December 31. You know, we see spreads overall as being on our whole portfolio of being in maybe about five basis points or so. So that will have an effect of lowering our dividend marginally. William Dellal: Good morning, Trevor. On the dividend, obviously, we'll go through the normal routine of deciding that later in the quarter. Together with the board. I will say still young in the quarter, so it's too early to say what the trend will be on the dividend. Nicholas Letica: And sorry, I realize I just misspoke at the end of my I said lower the dividend. It's not what I meant to say. Lower the return potential marginally. Trevor John Cranston: Yeah. I assume. But thank you for the clarification. And then I guess the second question, you know, since the news came out about the GSE buying, you know, it seems to have had a, you know, kind of a varied impact on the various coupons. Can you say if you guys have had any kind of material changes with your coupon exposures so far in January and sort of how you're thinking about the coupon stack? In light of the initial announcement and the potential for kind of additional announcements aimed at targeting mortgage rates? Thanks. Nicholas Letica: We haven't changed it materially. We have lowered our mortgage exposure overall to some degree. I think there are two effects that are going on. I think the GSEs if, you know, if I were implementing this and you wanna be effective lowering the mortgage rate, lowering current coupon spreads, you would buy current coupons. So I think that there is a natural that's, like, where I would imagine that the GSE buying is focused. You know, commensurate with that, I think we have we've seen a fair amount of down in coupon trades coming out of, you know, various entities, including money managers that haven't, you know, materially lowered their allocation yet to mortgages, but do seem to have gone down in coupons. So thus far on the year, we've seen the biggest positive effect on the lower coupons. Followed by current coupons. And then the higher coupons have actually widened a little. We've seen, you know, quite a bit of expansion of the coupon of the sorry, contraction of the coupon stack. As you go up, you know, some of the higher coupons are actually now wider, you know, on the year. Trevor John Cranston: Appreciate the comments. Thank you. Ruth: Our next question comes from the line of Harsh Hemnani with Green Street. Harsh Hemnani: Thank you. So we've obviously discussed the GSE buying and its impact on spreads, but one of the other things that's justifying spreads today is how low the volatility is. Maybe there's a few events upcoming on the calendar, particularly with, you know, a new federal reserve the middle of this year, you know, how would you expect any, I guess, uncertainty or changes in policy on that front to first off, impact the volatility and then also funding markets for agency MBS. Nicholas Letica: Hey, Harsh. Very good question. I can't say I really have a firm answer. I mean volatility is drifted back to being on the historically low side. We have had periods where been lower than it is right now. As you mentioned, we have, you know, new nominee for the Fed chair. And, you know, it'll take a little bit of time to fully assess what he wants to do at the Fed, and also we'll take him some time likely to develop, you know, the consensus to make that happen. So I mean, I would expect that we might see a mild amount of increase in volatility as a result of that. You know? And, you know, and we're still in an environment where from a, you know, macro perspective, the economy seems to be humming along, but inflation is still running a little hotter than I think the Fed would like. And, you know, it's not clear where those paths are gonna settle out here. So it would make sense that volatility would pick up a little bit, and, you know, that's a little bit of our overall thesis of being a little more defensive here on mortgage spreads. That, you know, vol has kind of drifted historically low in there could be some things that kick it off. It's always hard to say ahead of time what's gonna be the catalyst to make that happen, but it's reasonable to think that we could be in for a little bit of a higher level of volatility. What was the second part of your question? I'm sorry. Harsh Hemnani: Oh, funding markets. Any impacts on agency funding markets? Nicholas Letica: We haven't really seen much of an impact on funding markets. I mean, there's been a few people that postulated that that could be one of the things the administration does or the Fed does to try to lower funding rates for mortgages and other spread assets. To drive that tighter. That's possible. But, you know, at funding markets, it's been stable, we don't really see any disturbance on the horizon on that front. Harsh Hemnani: Got it. And then maybe on the hedge portfolio front, it feels like you moved a little bit heavier into the shorter duration hedges. Any thoughts on what's driving that and how that could evolve going forward? Nicholas Letica: No. I mean, I would say that we, you know, we've continued to have a little bit of a curve steepening bias in the portfolio. It has not been big. I think there's still reasons to believe that curve could steepen further here. So, no, I don't, you know, we can talk about it more specifically. You know, offline. But I don't see us as having shifted our hedges very much in that way. Harsh Hemnani: Thank you. Ruth: Our next question comes from the line of Eric Hagen with BTIG. Eric Hagen: Hey. Thanks. Good morning. Do you guys have a rough breakdown of the channel mix for your current MSR portfolio? Like, what percentage were originated in the broker channel versus the retail channel? And how do you guys feel like the origination channel impacts the prepayment behavior of your portfolio? William Ross Greenberg: Good morning, Eric. Thanks for the question. I don't have those at my fingertips here. You know, we've been, you know, over the years active buyers both across flow and bulk channels. And, you know, they do have different prepayment characteristics, and we attribute different prices to those loans and those characteristics. And so, you know, whatever differences there are in prepayment behaviors are generally reflected in the prices at which we acquire them at. Right? And so all of that is incorporated into the way that we manage the portfolio. They don't have the specific numbers of what's broker versus retail versus a correspondent handy with me right now. Eric Hagen: Got you. Okay. Know, some recent commentary from other originators noticed noted that the GSE cash window has been more active as a delivery execution channel for community banks and small retail originators. Are you guys seeing the same thing? And how do you guys feel like the cash window impacts volatility and MSR valuations in the market? William Ross Greenberg: I think that the MSR market is reasonably diversified in terms of the products that are coming to market and so forth. And those are affected in the price. We continue to see robust MSR demand. Volumes in the MSR market are lower than what they have been in recent years. We have a chart in the deck on that. And so, you know, I think this is just a normal MSR environment. As we're changing regimes to lower supply than what we've seen in the past. Eric Hagen: Got it. But does the GSEs being active with the cash window, is that a reflection of MSR valuations? In any way? William Ross Greenberg: No. I don't think so. Eric Hagen: Okay. Thank you guys for the comments. William Ross Greenberg: Thanks, Eric. Ruth: This concludes today's question and answer session. I would like to turn the call over to William Ross Greenberg for any additional or closing comments. William Ross Greenberg: Just like to thank you all for joining our call today. As we said in the earlier prepared remarks, we view the merger with UWM to be extremely exciting. And we expect that it's going to deliver meaningful upside for our shareholders. Have a great day, and look forward to speaking to you all again soon. Ruth: This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Good morning and welcome to the Broadridge Financial Solutions, Inc. Fiscal Second Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, press star then two. Please note this event is being recorded. I would now like to turn the conference over to Edings Thibault, Head of Investor Relations and Corporate Communications. Please go ahead. Edings Thibault: Thank you, Drew, and good morning, everybody. Welcome to Broadridge Financial Solutions, Inc.'s second quarter fiscal year 2026 Earnings Conference Call. Our earnings release and the slides that accompany this call may be found on the Investor Relations section of broadridge.com. Joining me on the call this morning are Timothy C. Gokey, our Chief Executive Officer, and our Chief Financial Officer, Ashima Ghei. Before I turn the call over to Timothy C. Gokey, I want to make a few standard reminders. One, we will be making forward-looking statements on today's call regarding Broadridge Financial Solutions, Inc. that involve risks. A summary of these risks can be found on the second page of the slides and a more complete description on our annual report Form 10-Ks. Two, we'll also be referring to several non-GAAP measures, which we believe provide investors with a more complete understanding of Broadridge Financial Solutions, Inc.'s underlying operating results. An explanation of these non-GAAP measures and reconciliations to the comparable GAAP measures can be found in the earnings release and the presentation. Let me now turn the call over to our CEO, Timothy C. Gokey. Timothy C. Gokey: Thank you, Edings. Good morning. I'm delighted to be here this morning to discuss our strong second quarter results and provide an update on some of our strategic initiatives. Entering the second half of our fiscal year, the market backdrop remains positive. U.S. equity markets rose 16% in calendar 2025, and they largely remained strong in January. Our clients are clearly benefiting from strong capital markets activity, and so are we. I'm especially excited to be here today because the accelerating pace of technology and a pro-innovation regulatory agenda are together creating exciting change. And Broadridge Financial Solutions, Inc. is uniquely positioned to help our industry drive innovation at scale. A few examples: Tokenization continues to gain steam across capital markets, wealth, and asset management. In shareholder engagement, a quiet revolution is transforming how funds and public companies engage shareholders and manage proxy. Digital communications are driving down the cost of interacting with shareholders and increasing investor engagement. And of course, AI is enabling all this at a faster pace. These are the kinds of transformational changes we have built Broadridge Financial Solutions, Inc. to address. And our ability to drive innovation at scale is creating opportunity for the future even as it translates into results today. So let's dig into those results. Starting with the headlines on page three. First, Broadridge Financial Solutions, Inc. delivered a strong second quarter including 8% recurring revenue growth constant currency and adjusted EPS of $1.59. Second, we continue to execute on our strategy to democratize investing, to simplify and innovate trading, and to modernize wealth management. We're beginning to see positive incremental impacts from delivering new forms of shareholder engagement, extending our omni-channel digital capabilities, and driving tokenization across governance, capital markets, and wealth. All enhanced by our platform and AI capabilities. Third, we remain committed to balanced capital allocation to drive shareholder value. We are on track to deliver another year of 100% plus free cash flow conversion, which gives us ongoing flexibility to pursue additional compelling M&A opportunities while returning capital to shareholders. Fourth and last, we remain on track to deliver strong results in fiscal 2026 and beyond. We are reaffirming our 2026 guidance for recurring revenue growth, margins, and closed sales, and we are raising our outlook for adjusted EPS growth to 9% to 12%. That outlook keeps us on track to deliver on our three-year top and bottom line objectives. Let's move to the drivers of those results on Slide four. Starting with our Governance business, where we continue to drive the democratization and digitization of investing. Governance recurring revenues rose 9% constant currency driven by revenues from sales and continued position growth. Investor participation trends remain healthy across both equities and funds. Total equity position growth remained strong at 17%. Revenue position growth was 11%, driven by growth in managed accounts. Looking ahead, we're seeing low teens position growth for the second half, which should drive high single-digit growth in revenue positions. Fund position growth, which was hurt by timing in Q1, strengthened as expected from 2% in Q1 to 15% in Q2. Looking through the timing noise, fund position growth was 8% for the first half. Looking ahead, we continue to see fund position growth for the year trending in the mid to high single digits, in line with H1. We've also seen higher than expected event-driven activity across both fund elections and corporate events, which gives us the opportunity to accelerate our innovation roadmap for the benefit of our clients and our shareholders. Beyond position growth, our business is benefiting from our investments in innovation, starting with what we are calling a quiet revolution in shareholder engagement. This coming proxy season, we expect more than 600 funds covering $4 trillion of assets to use our voting choice solution, up from 400 funds and $2 trillion last year. Fewer than 100 funds two years ago. We are also rolling out our AI-native policy engine and vote implementation capabilities for institutional investors like JPMorgan and Wells Fargo who are seeking to reduce their reliance on proxy advisers. This is a powerful example of how our AI capabilities are enabling new revenue. And we continue to build on our pilot program first launched with ExxonMobil, to enable retail shareholders to provide standing voting instructions for annual meetings. We also continue to make progress in driving the digitization of communications, closing a significant sale to extend our flagship wealth and focus platform to cover a million additional accounts. I'm also excited to note the rapid progress we are making in addressing the tokenization opportunity in equities. I said on our last call that we see tokenized equities as an opportunity for Broadridge Financial Solutions, Inc., and recent client and industry conversations have only reinforced that conviction. The last several weeks have seen announcements by the major exchanges and the DTCC on their plans to build tokenized trading capabilities for equities, as well as announcements by issuers themselves of tokenized equity offerings. As tokenized equities scale, providers will need to ensure they meet the same governance and disclosure requirements as traditional equities. And for real liquidity, the market will need to access broker-dealers who are our core clients even as we increasingly serve new intermediaries as well. For both, the challenge is to gather communications from every issuer and fund, distribute them accurately according to clients' preferences, take back and reconcile votes, and ensure regulatory requirements are met and that proxy voting is accurate, transparent, and documented. And that's our core competency. And for issuers, while tokenized equities enable real benefits, they also represent new complexity. Issuers will now have registered shares, beneficial shares, and potentially tokenized shares across multiple models of tokenization and multiple layer one networks. The opportunity for Broadridge Financial Solutions, Inc. is to simplify that complexity for brokers and platforms, issuers, investors, and regulators, just like Broadridge Financial Solutions, Inc. simplifies that complexity in traditional models today. To make this happen, we expect to integrate tokenized and digital assets into our proxy capabilities by the end of this year. From there, we'll extend those capabilities to include other parts of the servicing model, including corporate actions and disclosures. We'll also extend those solutions to digital wallets, to create a seamless client experience regardless of where investors hold their equities and other tokenized assets. Since our last update, we have talked to and worked with dozens of clients, regulators, and industry partners. Feedback from them on our roadmap has been universally positive. There is a clear market need, and we are stepping into it, ensuring that governance complexity does not inhibit market growth. And as we open the market to new investors and new products, that will drive additional position growth, just as innovation has done in the past. I'll close my review of governance by noting that we also continue to strengthen our business with M&A. In early January, we closed the acquisition of Acler, which will augment the suite of services we offer to funds in Europe across their life cycle, from creation and registration to ongoing distribution. The acquisition of Acler, like the tuck-in deals we completed earlier this year for iJoin and Signal, extends our product and geographic reach. Turning next to capital markets, where we are simplifying and innovating trading. Recurring revenues grew 6% on a constant currency basis. Our capital markets business is benefiting from balanced demand across our front and back office solutions and from tokenization revenues, including the growing adoption of our distributed ledger repo platform and revenue from Canton Coin. Volumes on our market-leading DLR platform, distributed ledger repo platform, continue to grow as we add new clients. We tokenized $384 billion per day in December, or $9 trillion for the month. That's more than double where we were in June. As demand for our tokenized collateral solution grows, we are on track to launch a real-time repo capability in fiscal year 2026, which will incorporate Stablecoin to make repos a real trading and financing instrument and further scale volumes. I'm also pleased to note that we completed SOC GENS first digital bond issuance in the U.S. during the second quarter. This issuance highlights the flexibility and power of our DLR platform to tokenize a wide range of assets. So it should be no surprise to know that Broadridge Financial Solutions, Inc. will be extending our tokenization platform to other asset classes, including deposits, in fiscal 2027. Beyond DLR, we are also actively working to enable our primary trade processing engines to support digital assets alongside traditional assets by the end of fiscal 2026 across both capital markets and wealth management. And speaking of wealth management, recurring revenues grew 11% during the quarter, propelled by strong organic growth and the final month of M&A revenue from the acquisition of SIS. Our wealth platform continues to gain recognition in the marketplace and was recently named a leader in wealth management technology by IDC. That recognition is contributing to a growing pipeline of platform opportunities. I'll finish my review this morning with closed sales. After a slower start in Q1, I'm pleased to report that our sales momentum is picking up. Q2 closed sales rose 24% to $57 million. In addition, new pipeline generation, our measure of new sales opportunities, rose more than 20% over 2025, driven in part by the transformational opportunities I just mentioned. Clients are engaging with us on tokenization, shareholder engagement, and digital communications, as well as more traditional needs like preparing for T+1 in Europe and 23 by 5 trading in the U.S. Those conversations are driving multiple exciting pipeline opportunities and keeping us on track to deliver on our closed sales guidance. I'll close my remarks with a few key takeaways on Slide five. First, Broadridge Financial Solutions, Inc. is delivering strong results today, with 8% recurring revenue growth and adjusted EPS of $1.59 in the second quarter. More importantly, we are on track to deliver a strong fiscal 2026 with recurring revenue growth constant currency at the higher end of 5% to 7%, and adjusted EPS growth of 9% to 12%. And with this guidance, we're on track to deliver on our top and bottom line objectives for the three years ending this June, which will be the fifth consecutive three-year period in which we met our goals. Second, we're actively putting in place the building blocks for continued growth tomorrow. I started my comments this morning by calling out the shifts we are seeing in the services industry. In each of those areas, we are investing to create what we believe will be a significant opportunity tomorrow. We're leading in tokenized trading, and we're extending that capability to new uses and asset classes. As tokenized equities begin to emerge, we'll accelerate that adoption by addressing the full suite of proxy and other asset servicing needs so that tokenization platforms can focus on gathering assets, driving liquidity, and reducing trading costs. We're actively enabling the next generation of shareholder engagement. Asset managers and issuers are dramatically changing the way they interact with investors, equity owners, and fund owners, and Broadridge Financial Solutions, Inc. is enabling that change with a suite of new solutions. We're driving the next generation of digital communications. Our wealth and focus platform is already making communication between wealth managers and their clients more effective, more engaging, and less costly. And we're leveraging our strong AI and platform capabilities to rapidly build these and other new solutions while improving productivity. With our deep domain knowledge and critical role at the intersection of financial services, AI will both expand Broadridge Financial Solutions, Inc.'s opportunities and drive efficiency improvements. Third, given all these opportunities, we are managing our investments and capital wisely and with balance to deliver for shareholders today and tomorrow. We're leveraging the unexpected benefit of more event revenue to accelerate our roadmap in each of the key initiatives I just noted, even while delivering higher earnings. And we're carefully balancing capital allocation in light of strategic opportunities we see for both share buybacks and for strategic tuck-in M&A. With the pace of industry evolution starting to accelerate, Broadridge Financial Solutions, Inc. has never been better positioned to play a critical role in helping our clients grow and win. And I've never been more excited about the opportunities we have in front of us. Before I turn the call over to Ashima, I want to thank our Broadridge Financial Solutions, Inc. associates. We often talk about the importance of culture because we see firsthand how our focus on clients drives success and sets the stage for continued growth. With that client-focused culture and unprecedented depth in financial markets, our associates have been and are the key to making Broadridge Financial Solutions, Inc. the trusted and transformative partner for the financial services industry. Thank you. I also want to take a moment to thank Brett Keller, who will be leaving our Board in April. Brett has been an invaluable counselor for nearly eleven years, and we will miss his wisdom and insight. And I want to welcome Trish Moscone and our own Chris Perry to the Board. Trish brings a wealth of experience from senior consulting roles at both McKinsey and BCG and from senior executive positions at BlackRock and Synchrony. And Chris brings a long career in wealth, data, and financial services generally, along with intimate knowledge of Broadridge Financial Solutions, Inc.'s most important clients. Trish and Chris, welcome. Now let me turn it over to Ashima. Ashima? Ashima Ghei: Thanks, Tim. Good morning. It's great to be here with you today. I'll begin my discussion this morning with five key callouts. First, Broadridge Financial Solutions, Inc. delivered strong second quarter results. Second, we continue to benefit from elevated event-driven activity. We reported $91 million of event-driven revenues in Q2, which contributed to a record $204 million in the first half. As always, we take advantage of periods of elevated event-driven revenues to accelerate our long-term growth investment. And we are investing in key product initiatives around tokenization, shareholder engagement, digital communications, and in our core tech infrastructure. Third, we recorded a $187 million non-cash mark-to-market gain related to our digital asset holdings. Between our coin holdings and our stake in the digital asset treasury, the value of our digital asset holdings rose to $265 million at quarter end, which represents real value for Broadridge Financial Solutions, Inc. shareholders. Fourth, our capital position remains strong, and we are actively delivering against our balanced capital allocation policy. We recently closed on the Acler acquisition and have now completed three tuck-in acquisitions in fiscal 2026, totaling $126 million. As we enter the second half of the fiscal year, we remain on track to deliver free cash flow conversion of greater than 100%, and we are in a strong position to deploy additional capital to drive growth and shareholder returns. Finally, we expect to deliver strong fiscal 2026 results. We are raising our adjusted EPS growth guidance to 9% to 12% from 8% to 12%. Additionally, we are reaffirming our recurring revenue growth outlook at the higher end of the 5% to 7% range and closed sales of $290 million to $330 million. Now let's go to the numbers on Slide six. Recurring revenues grew 9%, or 8% on a constant currency basis, including strong 7% organic growth. Adjusted operating income margin declined 110 basis points to 15.5% as we lapped record event-driven revenues in Q2 last year. Adjusted EPS grew 2% to $1.59, and closed sales grew 24% to $57 million. Let's move to slide seven to discuss our segment recurring revenue, starting with our ICS or Governance segment. ICS recurring revenues rose 9% to $590 million, including a two-point benefit from acquisitions and a one-point headwind from lower interest rates. As a reminder, the earnings impact of lower rates is functionally hedged by lower interest expense on our variable rate debt. Regulatory revenues rose 18% in Q2, driven by 11% growth in equity revenue positions and 15% growth in fund positions. Regulatory revenues in Q2 saw a six-point timing benefit, with approximately half coming from Q1 and half being brought forward from Q3. Data Driven Fund Solutions revenues declined 2%, with healthy growth in our Data and Analytics business offset by a decline in our retirement and workplace solutions. Lower interest rates represented a two-point headwind to growth. Looking forward, we expect to see data-driven fund revenue growth to accelerate, driven by stronger organic growth and an approximately five-point contribution from the IJOIN and Acler acquisitions in the second half. Issuer revenues grew 8%, driven by growth in our 5% driven by double-digit growth in our digital communications revenues as we continue to execute on our print-to-digital strategy, and a four-point contribution from the acquisition of Signal. For the year, we expect ICS recurring revenue growth to be in line with our guidance for total recurring revenue and in line with the first half. Turning to GTO, recurring revenues grew 8% in Q2, including 6% organic. Starting with Capital Markets, revenues grew 6%. Our Q2 revenue growth benefited from a balanced mix of sales, digital asset revenues, and growth in trade volumes, which more than offset a point of losses related to the business exit that we discussed at the end of last year. Digital asset revenues were $7 million in the second quarter. Looking to the second half of the year, we expect digital asset revenues to moderate significantly as a result of scheduled changes in the Canton network minting curve. Overall, we expect digital asset revenues to contribute approximately one point to capital markets growth in fiscal 2026. Moving to Wealth and Investment Management, revenues grew 11%, driven by 6% organic growth and a 5% contribution from the SIS acquisition. As a reminder, we have now lapped the 11/01/2024 close date of the acquisition. For the year, we continue to expect GTO recurring revenue growth of 5% to 7%, with higher growth in wealth. As a reminder, timing of license revenues can have an impact on quarterly revenue growth rates in both our GTO businesses. We expect lower license revenue to result in a four-point headwind to GTO growth in the third quarter, largely in our Capital Markets business. Now let's move to slide eight to review our key volume indicators. We saw strong growth in investor participation across both equities and funds. Equity position growth was 17%, including 11% growth in revenue positions. Looking ahead to the seasonally more significant second half of the year, our testing indicates low teens growth in total equity positions, which we expect will generate high single-digit revenue position growth. Q2 fund position growth of 15% was partially impacted by the timing of fund communications in the quarter. First half position growth was 8%. Our testing continues to indicate mid to high single-digit position growth in the second half of the year. In GTO, trade volumes rose 11% for the quarter, driven by growth in both equities and fixed income volumes. I'll wrap up my discussion of recurring revenue growth on slide nine. In Q2, recurring revenue growth was 9%, primarily driven by seven points of organic growth. Revenue from closed sales remains the biggest driver of our organic growth at five points, as we onboarded revenues from our $430 million fiscal 2025 year-end backlog. Our revenue retention rate was 98% for the quarter. Internal growth contributed four points, driven by position and trade growth, timing of fund communications in the quarter, and digital asset revenues. Acquisitions, primarily SIS and Signal, contributed two points to growth. And finally, changes in FX contributed one point. Let's close our discussions of revenues on Slide 10. Total revenue increased 8% to $1.7 billion, driven by five points of growth from recurring revenue. Lower event-driven revenues accounted for a two-point headwind. While event-driven revenues of $91 million declined $34 million versus the prior year's quarterly record, they remain elevated relative to long-term averages. Strong event-driven revenue was driven by a combination of healthy mutual fund proxy activity and higher levels of corporate actions, including the M&A contest for a major media company. Looking ahead to the second half of the year, we expect quarterly event-driven revenues to return to closer to the seven-year average of approximately $60 million. Low to no margin distribution revenues grew 14%, driven by a balance of higher postage rates and higher volumes, and contributed four points to total revenue growth. Turning now to margins on slide 11. Adjusted operating income margin was 15.5%, a decrease of 110 basis points from Q2 2025. The decline was driven by a year-over-year reduction in event-driven revenues, which more than offset the operating leverage from higher recurring revenues. Additionally, the net impact of lower interest rates and higher distribution revenues reduced AOI margins by 40 basis points. Looking ahead, we remain on track to deliver full-year adjusted operating income margin of 20% to 21%. Let's move on to earnings on slide 12. Q2 adjusted EPS grew 2% to $1.59. As I noted in my callouts, in Q2, Broadridge Financial Solutions, Inc. recorded a $187 million non-cash gain driven by the increase in the value of our digital asset holdings in the quarter, from $0.04 at the September to $0.15 on December 31. That non-cash gain was reported in other non-operating income and was excluded from our calculation of adjusted EPS. Due to the volatility of digital asset prices, we will continue to exclude quarter-to-quarter non-cash gains or losses in the value of our digital assets from our calculation of adjusted EPS. Let's turn to sales now on Slide 13. Broadridge Financial Solutions, Inc. recorded Q2 closed sales of $57 million, an increase of $11 million from Q2 2025. Year-to-date sales were $89 million, down from $103 million last year. As Tim noted, we are seeing higher levels of client engagement, which is translating into a more than 20% increase in pipeline creation and giving us confidence in our full-year closed sales guidance of $290 million to $330 million. Turning to our cash flows on slide 14. Broadridge Financial Solutions, Inc. generated free cash flow of $319 million in the first six months of fiscal 2026, up from $56 million in fiscal 2025. Our strong cash performance continues to benefit from higher earnings and working capital management, and we remain on track to deliver free cash flow conversion of over 100% in fiscal 2026. Turning next to capital allocation, on Slide 15. We are delivering against our balanced capital allocation policy. Year-to-date, we have deployed $49 million in capital spending and software, an additional $17 million to onboard clients onto our solutions. We have invested $126 million in M&A in three strategic tuck-in acquisitions, including the acquisition of Acler on January 5, for $70 million. We have also returned $367 million in capital to shareholders via our dividend and share repurchases through the first six months of the year. Separately, in the second quarter, we contributed $342,000 Canton coins valued at $53 million for an approximately 8% stake in the Theramune digital asset treasury. Looking forward, our strong balance sheet and free cash flow conversion leaves Broadridge Financial Solutions, Inc. well-positioned to fund additional tuck-in M&A and repurchase additional shares over the balance of the year. Let's start to wrap by reviewing our fiscal 2026 guidance on Slide 16. We are reaffirming our guidance for recurring revenue growth constant currency to be at the higher end of the 5% to 7% range. We continue to expect adjusted operating income margin of 20% to 21%. We are raising our adjusted EPS guidance to 9% to 12%. And we continue to expect closed sales of $290 million to $330 million. I'll wrap by summarizing my key points. Broadridge Financial Solutions, Inc. reported strong second quarter results. Second, our key revenue drivers remain healthy, giving us incremental confidence that we will continue to deliver strong results in the second half. As a result, we remain on track to deliver another strong year of recurring revenue and adjusted EPS growth in fiscal 2026 while funding additional investment in key growth initiatives. And that in turn should enable Broadridge Financial Solutions, Inc. to deliver again on our top and bottom line three-year objectives. And finally, our strong balance sheet and cash flow generation positions us to continue to fund additional share repurchases and pursue attractive M&A opportunities as we focus on driving shareholder value. With that, let's move to Q&A. Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. Please limit yourself to two questions each. At this time, we will pause momentarily to assemble our roster. The first question comes from Alex Kramm with UBS. Please go ahead. Alex Kramm: Yes. Hey. Good morning, everyone. Tim, thanks very much for all the color on tokenization and how you think you're gonna benefit from that. I will have to obviously note, though, that as you're probably aware, there's a big debate out there, and you've seen this in your share price that tokenization is actually something that's gonna work against you. I think there's a lot of different ways of this narrative, but I think in its pure form, it's basically, hey. In a tokenized world, you know, companies can directly engage with shareholders maybe through smart contracts. They're gonna cut you out of the process. Or at the very least, it's gonna drive pricing down. So maybe, you can just respond to that and give us your view on maybe that side of the debate. Thank you. Timothy C. Gokey: Great, Alex. Well, look, thank you very much for that question. And obviously, as you heard from the script, we see tokenized equities as a significant opportunity. We think they represent the next wave of democratization. We think they're going to create new sources of demand for U.S. equities, and that's going to drive position growth. When you think about, I think implicit in your comment is the agreement that tokenized securities are still subject to all the core regulatory principles, including governance. So the question is really how that's gonna happen. We see the vast majority of tokenized equities in the future, irrespective of the model, whether they're tokenized directly by the issuer, they're tokenized by an intermediary or by a depository, or wrapped in some way. We see the vast majority of those are gonna be purchased through a broker-dealer or through a digital trading platform. And those intermediaries are gonna have the same asset servicing obligations that they have today, including proxy, but also corporate actions, class actions, tax, and all the other things that are actually big opportunities for us. And you know, it's not you know, we think about are those intermediaries gonna give knowledge to the underlying corporate issuers as to who the shareholders are? Not at all clear that they're gonna wanna turn over their client list that way. You know, when you think about the Oboe and Oboe protections, the ability of investors to keep their identity and their private information separate. So you know, we do think that it is gonna remain a, you know, a complex situation between issuers, brokers, and other intermediaries. And managing that complexity is what we do irrespective of the model of tokenization. And, you know, obviously, there are multiple models out there. It's not clear which one is gonna win. As we talk to the SEC, they're, you know, they're clearly gonna let the market decide. And you know, I would also comment just on the new entrants in the market, the Coinbase and Krakens of the world. We think they are drawing in new investors. We think that expands the market. And that's going to contribute to long-term growth. So and then let's not actually forget, Alex, to talk about issuers and there are benefits if they do end up with a little more direct access. But don't forget this also creates significant complexity for issuers also because now and I've said this in the script, but in addition to their regular shares, you know, they have registered shares, beneficial shares, tokenized shares across multiple models across multiple L1s. So trying to get the materials and distributions and events to all of those different endpoints, take it back, reconcile it, that's a lot of work. And we think that's a great opportunity for Broadridge Financial Solutions, Inc. to help issuers. For nearly 80% of the Fortune 500 engaged in Broadridge Financial Solutions, Inc. today to reduce the complexity of proxy when they only have to worry about registered and beneficial. And so in the future world, you know, we see that even more value created there. So whether it's creating value directly with issuers, or really through the intermediaries where we think the vast majority of investors will go, we think there's a great opportunity here. Alex Kramm: Excellent. Alright. Thanks for the color here. And then maybe staying on topical items, clearly, a lot happening on the proxy advisory side. You mentioned JPMorgan. I think you hadn't disclosed that one before. And also Wells Fargo, which I think we heard about. You're clearly helping, I guess, drive change. Can you just talk a little bit more about what that means financially? I mean, is there a big pipeline behind the JPMorgan and Fargo's of the world? How do you view the TAM? How quickly do you think this can ramp? I know it's all just beginning, but just curious how you see that opportunity because it is, I guess, a very specific area where you're winning in the marketplace right now. Timothy C. Gokey: Yeah. And look, we can do different things for different people. Sometimes it'll be the full AI-driven custom policy engine. Sometimes it'll be helping more on the vote execution side. You know, we think that this is when you look across all the different things in shareholder engagement, and you know, this is one of the needs that we're talking about with helping with data-driven and objective voting. But we think collectively, this is a multi-$100 million market. So it's an opportunity to expand the services. Obviously, it will take time to grow into that. But we think collectively this could add, you know, as much as a point of growth to our governance business over the next few years. Really creating more revenue per position. And I just I think there are, you know, there are multiple topics here. And collectively, you know, we really love what's happening as we work with our clients to create, you know, what I would call really the next generation of shareholder engagement. That's deepening our role, and as I just said, it's a substantial business opportunity because, you know, there are multiple industry issues that have been building and are reaching a critical mass. There's what we just talked about in terms of the concern about proxy advisory firms. There's also a growing concern about the concentration of power with passive asset managers. And this concern that retail participation has been lower. And each of those are opportunities for us to work with our clients to bring market-driven technology to help solve those. Obviously, we're with asset managers like JPMorgan and Wells Fargo. But we're also working with the large, passive funds that I mentioned in the script. And, you know, we see a big opportunity to work with public companies to make retail shareholder voting more convenient through standing instructions. We launched that with Exxon. But there's a lot of demand behind that one. So collectively, all of those we think really create a significant opportunity financially, but also just strategically as we deepen our role. Alex Kramm: Alright. Excellent. Thanks again for the color. Operator: The next question comes from Patrick O'Shaughnessy with Raymond James. Please go ahead. Patrick O'Shaughnessy: Hey. Good morning. So going back to the topic of tokenized equities, do you see as some of the main obstacles that need to be worked through by the SEC as the SEC considers various exemptive relief requests? Timothy C. Gokey: Yeah. Thanks, Patrick. You know, I think the you know, one of the questions that the SEC has is this all going to be too complex, and therefore, how much exemptive relief do they need? And I think in our conversations with them, you know, we've really stressed that you know, we're here to solve that complexity and that irrespective of the tokenization model, you know, it's completely feasible for you know, for there to be really good front-to-back communication and connectivity. So I actually don't think there's a need for exemptive relief in this area. And I think that you know, I think they see that too. So, you know, we'll see how it all plays out. But I think the you know, the conversations that we're having with each of the different whether it's with issuers, whether it's with the DTCC, whether it's with the exchanges, and the digital trading platforms, I think it's pretty clear how this model can work. And work really well. Patrick O'Shaughnessy: Gotcha. Appreciate that. And then staying with the topic of tokenized equities, if they were to clear and settle on the blockchain, how would you see that impacting the range of services that you provide to your post-trade processing clients? Timothy C. Gokey: Patrick, I think part of this is we have to expect to have, you know, a significant role in that. We are one of the large trading platforms today. And, you know, when you think about our DLR platform, it is designed as a multi-asset platform. And we'll be extending that to additional asset classes. I think the other thing is that there is, you know, there's all the other complexity around asset servicing that needs to take place. And when you think about what takes place today, there's a trade, and then what happens after that. There is obviously, we've been talking about proxy, corporate actions, but let's talk about tax. Let's talk about margin. Talk about seg. Talk about securities lending. The idea that all of that is gonna happen through some sort of smart contract is, you know, I don't think people are really thinking through all the implications of a tax, for instance. You know, it's not just the instrument. It's the person, and it's in what position the person is and what are the other things that they have and where are they. So it's really there's a lot of complexity there. I think one of the concerns that many players have is actually that in the very, you know, as long as they can foresee, costs could go up instead of down because they could have a whole infrastructure around their digital assets and a separate infrastructure around their regular assets. And that's one of the things when we talk about enabling digital assets in all of our core engines, you know, what we're talking to clients about is actually mirroring the positions in the core engines so they can use all their existing technology for margin, tax, all those other things so they don't end up with that duplication of cost. That's something that they are finding really attractive because it is, you know, it's complicated to handle all of those downstream activities. Patrick O'Shaughnessy: Got it. Makes sense. Thank you. Operator: The next question comes from James Faucette with Morgan Stanley. Please go ahead. Michael Infante: Hey guys, it's Michael Infante on for James. Thanks for taking our question. I just wanted to ask about obviously, the reaffirmed closed sales outlook. But can you maybe just speak to how you're thinking about your visibility into the second half? Like how much is already sort of late stage from a contracting perspective? Or you know, sort of timeline of expected renewals versus truly jump on net new logos? I'm just curious how you would describe confidence levels on being able to deliver on the full year. Thanks. Timothy C. Gokey: Yeah. Thank you. Thank you very much. And look, first of all, I'll just say with $89 million year-to-date, we clearly have wood to chop in the second half. That's not uncommon for us given the seasonality of business and we do really like the momentum that we're seeing. I think one of the things that I talked about in the remarks is how we've seen origination pick up in the first half of the year, up more than 20%. And you know, that's a really nice indicator for us. For clients. I think maybe as, you know, implicitly in your question that you rightly point out, is that things that we've just originated in the first half, maybe those aren't necessarily some of those are things that will close this year. Some of them are things that will close next year. But when I look at that, we're seeing growth driven by our strategic initiatives around shareholder engagement, digital communications, platform, wealth, and tokenization. And we have really nice things in each of those areas that we originated some time ago. I mean, just last week, we closed, you know, a strategically significant DLR sale to a tier-one global bank that's the largest sale to date for that. So we really see continued momentum there. And we're really seeing, you know, as I was just in Dallas a couple of weeks ago, talked to more than a dozen client CEOs. And it's clear that they welcome our help in contributing to the transformation of our business. You know, as we look deep into our pipeline and look at, you know, what stage things are in and which of those are, you know, solidly on track to close this year versus could close this year. We really like that mix, and that's why we are reaffirming our guidance at $290 million to $330 million because that's what we think we're gonna finish by the end of the year. Michael Infante: That's helpful, Tim. Just one follow-up for me. Just on the sort of spread between equity position growth and equity revenue position growth? You obviously gave some helpful commentary on the forward look. But it looks like the spread there is widening, at least marginally. Like, how do you think about sort of the underlying mechanics of that spread and or, you know, whether or not you expect the spread to sort of remain consistent with, you know, recent levels or perhaps widen or compress? Thanks. Timothy C. Gokey: Yeah. I think it's an interesting question, and one we're still figuring out ourselves as the growth of this is really new. And I think of it a little bit more as a little bit less than the top-line number from which you're taking away some things. A little bit more as growth in equity revenue positions. And then on top of that, there's this additional growth in fractional shares and sort of small dollar managed accounts. And so it's really, you know, I tend to come back to sort of say, what's just the driver of the core revenue positions, which is around, you know, good sort of single name drive growth and then continued growth in managed accounts, which remains very healthy. So I think that that spread, so to speak, will go up and down a little bit, but what we're really monitoring is the core drivers of the revenue positions. Ashima Ghei: Yeah. And I'll just add on to that a little bit. Right? If you think about the revenue position growth, we're seeing 11%, of course, for the quarter, it is still higher than our long-term history. We typically talk about mid to high single-digit position growth. So this is still elevated versus those levels. And like Tim alluded to, the additional is incremental on top of it, which I would akin to almost position backlog that we might see converting at a later point? Even the base level is higher than what we have been. Operator: The next question comes from Kyle Peterson with Needham. Please go ahead. Kyle Peterson: Great. Good morning. Thanks for taking the questions, guys. Wanted to start off on some of these on-chain progress you guys have had on the Canton network, the DLR stuff. You know, seems really to be making some good milestones. I wanna see if you had an update or pipeline on, you know, potentially moving, you know, some other asset classes, you know, to this platform and, you know, how we should think about, you know, the potential for this to expand both in the near and medium term? Timothy C. Gokey: Yeah, Kyle. Thank you very much for that question. It's one that I'd love to talk about. As you know, so as we said, this has doubled since last June, and we have a nice roadmap of additional significant clients that we're looking at and talking to. I think, you know, when I think about the roadmap for this platform, and as I said, it is multi-asset and has a lot of capabilities built into it. Including, you know, as I noted in the script that we did our first issuance of a corporate bond for SocGen in the second quarter. I think the next real thing is taking it real-time. When we think about repos, today, they are sort of largely a financing function carried out by treasury on an overnight basis. And as we move that to and largely, a lot of the volume we're doing is intra-institution. As we move that to bilateral and to real-time, this can become, you know, we see the really unclear where the volumes could go, but it becomes less be more than a financing function, but really a trading function to, you know, and allowing desks to do trades and finance them, you know, simultaneously. That we expect to be doing in the first half of the calendar year, you know, within this fiscal year. And then going to other asset classes, you know, other things in fixed income, deposits. We're talking to a number of institutions about that. So I think that over the course of this year, you'll see us continue to advance both the speed and the breadth. I think the other factor to think about here is moving this into the I'm gonna call it the main net of Canton. Right now, we're on a private version, which is separate from that, which makes interoperability, you know, not as high as it will be when we're on the main version. There are some things for that version that still need to take place for it to be ready for that. DTCC has a statement of work with DAH and is looking toward this sort of the second half of the calendar year for that to all be ready, and we're committed to move on to that when it's ready. And, of course, you know, we are we stated that we will be multiple L1s beyond the Canton network as well. So a lot to do, a lot of roadmap. That's one of the reasons why we're really excited to be able to accelerate the investment that we've talked about. Really move up and accelerate some of these things on our roadmap. Kyle Peterson: Great. That's really helpful. And then maybe as a follow-up, I wanted to ask about kind of the plans for the balance sheet as you guys are continuing to accumulate more of the Canton coins here. I guess, like, you know, the mark-to-market gains, it's a little bit material now. And assuming you guys continue to get more even if the minting curve slows a little bit. But you know, I wanted to see, like, are there additional opportunities such as, you know, TheraMune out there that you guys would consider? Are there other avenues you guys would take potentially create some more with more liquid assets from that? Or just any thoughts on that as you guys continue to accumulate more, especially would be, you know, great to hear about. Timothy C. Gokey: Yeah, Kyle. Thank you. Well, we are continuing as a super validator. As you mentioned, the minting curve has changed. That was sort of something that sort of built into it, a change as of January 1. So we will be accumulating at a lower rate in the future just to, you know, be level set for everyone. And, I said on the last call, you know, we're an operating company, not an investment company. So we're not gonna be the next micro strategy. And you know, on the other hand, you know, when you look at the value of these network coins versus others, they are, you know, there's a real argument. They could be a lot more valuable than this. So, you know, we'll see. But I think our intent is to really sort of, you know, over some time, dollar cost average out of these. But that's probably over multiple years. And you know, that's I don't see us sort of trying to get, you know, immediate liquidity or things like that from it. I think it's something that will be on the balance sheet. And you know, it could be a nice source of value in the future. We're not looking for particular investments like TheraMune. That was sort of, you know, it came up because, you know, the key actors around Canton were just trying to make sure that there were sort of multiple ways for people to access that. Kyle Peterson: Great. Thanks for taking the questions, and nice results. Operator: The next question comes from Matthew Roswell with RBC Capital Markets. Please go ahead. Matthew Roswell: Congratulations on a nice quarter. It's been a lot of talk about the innovation that's been going on in the whole space, and I'm thinking specifically, like, capital markets piece. Are you seeing any changes among clients looking at their legacy system and kind of the competition with either them doing it in-house or your more traditional competitors? Hopefully, that question made sense. Timothy C. Gokey: Yeah. Yeah. It does, Matt. I think the, you know, when we think about competition in capital markets and you think about our traditional competitors, one of the things that we have really liked, Matt, is just how we're positioned well into the competition because really, our legacy competitors have been disinvesting in this area for some time. And it's an area where we have continued sort of, you know, good regular investment as we have globalized our platform as we are evolving it onto the new platform architecture that we've talked about. And so we think that the functionality and utility of our platform relative to legacy competitors within certainly within cash securities is significantly higher, and that's why I think we continue to see nice competitive wins. We haven't seen anyone looking at internalizing or doing self-builds in this area in capital markets. It's, you know, there are a few players that have that internally. And they're, you know, they're staying where they are. But we haven't seen any broad new efforts. Matthew Roswell: Okay. Thank you. And if I could sneak in a modeling question. Are there any timing differentials we should think about between the fiscal third and fourth quarter? Like, if I remember correctly, last year, the timing of Easter caused a flip in the proxy business. Is there anything that we should be thinking about? Ashima Ghei: Yeah. There's just two things I'll call out in terms of what we're aware of right now. One, when I spoke about, in my prepared remarks, I spoke about timing in our regulatory business. Half of which you should expect to see in Q3. So that's one timing impact that you'll see, not so much between Q3 and Q4. And two, I also called out in my remarks term license, the impact of term license on our GTO business. Specifically in capital markets. So you will see a seven-point hit headwind in our Capital Markets in Q3. And a more modest, about a one-point impact in wealth in Q4. But those are just term license swings to be aware of. The only other thing I'll call out is event, as you know, varies from quarter to quarter. Where we sit right now, we're not aware of any large mutual fund proxy or any large tentpole event. That would lead us to believe that it'll be anything higher than the $60 million average that we see in terms of long-term averages. Matthew Roswell: And anything hitting the margin other than the revenue switches? Ashima Ghei: Nothing hitting the margins except for what we called out already. The growth that we've seen in the first half of the year is allowing us to increase our investments. You will see the impact of some of those investments come through in Q3 and Q4. Matthew Roswell: Okay. Thank you very much, and congratulations again. Operator: This concludes our question and answer session. I would like to turn the conference back over to Timothy C. Gokey for any closing remarks. Timothy C. Gokey: Thank you, operator, and thank you for everyone on the call today. As we wrap up, I hope you hear how excited we are about the transformation we're seeing in the industry. The opportunities that are creating for Broadridge Financial Solutions, Inc., the opportunities for us to add value for our clients, and our industry and to really take that innovation and scale it. And through that, to deliver returns to you, our shareholders. Thank you for your investment in our company. And have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Q4 2025 AMETEK, Inc. Earnings 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. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Kevin Coleman, VP of Investor Relations and Treasurer. Please go ahead. Kevin Coleman: Thank you, Crystal. Good morning, and welcome to AMETEK's Fourth Quarter 2025 Earnings Conference Call. Joining me today are Dave Zapico, Chairman and Chief Executive Officer, and Dalip Puri, Executive Vice President and Chief Financial Officer. During the course of today's call, we will be making forward-looking statements which are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations. A detailed discussion of the risks and uncertainties that may affect our future results is contained in AMETEK's filings with the SEC. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements. Any references made on this call to historical results will be on an adjusted basis excluding after-tax acquisition-related intangible amortization and excluding acquisition-related costs. Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investors section of our website. We'll begin today's call with prepared remarks and then we'll open it up for questions. I'll now turn the meeting over to Dave. Dave Zapico: Thank you, Kevin, and good morning, everyone. AMETEK completed a strong year with excellent results in the fourth quarter, highlighted by double-digit growth in sales, orders, and operating profit, robust core margin expansion, strong cash flow growth, and earnings per share ahead of our expectations. In the quarter, we established records for sales, orders, operating income, EBITDA, diluted earnings per share, operating cash flow, and free cash flow. We also ended the quarter with a record backlog and today announced the acquisition of LKC Technologies, an attractive technology acquisition which broadens our med tech exposure. I'll provide more details on LKC shortly. Now let me turn to our fourth quarter results. Fourth quarter sales were a record $2 billion, up 13% from the same period in 2024. Organic sales were up 5%, acquisitions added seven points in the quarter, and foreign currency was a one-point tailwind. Orders were very strong in the quarter with overall orders up 18% to a record $2 billion and organic orders up 7% versus the prior year, leading to a record backlog of $3.58 billion. Sales and orders growth consistently improved throughout the year, with the fourth quarter growth the strongest of the year. AMETEK delivered excellent operating results in the quarter. Operating income was a record $523 million, a 12% increase over 2024. Dalip Puri: Operating margins were 26.2% in the quarter. Core margins were an impressive 27.6%, up 100 basis points. EBITDA in the quarter was a record $618 million, up 10% versus the prior year, and EBITDA margins, a strong 30.9%. Our excellent operating performance led to strong cash generation, with free cash flow a record $527 million in the quarter, up 6% versus last year's fourth quarter, and free cash flow to net income conversion of 132%. Diluted earnings per share were a record $2.01, up 7% versus 2024 and above our guidance range of $1.90 to $1.95 per share. Adjusting for an abnormally low tax rate in last year's fourth quarter, diluted earnings per share would have increased 11% in the quarter on a 5% increase in organic sales, reflecting strong incremental margins. Now let me provide some additional details at the operating group level. First, the Electronic Instruments Group. EIG delivered excellent operating performance in the fourth quarter with record sales and operating profit along with impressive core margin expansion. EIG sales were $1.37 billion, up 13% from last year's fourth quarter. Organic sales were up 2%, acquisitions added 10 points, and currency was a one-point tailwind. We are encouraged by the organic sales growth in the quarter and the steady improvement in EIG growth rates throughout 2025. EIG's fourth quarter operating income was a record $413.7 million, up 7% versus the prior year. Core operating margins were a robust 32.3%, up 50 basis points from the prior year. The Electromechanical Group completed an outstanding year with very strong broad-based growth and excellent operating performance in the fourth quarter. EMG's fourth quarter sales were $629 million, up 15% versus the prior year. Organic sales were up an impressive 14% and foreign currency was a one-point tailwind. Sales growth was strong across all EMG divisions with each growing double digits organically in the quarter. EMG's operating income in the fourth quarter was $142.5 million, up a sizable 28% compared to the prior year period. While EMG's fourth quarter operating margins were 22.7%, up 240 basis points versus 2024. Now for the full year results. AMETEK delivered excellent overall results in 2025, establishing annual records for sales, operating income, operating margin, EBITDA, and diluted earnings per share. Overall sales for the year were $7.4 billion, up 7% from 2024. Operating income for 2025 was $1.94 billion, up 7%, and operating margins were 26.2%, up 10 basis points from the prior year period. Dave Zapico: While core margins were up a very strong 80 basis points. EBITDA for the year was $2.33 billion, up 7% with EBITDA margins of a very strong 31.5%. Full year 2025 earnings were $7.43 per diluted share, up 9% versus the prior year. We also delivered strong cash flows in 2025, providing us with significant capital to deploy on strategic acquisitions with free cash flow and net income conversion of 113%. I'm very proud of our performance in 2025. Our businesses successfully navigated through sluggish industrial markets and ongoing macroeconomic uncertainty and delivered excellent results. Thank you to all AMETEK colleagues for your outstanding contributions and hard work, delivering on our commitments to our customers and shareholders. AMETEK is well positioned for continued long-term success given your efforts. Now turning to acquisitions and capital deployment. In 2025, we completed the acquisitions of Ferro Technologies and Kern Micro Technique for approximately $1 billion, acquiring approximately $400 million in annual sales. The integration of both businesses is going well as they integrate the AMETEK growth model into their businesses. Now switching to our most recent acquisition, LKC Technologies. LKC is a leading provider of innovative technologies that enable effective diagnosis and management of ophthalmic conditions. Advanced technology solutions help doctors test and monitor eye health and are designed to detect early signs of diabetic retinopathy and other serious eye conditions that can lead to vision loss. A combination of LKC with our Ultra Precision Technologies Ryker business provides attractive market expansion and creates a broader ophthalmic portfolio. LKC was privately held and headquartered in Germantown, Maryland. I'm excited to welcome all LKC Technologies colleagues to the AMETEK family. Dalip Puri: With our robust balance sheet, strong cash flows, and disciplined approach to capital deployment, AMETEK is well positioned to continue driving long-term value through our acquisition strategy. We are encouraged by our strong pipeline of high-quality acquisition candidates. Our significant financial capacity provides us with the flexibility to deploy over $5 billion in capital while maintaining an investment-grade credit rating. Our top priority for capital deployment remains acquisitions, while our strong cash flow provides us with the flexibility to repurchase shares and pay a consistently increasing dividend. We also continue to focus on ensuring AMETEK is strategically positioned for long-term sustainable growth through continued investments back into our business. These investments have strengthened our leadership position within our niche markets, helped open up new growth markets, and attractive adjacencies, and accelerated our new product development and technology innovation. All of 2025, we invested an incremental $90 million in support of these growth initiatives, with the majority of these going into our research, development, engineering, sales and marketing, and digital initiatives. And in 2026, we expect to invest an incremental $100 million. We're seeing great results from these investments. In the fourth quarter, our vitality index, which measures sales and new products introduced over the last three years, was an outstanding 30%. Dave Zapico: This is an impressive result and reflects the great work of our businesses and colleagues. I wanted to highlight a couple of examples of how our businesses are leveraging their technology innovation efforts and broad product portfolios to help strategically expand their presence within attractive market segments. The first business is AMETEK Spectro. Spectro is a leading provider of advanced analytical instrumentation for use in critical industrial, environmental, research, and academia applications. Spectro's products and solutions provide highly accurate, reliable, and efficient elemental analysis. Spectro has recently introduced a new product family of elemental analysis instruments, broadening their technology product capabilities and market reach. These new products, the SpectroMax and the XSort, have seen outstanding demand as rapidly rising commodity prices have increased the importance of precise and accurate metals analysis within a wide range of applications. We are also seeing growing demand across our defense businesses, in particular within our European defense businesses, as our differentiated technology capabilities and product portfolio are well positioned to benefit from the expanding defense spending in the region. Our defense businesses provide a wide range of ruggedized high-performance solutions for a diverse set of mission-critical defense applications, and we continue to win content on new programs given strong design and engineering capabilities. To share a few examples, AMETEK's Rotron and Ear Technology businesses are providing advanced cooling solutions for use on a number of European air defense systems. Our Abaco business is providing integrated high-performance computing systems for European aircraft and communication platforms, and our power and data systems businesses are supplying power generation systems for a number of UAV platforms. Great work by our businesses in developing the critical product and technologies needed by our customers. Now shifting to our outlook for the year ahead. For 2026, we expect overall sales to be up to high single digits on a percentage basis, with organic sales expected to increase low to mid-single digits versus the prior year. Diluted earnings per share for the year are expected to be in the range of $7.87 to $8.07, up 6% to 9% compared to last year's results. For the first quarter, we anticipate overall sales to be up approximately 10% versus the prior year's first quarter with adjusted earnings of $1.90 to $1.95 per share, up 6% to 9% versus the prior year. To summarize, AMETEK delivered a strong finish to the year, with excellent performance in the fourth quarter reflecting the strength of our portfolio and our ability to execute our growth strategy. We entered 2026 with a record backlog and solid momentum given the strong sales and orders growth we saw in 2025. Our differentiated technologies and deep industry expertise continue to position us well in attractive niche markets. Additionally, we have significant capital to deploy on strategic acquisitions, and a track record of delivering strong returns on capital. Lastly, our proven operating capabilities allow us to deliver strong incremental margins and manage through economic uncertainties. With a focus on innovation, operational excellence, and disciplined capital allocation, we are confident in our ability to drive continued growth and create long-term value for our shareholders in 2026 and beyond. I will now turn it over to Dalip Puri, who'll cover some of the financial details of the quarter. Then we'll be glad to take your questions. Dalip? Dalip Puri: Thank you, Dave, and good morning, everyone. As Dave noted, AMETEK had an excellent finish to the year, establishing records for orders, sales, operating income, earnings per share, and free cash flow in the quarter. Now let me provide some additional financial highlights for the fourth quarter, the full year, as well as some additional guidance for 2026. Fourth quarter general and administrative expenses were $33 million, up $4 million from the prior year due to higher charitable donations in the period. For the full year, general and administrative expenses were up $10 million. As a percentage of sales, full-year G&A expense was 1.6%, up slightly from 2024 levels. For 2026, general and administrative expenses are expected to be approximately 1.5% of sales. Fourth quarter other expenses were up $6 million compared to 2024. For 2026, we expect other operating expenses to be largely in line with 2025 levels. The effective tax rate in the quarter was 16.3%, up from 12.8% in 2024. For the full year, the effective tax rate was 17.8%. For 2026, we anticipate our effective tax rate to be between 18.5% and 19.5%. As we have stated in the past, actual quarterly tax rates can differ dramatically, either positively or negatively, from this full-year estimated rate. Capital expenditures were $57 million in the fourth quarter, and $130 million for the full year. Capital expenditures in 2026 are expected to be approximately $160 million or about 2% of sales. Depreciation and amortization expense in the quarter was $106 million, and for the full year, was $1.423 billion. In 2026, we expect depreciation and amortization to be approximately $430 million, including after-tax acquisition-related intangible amortization of approximately $210 million or $0.91 per diluted share. For the quarter, operating working capital was 16.5% of sales, a 30 basis point improvement versus 2024. Operating cash flow in the quarter was a record $584 million, up 6% versus 2024. Free cash flow was also a record in the quarter, up 6% to $527 million with outstanding free cash flow conversion of 132% for the quarter. Free cash flow for 2025 was $1.7 billion, with full-year free cash flow conversion also very strong at 113% of net income. For 2026, we expect free cash flow conversion to be between 110% and 115% of net income. Total debt at year-end was $2.3 billion, up $200 million from 2024 due to the acquisition of Ferro Technologies. Offsetting this debt is cash and cash equivalents of $458 million. During the quarter, we spent approximately $285 million on share repurchases, bringing our total share repurchases for the year to approximately $443 million. We continue to have significant financial capacity and flexibility to support our growth initiatives and capital deployment strategies. We demonstrated our financial flexibility in 2025 by deploying over $1.8 billion on acquisitions, share repurchases, and dividends, all while maintaining our financial capacity and a conservative balance sheet. At the end of 2025, our gross debt to EBITDA ratio was one times, and our net debt to EBITDA ratio was 0.8 times, essentially unchanged from the end of 2024. In summary, we delivered strong fourth quarter and full-year operating results, highlighted by record revenue, record earnings, robust margin growth, and excellent cash flow generation. With a proven strategy, significant capital deployment capacity, and a strong track record of execution, we are well positioned to continue delivering exceptional results in 2026. Kevin? Kevin Coleman: Thanks, Dalip. Crystal, could we please open the lines for questions? Operator: Thank you. You will need to press 1 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. And our first question will come from Matt Summerville from D.A. Davidson. Your line is open. Matt Summerville: David, I was hoping you could drill deeper into the medical portfolio and their performance therein across both EIG and EMG and how we should be thinking about kind of the medium to long-term algorithm associated with 21% of our business now, the broader health care exposure. If you look at the health across both groups, Paragon and Rowland driving the results. They were up low double digits in Q4. So that was a very good quarter, up low double digits. And for the full year, '25 they were up high single digits. And we're thinking for '26, it will be up mid single digits. So our initial guide is mid single digits. More challenging comps, but still very healthy businesses and performing well. And what's the Matt? Matt Summerville: I was wondering if you could talk about how you're thinking about strategic price capture kind of going forward you know, after passing through this multiyear period where you had, you know, pretty meaningful inflation And then, obviously, you know, you had the tariff pressure So what's kind of the go forward price algorithm does that look like for AMETEK now? Thank you. Dave Zapico: For for the the '25, we had a positive price cost spread. So we our pricing offset both inflation and tariffs. So and we think that that is gonna be what's gonna happen in '26 for the so for the full year '26, we're confident we can offset inflation and the existing known tariffs. So we're getting, you know, we we have highly differentiated businesses of AMETEK product portfolio, leadership in niche markets around the globe, and these are mission critical products, And the pricing is is not going backwards. It's gonna stick. The vast vast majority of it is you know, price increases, not just kind of offsets So we we had a good pricing situation. As I mentioned in my prepared remarks, we have a refreshed product portfolio. 30% vitality, mission critical products. So we really have done this for quite a while and don't see any change. So I think we'll be positive when you take into account inflation and and tariffs for the year. Matt Summerville: Thank you, David. Dave Zapico: Thank you, Matt. Operator: Our next question comes from Deane Dray from RBC Capital Markets. Your line is open. Deane Dray: Thank you. Good morning, everyone. Dave Zapico: Good morning, Dean. Hey. Maybe we can step back and Dave, do your typical run through the end markets key platforms? It sounded like everything in medical was certainly hitting expectations. And if you could touch on any kind of regional dynamics as well. Thank you. Sure, Dee. The process business, let's start there. Overall sales, for our process businesses were up mid teens in the fourth quarter, driven by the contribution from recent acquisitions, So we acquired the the apparel business, the the Kern business, and we bring those in. They're lower margins and and you know, we're improving them as we go. But the that group grew low single digits organically in quarter. So that's the first time we saw low single digit organic growth in Process. We're pretty happy with that. We saw continued improvements throughout the whole year. As I said, the the most positive in the fourth quarter. We're encouraged by that finish to the year, and we've talked about before we see a very strong pipeline of growing opportunities in our broader process and analytical instrumentation markets. For the full year 2026, we expect organic sales for our process segment to be up low single digits. Talk about our aerospace and defense businesses. They completed an outstanding year with low double digit growth in both overall and organic sales in the quarter. Similar to the full year, growth was broad based strongest orders, strongest growth across our commercial OE, and aftermarket businesses in the quarter. Our businesses are well positioned with strong and expanding content on a wide variety of aerospace and deflant defense platforms. And looking ahead, we expect another strong year high single digit organic growth in 2026, and really balanced across both our commercial and defense businesses. Jumping next to our power business, delivered solid growth in the quarter, both overall and organic sales were up mid single digits. Growth in the quarter was strongest within our RTDS and Power Instruments businesses. Driven by global grid modernization and applications supporting the data center build out Talked a little bit in the last meeting. We have applications in power generation, backup power, microgrids, power system simulation services, all supporting their broader data center ecosystem and delivering power to the ecosystem. Looking ahead to 2026, we expect organic sales for our power businesses to be up mid single digits. And finally, our automation and engineered solutions businesses delivered another outstanding quarter. With low double digit overall inorganic sales growth, Growth was again broad based across our automation and engineered solutions businesses. With our Paragon Medical businesses delivering the strongest growth. For 2026, we expect sales for our automation and engineer solutions businesses to be up mid single digits organically. And I think you asked about the geography also, James. Yeah. And yeah, we we had you know, both US and international sales were up mid single digits. So so it's you know, kinda good strength across the board. In in The US, we were up MSD, mid single digits driven by strength on our automation and engineered solutions business. In Europe, we were up low single digits, driven by strength in aerospace and our automation businesses. And Asia was up 10%. We were very pleased. China was up low double digits for us. Driven by our process, power, and automation businesses and again, Asia was up 10. We if we take China out of Asia, Asia was up high single digits. So Asia was pretty much strong across the board. So pretty pretty good performance geographically across the board Deane Dray: That's all good to hear. Just a quick follow-up. You talk about record backlog. What kind of conversion should we expect in 2026 of backlog? I mean, I know typical, you're at like 30% conversion, but with the recent kind of expansion, it's been closer to How does that shape up for '26? It it it's in the same ballpark. It's it's it's it's with our long cycle businesses, our aerospace and the the defense business with with our process businesses. Some of those are multiyear but there's plenty for us to ship near term. So we're we're pretty pretty, optimistic about the order pipelines. We we had good orders throughout the quarter. December was the strongest quarter December was the strongest record quarter for us. In one month. We also started the year strong. So so, you know, orders are good. We're we're you know, there's again, the backlog is you know, with our multiple industries, it's a little bit difficult. But you're right. In it says between that 30-50% number. But we're we're in good shape and and and it's feeling good with the strength. Deane Dray: Great to hear. Thank you. Dave Zapico: Thank you, Dean. Operator: Thank you. Our next question comes from Andrew Buscaglia from BNP Paribas. Your line is open. Andrew Buscaglia: Morning, Andrew. Was hoping to focus on EIG. Just that you know, it sounds like, you know, that organic growth of 2% little bit below kinda what you had expected because you expected the full year to grow year over year. So I imagine in process and analytical instrumentation that maybe didn't come through the growth didn't come to fruition the way you thought it would. What are your expectations into 2026 for that segment and or subsegment? And and direct activity converting. Dave Zapico: Yeah. Just if you if you go back to the beginning of 2025, we actually had negative organic growth in the first couple of quarters in our process businesses. And those improved. So so we actually were positive in Q4. So we were pretty we were pretty pleased with the performance of of EIG turning positive in Q4 on the back of the process of business performance. If I look at 2026, you know, we we have our overall sales, I already mentioned in the prepared remarks, is up mid to high single digits. Organic up low to mid single digits. And we think both of our businesses will have low to mid single digit organic growth. So both both EIG and EMG overall will be up mid to high single digits. And both will have organic growth of low to mid single digits. Andrew Buscaglia: Okay. Got it. And, you know, that outlook in EMG, you know, you're you're Sales were so strong in Q4. Was there something, I know, of the order ordinary unusual that that would drive that 15% growth that this won't repeat going forward? Dave Zapico: No. I I I think that, as I mentioned in the prepared remarks, every division within EMG had double digit growth in sales. So there's really a lot of strength there. I mean, there's we you know, if you know, gonna get some tougher comps next year, But but we're performing well. We have strong execution. Disciplined operations. We're gaining momentum in the before portfolio. EMG recovered nicely. Automation and med tech are solid. A and D remains strong with good backlogs. So I I think what you might be seeing there is the guide's a little bit prudent. Are this early in the year? But, we feel good about the EMG in 2026. Andrew Buscaglia: Alright. Fair enough. Thank you. Dave Zapico: You, Andrew. Operator: Our next question comes from Brett Linzey from Mizuho. Hey. Good morning, Dave Zapico: Good morning, Brad. Hey. I wanted to just come back to the kind of the pricing dynamic. I know there's a lot of fits and starts on on tariffs last year. Brett Linzey: And subsequent pricing. Any any signs of prebuy or prebuild in in some of those channels as maybe some of that destock has turned to restock and customers are maybe looking to get ahead of some of the price last year? Dave Zapico: No. I I I think, it seems like we've you know, there's a lot of macroeconomic things we're dealing with and uncertainties and and related to the broader deglobalization. But I think all that stuff happened in 2025, and I think we're we're, you know, we're more of a more normalized feels like it's more normalized now where you're not you don't have buy add buy add you don't have things like that. And so it feels more normal than it did in '25. At the beginning of '26. Okay. Great. And then just a follow-up on price and and cost. Maybe discuss your your actual pricing expectation for 2026. And then how are you thinking about price cost spread for the year? I know we're getting a little bit of metal inflation here. Brett Linzey: Yeah. We're we're not we're not giving a specific target but what what we will say is in in in the fourth quarter, as I mentioned to to Matt, we offset price price offset inflation plus tariffs plus in about 50 basis points. So it was very strong. And I expect a similar kind of performance next year. That's our target. So so there's in our different businesses, there are different levels of inflation. There's dynamics. But we have a strong history of of because of the product portfolio and the special place in the value chain we have with our customers, being able to to offset price offset inflation and tariffs with price. So that's that's gonna continue. Brett Linzey: Alright. Great. Thanks, Dave. Dave Zapico: Thank you. Operator: Our next comes from Andrew Obin from Bank of America. Your line is open. Dave Zapico: Yes, good morning. Hello, Andrew. Andrew Obin: Can we just get an update on FARO acquisition? What are you seeing? What's the progress has been? What are the key learnings? Dave Zapico: Good question. Remember everybody, it's designed and develops advanced three d metrology and digital reality solutions. These include product families like measurement arms, laser scanners, laser trackers, integrated process and analytics software, and it's an excellent strategic fit with our CreateForm business. So we have a business that's complementary to it and complements our metrology capabilities. So it a and we acquired the business, and we think we can add meaningful value to Ferro. So along with the elimination of the public company cost, then the integration of in the AMETEX global infrastructure, we think there's a tremendous amount of synergy. So we acquired the business for about 2.7 times and we we feel that cost synergies will allow us to more than double EBITDA margins from the current know, mid teens level to a 30% level and achieve a 10% return on invested capital by year three. And and that was the plan going in, and it's still we're more confident than ever we're gonna be able to do that. The we we have made moves on on integrating the business. We formed two business units One is more the metrology business unit, and one is more the digital reality business. So those are people coming from Legacy AMETEK and FARO in both businesses. And that's going going going extremely well. You'll see in the the press release we put out, We we have some one time charges with that. It was about $17.6 million, I believe. So that's allowing us to get the kinds of improvements that we're getting in the business, and that's why there's know, quite quite a big gap between the our core margins that I mentioned. And the reported margins. You got the along with being a a know, a less profitable business, And we do we do we're doing some work on on on improving the business. But, you know, I I'm very, very bullish with the business. I mean, there's a a great coverage throughout the world. We didn't have overlap and capability of really complimentary, and and the team is extremely motivated. So the AMETEK leadership style is having a positive effect on Farewell. So we're very pleased with it. Andrew Obin: Thank you. And and and then last, you know, '25 was a year where I think we're all waiting for a short cycle recovery that never happened. And, you know, you've clearly stressed that your orders improved. Into the year end and continue to be strong in January. What kind of conversations are you having with your customers? Do you feel better that what's happening right now is not maybe flash in the pan? Maybe more of a substantive recovery. Would appreciate any color. Thank you. Dave Zapico: Yeah. If you go back and listen to our last couple of conference calls, we were feeling better, through the quarters too. We could see momentum building and and, it seems to continue to build. And you know, we've had a fantastic pipeline of opportunities and more of those are starting to to happen. And and I yes. You know, he had three years of negative PMI prints, and it's I think it's changing. Feels good for us. And you know, you have a you have a lot of you know, we got we got the the positive statements that we talked about. And then and we got the power business now as well positioned, it's gonna benefit from the build out of power capacity. The process business is seeing steady improvements we're managing a strong pipeline. Future project activity remains extremely healthy. You look at the a little bit of macro uncertainty around the broader decobilization, but at the same time, conditions remain constructive. Interest rate policies are positive. M and A environment looks favorable. You know, the industrial renaissance across the West should offset help us offset any kind of drag from the tariffs. So, yeah, we're we're building our business and we're feeling pretty good right now. So you never know if it's long lasting, but right now, it's it's it's it's it feels feels feels solid and we're certainly being prudent with our guide. Because, you know, something like you you mentioned happens and weakens later in the year, but we don't see it right now. Andrew Obin: Thanks so much. Dave Zapico: Thank you, Andrew. Operator: Our next question comes from Jamie Cook from Truist Securities. Your line is open. Hi, good morning. I guess my first question, Dave, can you just, you did FARO, you did Kern, just sort of an update on how you're thinking about the M and A pipeline in 2026? And are there any sort of sizable deals that are out there? And then my second question, just on the implied margins for 2026 relative to the top line guide. We talked about priced costs being positive. Obviously, I think FARA is still gonna weigh. On margins a bit. Is there any other factors that we should consider as we're thinking about margins across your segments that are unusual? Thank you. Dave Zapico: No. I I I think, Jamie, I'll take the margin question first. I mean, we're firing on all cylinders in terms of margins. You know, if you look at our core operating margins, we're up a 100 basis points in the quarter. So if you back out the all the things you mentioned, they're very strong. Both groups, EIG was up 50 basis points EMG on a core margin was up 310. And if you look at incrementals, our our you know, core incrementals were 45% and and Q4. So know, that that's very strong. And and for twenty six, we've been a little more conservative. We're saying, you know, 35% reported incremental margins and 30 basis points of margin expansion. So so 30 basis points of margin expansion, which is pretty typical for us going into each year, and we're thinking we can get 3535% incrementals. And that'll be a little bit less than we got in '25, but it's more more prudent. We're feeling good about it. There shouldn't be any surprises. A business like ours, we're we I think we 31% EBITDA. Every time we acquire businesses, they're coming in at a lower profit margin. So, yeah, that's why we try to give the core margins and we communicate them. And and and we go through it all, and you have to about it all. But we had a business that has a lot lower margins, like, Saigo had essentially 15% EBIT I mean, FARO had essentially 15% EBITDA margin. So there's gonna be initial dilution. Have a tremendous capability of bringing those margins up. And the best way to look at that long term is our return on capital. You have to look at our balance sheet. It doesn't lie. We had a between a 1213% return on capital, and that's how we know we're creating value for our shareholders. Jamie Cook: Okay. So that was the genesis of my question. So it's it's just you being prudent versus anything else. Yeah. I think so. It really is. Dave Zapico: And then you talked about m and a, and and and you know, we're we're excited about the businesses that we got done done. Because we really can add a lot of value to to Farrow and Kern. But we really have the opportunity to differentiate our performance with m and a in the next year or two. Because with our ability to operate businesses, our discipline, and and really a key change in the pipeline, we're really having strong pipeline of deals right now. And as as Dallas said, we have a balance sheet ready to act, ready to put the work And the pipeline remains strong. We're actively looking at a number of high quality deals We could we could spend $5 billion and still maintain our investment grade credit rating So the team is active, and we're excited And it's really gonna be a way for us to differentiate our performance over the next couple of years. Operator: Thank you. Our next question will come from Nicole DeBlase from Deutsche Bank. Your line is open. Thanks for the question. Good morning, guys. Dave Zapico: Hi, Nicole. Nicole DeBlase: Maybe just circling back on China, really encouraging to see see a turn positive and nicely positive in the quarter. Dave, do you think we're seeing a turn in that market? If we could maybe double click on what you're seeing in the individual businesses there and what your expectation is for 2026 as well. Dave Zapico: Right. China is a little different for us. I mean, we have we have first of all, we have a fantastic team over there. We have just great great long term Amitek employees over there in do a great job of managing it. And we have products that are used by our customers in China to improve their manufacturing processes. You know, high value manufacturing processes, have products that they used to automate their processes. We have products that make their environment cleaner. We have process products that helps them build out their nuclear power infrastructure We have products that help them test their electric vehicle industry. So a lot of our products are really suited to our customer base over there. So Yes. It's you know, the the overall, you know, is the overall market, the overall country, I think you're seeing some deflation. I think you're seeing you still have a real estate hangover. But in the in the places that we're playing, we still have strong positions. And and you know, we we are we're being conservative on how we're looking at that business. But it was, it was good to see the change and and get a level low double digit growth and and driven by our process businesses, our power businesses, and our automation businesses, all firing on all cylinders in China. Nicole DeBlase: That's great. Thanks, Dave. And then just maybe following up on Jamie's question on M and A. It sounds like you're pretty fired up about the pipeline. Would you say like if you kind think about your time running AMETEK and compare today's pipeline versus what you've seen over the years. Is this like a stronger pipeline than normal? Or is it just okay, our pipeline is always strong, and this has been a focus of AMETEK for some time? Thank you. Dave Zapico: Yeah. The pipeline has always been strong, but I think right now, the pipeline is filled with a good mix of normal quality deals and and larger deals. So I think there's the there's probably more larger deals than have been in in our pipeline in a while, and larger deals, you know, we we've we've we're not looking to buy a business as our size or even half our size or even a quarter of our size. Mean, we we we don't think you add value that way, but there's a there's a a good bunch of businesses there that are of good chunky sizes for us. So we get bigger, we've expanded the the types of businesses we're looking at and you know, we we we're very pleased with mean, we're very disciplined. So what looks good today may not happen tomorrow, we're not gonna overpay. But at the same time, if we if we buy a business, you know we're gonna get the returns on capital. And we're optimistic. We're working very hard. We have a great team in 11 people dedicated to m and a. We're very few companies of in in the industrial world that have those dedicated people to it. And all of our operators are also involved. So we have a good process It's well defined processes. The processes that work on deal sourcing, deal modeling, diligence, integration, and I think the secret sauce of AMETEK is we have very strong business operators, well ingrained in the AMETEK culture, well ingrained in the AMETEK business system, providing ownership for delivery of financial metrics for each individual deal. So and we learn something new from every deal. It's we we're we're experienced at it, but but humble, and we learn something new from every every deal. And we we share the knowledge and just makes us better. Nicole DeBlase: Thank you, Dave. I'll pass it on. Dave Zapico: Thank you, Nicole. Operator: Our next question comes from Chris Snyder from Morgan Stanley. Chris Snyder: Thank you. I wanted to follow-up about the 2020 margin guide. It seems like on the math that Q1 margins would be down year on year again. I'm just looking at the 10% top line growth versus EPS up mid to high singles. So I guess, does that reflect some of the M and A headwinds still coming through in that year on year compare? And obviously, you guys are guiding margins up for the year. So do you think they will turn back to expansion in Q2? Or is that more of a back half event? Any just color on the trajectory there would be helpful. Thank you. Dave Zapico: Yeah. Yeah. Chris, I think in in Q1 specifically, we got overall sales at 10%. And you got FARO in there that's running at a lower margin pretty sizable bill running at a lower margin. So if you if you just look at Q1 and you look at the year on year increase in sales, and you apply a mid-20s contribution margin to you'll get you'll you'll it'll work out to to to to our guide. I mean, I think below the line items essentially offset, and we're getting mid twenties on the contribution margin on the incremental business. And that that'll be right in line with what we did. Dalip Puri: Yeah. Chris, if you adjust, for the acquisitions and look at core margins we do expect Q1 margins to expand like we guided for the full year in that same ballpark. Chris Snyder: Thank you. I I I appreciate that And then just a follow-up on staying on margins. And I guess maybe the inorganic margin opportunity or maybe the synergy opportunity on Pharo and Paragon is the better way to phrase it? Can you talk about where we are on that? You know, Pharo, I think you guys said comes on mid teens EBITDA. You guys see a pathway to, I think, double that to about 30. You know, any color on the path? And then Paragon is obviously closer to final margins, but I think you guys have talked about maybe another 500 bps or so there. Can you just maybe kind of provide any sort of timeline on, you know, how those businesses are progressing against those targets? Dave Zapico: I'll start with Paragon. Paragon is is already at EBITDA margins that now online with AMETEK. So it's a very positive work by the people that are doing the work in that business. Very happy with them. But there's more room to go. So I I think there's a a whole next leg of you know, margin improvement in Paragon that are this is gonna occur over the next twelve, eighteen months, and it's gonna it's gonna occur incrementally. We do things incrementally at low risk, and that's gonna happen. And then with FARO, you know, we're kind of in the you know, beginning stages of it. And, you know, you'll you're, you know, pretty saw some pretty heavy restructuring done early in the year. We're still doing some organizational work. There's a international infrastructure that we haven't dealt with yet in terms of duplication. So I think, you'll see some benefits from Paragon. In this this year. And and, you know, Farrell's gonna approve and but it's it's gonna take us couple of years to get it to 30. And, you you know, it's gonna it's gonna be in some chunky improvements, but it's gonna take us a couple years to get it Chris Snyder: Thank you, Dave. Appreciate that. Dave Zapico: Thank you. Operator: Our next question comes from Julian Mitchell from Barclays. Your line is open. Julian Mitchell: Hi, good morning. Maybe good morning. Just maybe wanted to start with, the orders sort of trends in recent months. You know, as you said, things felt better into year end. December was good, but I suppose the absolute organic orders growth rate was, I think, steady. Year on year in the third and the fourth quarters at about 7%. So were there things sort of maybe help us understand, were there things moving around on specific markets within the orders or or something geographically? Any color as to how maybe orders look different in the fourth versus the the third quarter? Dave Zapico: I I think it was pretty broad based. I mean, we had wanna when I look at the the fourth quarter, we had the organic orders of 7%, as you said. Both groups were up. So EIG and EMG. So was broad based, and that was a similar pattern from from Q3. And the book to bill of AMETEK was 1.02, and it was pretty broad based. Julian Mitchell: Thanks very much. And when we're looking at the organic sale oh, yeah. Dave Zapico: I think I think the the what you see is the the EMG businesses picked up first and the EIG businesses the process part of the EIG businesses are following later. And that's a typical pattern that we've had throughout history. So is there some time during the the, 2026 when we think the EIG the process part of EIG is really gonna inflect positive and historically, we've had great contribution margins when that happens. But that's that's that's that's that's how it's happening. EMG happens first. EIG happens later. We look at aerospace, it's been strong all along, and you look at that separately. Julian Mitchell: That's helpful. And and, Dave, just wanted to follow-up on your points just now on thinking about the phasing of the segment. So when we look at organic sales growth for AMETEK in 2026, Maybe clarify know, what degree of of sort of deceleration just from tougher comps, you know, dialing in inorganic growth through the year, with that prudent framework in mind. And are we assuming then that the EIG business kind of exits the year maybe organically growing a little bit faster because of that later pickup. Dave Zapico: That that I I would know what's gonna happen exactly because we're looking a long way out, but I think if you get into the second half of the year, EIG organics could be stronger and EMG organics could have a tougher comp. Julian Mitchell: Perfect. Thank you. Operator: Thank you. Next question will come from Joe Giordano from TD Cowen. Your line is open. Joe Giordano: Hey, good morning, guys. Dave Zapico: Good morning, Joe. Apologies if someone asked this. I'm kinda multitasking here a bit. But, Dave, can you on on the guide for process, I know you like to be cautious in the beginning of the year and market's far from certain here, but a little conservative, low single digit coming off like an acceleration throughout the year and now going positive. process? Can you kind of frame maybe the puts and takes that's driving that view on initial view on Dave Zapico: I I can see that. I mean, it it was We grew low single digits in Q4. And we got it low single digits for the year. So the Q4 was the first quarter process add. Positive low single digits. So it's we're we're being a bit prudent, but you know, one quarter does not make make a year. Is there a big spread in that segment between, like, what's getting better and what's kind of stable but not accelerating? Can you may maybe if there's a little bit more granularity we can get there? Yeah. I I think in that segment, you what you see is you know, the the the the semiconductor business is positive. And the instrumentation sold, the metals businesses are positive, and the the raw in business that we talked about earlier is positive. So a lot of a lot of things are positive. And then the places that are the oil and gas and the research are a little bit less than those those positive segments. Joe Giordano: Yep. Yep. That makes makes sense. Could you maybe give us a little color on the new deal, like, in terms of the size of the business and the the maybe the margin opportunity there? Yeah. Dave Zapico: Yeah. It's it's really a technology deal, and we're not disclosing terms. We have an agreement that we're not disclosing terms. It's a smaller deal. It's a technology deal. And you know, it's a really, really interesting business. They they're a leading provider of advanced eye care testing instruments. And and you know, optometrists are trying to find the initial signs of diabetic retinopathy. And and they're doing that with, you know, structural testing. And and they're testing your eye. They're they're looking at your eye. They're trying to see things. But this is a an actual electrical response, and it's at a portable device. They they there was a a technique that you used to do the test The test was expensive. It was very large piece of equipment. But they the innovation was to make it a really portable instrument. And this is really gonna help a lot of people. And it's kind of a you know, a a technique that's very, very growing rapidly, small but growing rapidly. And know, most of the sales are in The US, and and there's about about 60 employees near DC in Germantown, Maryland. And it fits right into our our record business. Our ultra precision technology business has a business that sells this type of equipment. It's just an additional product line. So we're really happy about it. Got it's adjacent technology. It broadens our portfolio. It lets us leverage our channels and leverage their channels. And this business has a recurring revenue of nearly 40% from these tests. From these sensor strips that are placed on the eyes. So it's really good technology. We're pleased with it, and we're not gonna disclose the terms, though. It's a smaller deal technology deal. Joe Giordano: Thanks, Dave. Dave Zapico: Thank you, Joe. Operator: Our next question comes from Steve Barger from KeyBanc Capital Markets. Christian Zyl: Good morning, everyone. This is Christian Zyl on for Steve Barger. Dave Zapico: Okay. Hello. I just have one question. A few years ago, EMG operated in a mid to high twenties percent operating margin. With the recent acquisitions and current mix, is it possible for you guys to get back there organically or does that likely come from acquisitions? Just really trying to get any thoughts of how you're thinking about EMG broadly and what your target targeting over the next few years. Thanks. Dave Zapico: Yeah. I I think, seasonally, EMG is usually a little bit lower and and Q4 than the other quarters because of some dynamics in the business. But I don't I don't think there's any reason that we won't be operating at that at that level. And and I think we did operate at that level in the third quarter. Yeah. Yeah. I if you go back couple of years like you stated, we were probably mid twenties, right, before the Paragon acquisition. And and and now if you look at where we are, we have we've kind of retract back maybe 60%, and I think we're on track to hit those, those mid-twenty margins in '26 in EMG and grow further from there. Christian Zyl: Great. Thank you. Dave Zapico: Thank you. Thank you. Operator: Our next question comes from Scott Graham from Seaport Research Partners. Your line is open. Scott Graham: Hey. Good morning. Thanks for taking the question. There's actually two of them. I don't remember, Dave, the last time we saw Vitality of thirty percent. I was hoping you would unbundle that maybe a little bit toward maybe is there some defense in there? Is there, you know, this may be chasing some data center sales in there Can tell us maybe where some of those are going specifically if you could and their impact on the organic Dave Zapico: Yeah. Thirty percent's a good number, Scott. We're very pleased with that. There there are some data center sales on that. We talked about in the last call that we've reconfigured some of our products for that market. That were sold to defense market. Those are certainly contributing to that. But there's just a the engineering capability of the company is unquestioned, and they they're really developing some good things or customers are very pleased with them. They're with the uptick and it makes us feel confident going into a a strengthening market that we get the right products that you need. But it's really it's bottom up, as you know. So it's it's all our businesses, and we're not we're not telling a business to develop this or develop that. It's organic. And there's just very, very viable product development plans, technology road maps, we're optimistic about what we've done with our products and our technology. Scott Graham: Okay. Thank you. The follow-up is simple. It's the defense budget potentially reaching $1.5 trillion at some point next couple of years. Do you need acquisitions maybe to get you a little bit more more broadly exposed to, you know, sort of have dibs on some of that? Or how do you feel about your defense business role? I I know that there's nothing specific in the budget on it. It's just a number. But how do you feel about maybe getting after some of that business? Do you need, a couple of deals to help you? Dave Zapico: Yeah. We'd love to do a deal in the defense industry. But that doesn't where we have fully developed product lines and and the business cases for what we have. And I mentioned the Abaco business and the computing area. I mentioned the air technology. I mentioned our road front business and advanced cooling. I mentioned our power business selling power systems to UAVs. So we're really competitive, and that business is doing very well. So we don't need an acquisition to continue growing and we actually have a little our aerospace and defense business is about 18% of sales. We have a little more defense sales than than commercial sales. So we're we're we're in a pretty good position there. Legacy centers on aircraft, selling to both commercial and and defense aircraft to some of the more lately, some of the modern more things we've done in in the recent years. So it's pretty wide range. It's the same strategy. We're focused on niche technologies, things we're really good at. And have plenty of people knocking on our door. And as I mentioned, the European you know, the the the European starting to to focus on their own defense and their own protection. Definitely definitely creating opportunities for us. Scott Graham: Thank you. Operator: Thank you. Our next question comes from Rob Wertheimer from Melius Research. Your line is open. Rob Wertheimer: Hi, and thanks. I know we're getting towards the end of the call. I had sort of a general question that you touched on with with Andrew, I guess. But on Paragon, it seems like a lot of things have gone well. And this may be a question as much about AMETEK as about Paragon, but I wonder if you could just you know, just give us insight into what you've done and what has, made the most positive improvements there as a way of learning about the company again. Thanks. Dave Zapico: Yeah. Well, I I I think the the most important thing is we bought a very good business. And if you remember when we bought it, the that was in the middle of a destock, and you know, people were worried about it. We weren't worried. Because we knew we had a good business. We knew we had a good team. And and you know, they they the consumable surgical instruments that they manufacture are good recurring revenue. They're a leader in implantable components. So we bought a good business. And we bought a business that, quite honestly, was undermanaged on the operations side. So we've done a lot of good work to improve that operations, combined it with one of our businesses who has a great capability in in another part of this market. So similar to the FARO model, we have a bought a business in a market we knew. We have some capability. We we restructured the business to be be more focused on on customers, more focused on understanding the p and l. And and we're bringing AMETEK's global capabilities to it. So it's a it's a, you know, kind of a playbook that we apply quite often and Paragon is gonna gonna lead the way, but Farrell's right behind him. Rob Wertheimer: Perfect. Thank you. Yep. Thank you. Operator: Thank you. And our next question will come from Robert Mason from Baird. Your line is open. Robert Mason: Just one question. Dave, to go back to the process business, it does sound like your business is there more likely to lead on growth Yeah. And you made a comment just around some of the research areas. How are you expecting those research areas, R and D exposed areas, to play out through the year? Do you think they've have a chance, you know, for to be flat or even up a little this year, start to see some turn? Dave Zapico: I I do. And and and there's always time for you, Rob. So so we'll always speak to him. So yeah, I I think in the research area, what you really saw in The US was there's there's a little bit of during the Doug's time, there was a little bit of a, you know, a little bit of dysfunction, and that's right in itself. So in in a lot of areas of research, so we happen to be particularly biased too. There's a lot of nuclear research going on. In the materials area, there's a lot of research going on to find new materials, to, you know, replace you know, other materials with with you know, the rare earth metals. There's a lot of research going on there. So in our Kamika business, there's high end research. There's high end research going into nuclear And the other thing that caused us some problems in 2025, which has gone away, was when the tariffs originally were put in place, they caused a substantial pricing disconnects for us and our customers, and now we've worked through that. So long as tariffs stay in about the same range, that won't be an issue. So I do think that we have the potential to to grow our research business in '26 just as an answer to your question. Robert Mason: Pretty good. Dave Zapico: Thanks, sir. Dalip Puri: Thank you. Operator: And I am showing no further questions from our phone lines. I'd now like to turn the back over to Kevin Coleman for any closing remarks. Kevin Coleman: Thank you again, Crystal, and thanks, everyone, for joining our call today. And as a reminder, a replay of the webcast may be accessed in the Investors section of ametek.com. Thanks all. Operator: Thank you. This concludes today's program. Thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the BellRing Brands first Quarter Fiscal Year 2026 Earnings 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. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Jennifer Meyer, Investor Relations for BellRing Brands. Please go ahead. Jennifer Meyer: Good morning, and thank you for joining us today for BellRing Brands First Quarter Fiscal 2026 Earnings Call. With me today are Dorothy Davenport, our president and CEO, and Paul Rode, our CFO. Dorothy and Paul will begin with prepared remarks. And afterwards, we'll have a brief question and answer session. The press release and supplemental slide presentation that supports these remarks are posted on our website in both the Investor Relations and the SEC filings section at bellring.com. In addition, the release and slides are available on the SEC's website. Before we continue, I would like to remind you that this call will contain forward-looking statements which are subject to risks and uncertainties that should be carefully considered by investors as actual results could differ materially from these statements. These forward-looking statements are current as of the date of this call, and management undertakes no obligation to update these statements. As a reminder, this call is being recorded. An audio replay will be available on our website. And finally, this call will discuss certain non-GAAP measures. For a reconciliation of these non-GAAP measures to the nearest GAAP measure, see our press release issued today and posted on our website. With that, I will turn the call over to Darcy. Darcy Horn Davenport: Thanks, Jennifer, and thank you all for joining us this morning. First quarter delivered a solid foundation for the year. As we continue to execute our plans. Results were ahead of our expectations with favorability, primarily driven by the timing of customer orders. The RTD shake category remains healthy. And Premier continues to hold a leadership position with 22% market share and best-in-class household penetration, brand equity scores, and repeat rates. Today, we have narrowed our range of our 2026 net sales guidance to between 4-6% growth. While much of our key selling periods remain ahead, we have observed more frequent promotional events from Insurgent Brands than expected. As a result, we have appropriately factored this into Premier consumption trends in our balance of year outlook. We are continuing to execute on our strategies of growing distribution, increasing brand investments, and launching innovation, which are progressing as planned. Many of these initiatives are ramping up, and are starting to positively impact consumption. We were encouraged by the growth in consumption during January, up 6% in all channels, and 16% excluding club. We expect Q2 premier consumption to be generally in line with net sales and expect these growth strategies to be more meaningful contributors to growth in the second half of the year. As Paul will discuss in more detail, we have updated adjusted EBITDA guidance to $425 to $440 million. This range incorporates our updated sales outlook and the impact of higher whey costs on our powder business. Turning to our category. We continue to expect RTD shake category growth in the high single digits for 2026, primarily driven by volume. In the medium to long term, we expect more marketing spend, expanded shelf space, innovation, and the mainstreaming and affordability of GLP-1s to drive higher household penetration and category growth. Retailers are fully behind the category and are increasing category space, testing higher traffic aisle locations, and expanding display space to capture growing consumer demand. As I discussed on our last call, the success of the category has attracted competition. As insurgent brands work to establish themselves in the market, we expected promotional spending would increase. However, as I briefly mentioned earlier, year to date, the number of events is tracking modestly ahead of our initial expectations. Over the longer term, we continue to expect retailers to consolidate the shelf behind a handful of the best-performing brands and move them to more heavily trafficked aisles. We remain confident in our ability to continue leading the category. Though we anticipate some near-term transitional impacts, on these competitive dynamics play until these competitive dynamics play out. We believe that mainstream appeal, high repeat rates, and execution capabilities will determine the long-term winners. Turning to our first quarter performance. I'd like to highlight that our supplemental presentation and corresponding metrics now reflect a change in category definition from convenient nutrition to wellness. With The US category size increasing to $24 billion from $21 billion. The broader definition includes the same brands and products as our historical category along with additional products that our research shows consumers consider in the category. This change does not impact any of our previously reported tracked consumption or household penetration metrics. The wellness category grew 7% in Q1, and RTD shakes also up 7% with growth driven by volume. Premier RTD shake consumption was down 2% in the quarter. Lapping 23% consumption growth in the '25. Which included very strong club consumption with the smallest number of new brand entrants and a nonrecovery promotion. Consumption outside of club was strong, up 11% in the quarter. Premier Q1 consumption growth came in slightly below our prior outlook of flat. Primarily due to the timing delays in activating promotional display at a mass retailer. As well as a modest impact from greater than expected promotional activity by Insurgent Brands. First quarter net sales increased 1% with Premier net sales down 1% and Dymatize net sales up 6%. On strong international growth. Paul will go into more detail in the quarter. Later. Now I'll provide a review of our operating plans, which will continue to provide momentum as we progress through the year. We are on track with our plans. To, one, continue growing our distribution both in and out of the aisle, two, increase advertising investment while elevating its impact. And three, launch innovation that provides consumer excitement adds occasion, and drives trial. Distribution both in and out of the aisle is a major opportunity. Starting with CLEV, we launched new products and formats as well as increasing sampling, and promotional spending. Which is expected to improve our performance in this channel as we move through the year. Our premier shake TDPs increased at strong double-digit rates in fiscal 2025. Primarily driven by mass, food, drug, and e-commerce channel. And we remain on track to expand at similar levels in '26. We're encouraged by the early performance with our new broker and internal retail sales team. In particular, our sales of single bottles have more than doubled in January. Effectively increasing trial. Our improved store activations are already meaningfully impacting our FDM channel results. With strong share increases in feature and display. In late Q1, we launched a partnership with a major mass retailer, which included extensive displays and end caps across pharmacy and grocery aisles. And the first launch of our coffee house shake innovation. Due to the timing of the retailer's holiday merchandise transition, program execution was modestly delayed. Our programming is now fully in place and we are seeing strong double-digit consumption growth as traction builds. We're also encouraged by the early performance of Coffee House. Where caramel macchiato is one of the highest, velocity four counts in January. Our second priority is advertising. We saw a strong return on investment in fiscal 2025 and have decided to further invest and elevate our creative in '26. Our go get them campaign was launched in late December and is designed to drive household penetration, strengthen emotional connections, and bring fresh energy and relevance to the premier brand. Premier Protein has always been a brand that celebrates the everyday go-getters. Not just those who work hard in the gym, but those who work seriously hard in life. As the original mainstream RTD brand, this campaign is perfectly positioned to bring in new households as the category continues to mainstream. This omnichannel campaign was developed with a new agency and runs across linear TV, streaming, podcast, and social as well as retail media and out-of-home locations, including gyms. Go Get them has tested better than any other prior campaign, and we expect it to drive further awareness and conversion as we move through the year. Turning to innovation. In '26, we are intensifying our focus on innovation across flavors, formats, consumer segments, and occasions. To expand shake occasions, last year, we kicked off the year our indulgence line. And this year, our new year, new you focus is on our new coffee house line. Coffee house meets the protein and energy consumer need with 30 grams protein and a caffeine equivalent of one cup of coffee and targets a sweeter taste palette. Versus our core cafe latte shake. Earlier early results are promising, and we're excited about the added adding a coffee house variety pack in bottles as an incremental item at a club retailer later this month. Premier is known for its flavor innovation. We will continue to bring flavor excitement to the category throughout the year. Our LTO strategy remains highly successful with winter mint chocolate performing at the top tier tile. In January, we launched strawberry powder, and in our third quarter, we will offer an exciting new seasonal shake flavor. Lastly, I'm pleased to announce that we have two new shake lines, we two new lines we are readying for launch in the second half. The first line a continuation of our strategy to expand our portfolio across protein levels. In addition to minis, which provides a smaller size product, with lower protein levels that are perfect for snacking, we will launch a product with higher protein for those consumers looking for more protein in their ready-to-drink shake. I'm especially excited about our second line launching late in the year. It offers consumers a completely different drinking experience versus our core products. It tested well above industry benchmarks and targets both incremental consumers and incremental occasions. In closing, the first quarter was a solid foundation for the year, and consumption is ramping up. We have conviction around the category, the strength of our brands, and our demand drivers. Premier remains the number one brand with record high household penetration and repeat rates. We have deep under deep expertise in one of the fastest growing categories in retail and continue to expect strong category growth. We are investing in our brands, sharpening our execution and innovation plans, and driving savings our savings agenda to deliver our '26 outlook. Our operating plans are on track. And we continue to expect an acceleration in growth in the balance of year. I remain highly confident in our future and our ability to create sustained long-term value for shareholders. Before turning the call over to Paul, I wanna discuss the leadership transition plan we announced this morning. As you saw from this announcement, I've decided to retire. From my role as president and chief executive officer later this year. Transition will take place on or before the end of our fiscal year on September. The BellRing board of directors has started a national external search to identify the company's next CEO. I remain fully committed to helping BellRing Brands achieve its full potential. Following the appointment of our new CEO, I will serve in an advisory role to ensure a smooth transition of leadership responsibility to provide strategic support to the company. Incredibly proud of all that we have achieved during my time with the company. And the road map we have established in the future. It has been an unbelievable ride. Seventeen years ago, I joined a privately held company with approximately $20 million in sales. Today, we are publicly traded, global $2.3 billion business with significant runway still ahead of us. While the growth is remarkable, what I'm most proud of is the culture we have built along the way A special thank you to all of our employees. Who put their hearts and souls in our purpose every day. Changing lives with good energy. The foundation of BellRing is strong, and I look forward to helping the board and the company's new CEO advance toward its next chapter of growth. You for your interest in the company. I will now turn the call over to Paul. Paul Rode: Thanks, Darcy, and good morning, everyone. Total BellRing net sales for the quarter were $537 million, up 1% over a year. We delivered adjusted EBITDA of $90 million at a margin of 16.8%. First quarter net sales were ahead of our expectations of down 5% driven by a timing benefit from customer orders that we previously expected in the second quarter and some upside at Dymatize. Adjusted EBITDA was ahead of our guidance on higher sales and SG&A leverage. Premier Protein net sales were down 1% with RTD shake net sales down 2%. Dymatize sales increased 16% driven by strong volume performance particularly in international. Q1 is our toughest comparison As we noted on our last earnings call, of the year in the club channel where we lapped a period with fewer new entrants, and chose not to repeat promotions for Premier and Dymatize. Gross profit was $161 million, with gross profit margin of 29.9%. Excluding mark to market adjustments on commodity hedges, adjusted gross margin declined 730 basis points. The decline was expected and driven by mid single digit input cost inflation unfavorable mix, and lapping of $5 million of nonrecurring cost favorability in the prior year. We expect whey protein inflation for the remainder of the year while headwinds on our RTD shake milk proteins will moderate in the 75 basis points on our gross margins in the quarter. SG&A expenses were $78 million at 14.5% of sales versus 15% of sales in the prior year quarter. Before reviewing our outlook, I'd like to make a few comments on cash flow and liquidity. As expected, the first quarter was a modest use of cash in line with our typical seasonality. We ended the quarter at net leverage of 2.5 times. We continue to return cash to shareholders through share repurchases, with $97 million repurchased in the first quarter. Turning to our 2026 outlook. We now expect net sales of $2.41 billion to $2.46 billion which represents 4% to 6% growth. Adjusted EBITDA is expected to be $425 million to $440 million with a margin of approximately 18%. Our guidance reflects our updated consumption outlook for Premier and some upside from Dymatize. We now expect Premier Protein net sales to grow mid single digits at the midpoint. In addition to healthy category tailwinds, distribution gains including innovation and increased brand investment are expected to lift sales growth starting in the second quarter with a more meaningful impact the second half of the year. Volume performance is expected to be partially offset by a low single digit headwind from promotional investment. We now expect modest growth in sales for the rest of the portfolio. For Dymatize, we have executed additional pricing actions to offset meaningful whey protein inflation and have prudently modeled in elasticities, which we expect to impact the second half of the year. Our updated adjusted EBITDA guidance of $425 million to $440 million incorporates sales outlook, embeds a slight mix shift towards the lower margin 300 basis points year over year at the midpoint, with lower adjusted gross margins the primary driver. The gross margin decline reflects significant input cost inflation, the introduction of tariff costs and the increased trade promotional investment. Tariffs are expected to have an unfavorable impact of 80 basis points on our full year gross margins. The remaining EBITDA margin impact is primarily due to increased which is partially offset by other SG&A leverage. We continue to expect advertising as a percentage of sales of approximately 4% with the largest year over year dollar increases in Q2 and Q3. For the second quarter, we expect net sales growth of 3% to 4% similar growth for both Premier and Dymatize. Consistent with the first quarter, second quarter EBITDA margins reflect significant commodity cost inflation and tariffs as well as higher planned advertising investment. These factors, along with the timing shift of sales into the first quarter now result in a second quarter adjusted EBITDA margin of approximately 13%. Our first half adjusted EBITDA margin is expected to be approximately 15% largely in line with prior expectations with significant sequential margin improvement expected in the second half. Specifically in the second half, our sales growth and cost savings accelerate. Dymatize becomes a smaller portion of our sales mix and we expect significantly higher SG&A leverage. In closing, we are executing our operating initiatives as planned expect the investments we are making in our brands this year to bolster our long-term position. Our business is highly cash generative, and we have a solid balance sheet, which positions us well to fund growth initiatives while continuing to repurchase shares opportunistically. I will now turn it over to the operator for questions. Operator: Press 11 on your telephone and wait for your name to be announced. Our first question comes from Andrew Lazar with Barclays. Andrew Lazar: Great. Thanks very much. Good morning, everybody. Darcy Horn Davenport: Good morning. Hi. Andrew Lazar: I guess, Darcy and Paul, guess my my one question would be the the main hope for the mass merchandiser test you talked about. Is to sort of just further prove that Premier Protein and and ready to drink shakes in general sort of belong you know, outside the pharmacy section, deserve greater points of disruption in the store. In those, I guess, stores where the execution of this test is in full swing, Maybe you could go into a little bit deeper. What sort of results are you seeing? And are they such that I think, if I'm not mistaken, this was supposed to be sort of a three month sort of test. There a possibility that based on the results you see that this gets extended? Or somehow changes the way Premier Protein is merchandised in either that store or others going forward, give me you'll have some proof points for it. Darcy Horn Davenport: Thanks, Andrew. Yeah. The the program is performing very well. So we absolutely internally view this as a success and something that we want to bring to others First of all, bring to that same retailer later in the year, but also bring to other food drug mass customers and show the impact that they can have on their category and on our business. We're seeing record weekly sales on the rollback items, January was our largest month ever. At this retail I mean, just a shout out to our team. They're doing an amazing job with execution. And when I say our team, the broader team, we have an internal activation team that I talked about in prior calls as well as a new broker, and, you know, they're in the stores all the time. And it it's working. So I think, you know, we had we had we have good learnings. This was really our first major kind of program. If you think of I mean, right now, we have you know, up to it depends store to store, but we could have up to kind of seven displays throughout the store. Obviously, some are in testing, some are in fewer markets. But it is we have really good learnings that we can now apply to other customers. So, yeah, thanks for the question. It's it's we're really pleased with the results. Andrew Lazar: Okay. Great. Thank you. Operator: Our next question comes from Megan Klap with Morgan Stanley. Megan Christine Alexander: Hi, good morning. Thanks so much. Wanted to ask a little bit about the consumption. Darcy, last quarter, you talked about an expectation that December consumption for Premier would accelerate to low double digits, and that would continue into January. I think you noted in the prepared remarks that some of the timing of the mass retailer partnerships was was the primary driver of Premier being slightly below. But it seems like into January, the the consumption's still running a bit below what you would had expected. So you just help us understand a little bit more of know, is that primary just what's going on primarily what's going on in the club channel You know, maybe some of the weaknesses persisted a bit longer than you expected on the on the the promotional intensity into January. And just help us understand kind of what's what's embedded into the the balance of the year for that channel in particular and maybe you can touch on just the expanded, sets as well and and how that's factored in. Thank you. Perfect. Okay, so yes, two main reasons that we so Premier shake consumption was down 2% in Q1, and we we modeled, and I predicted it would be flat. So two main reasons. One was what you talked about, which slightly we were slightly below the guide because of the time the timing delay. In setting up that mass promo. And then there's a second piece. Which is we start and I talked about it in my remarks. But we saw a small impact from increased frequency of events from insurgent brands, and that was mainly in club, but also some in mass as well. So part of bringing down our know, narrowing our guide a couple points, basically taking the top end off the guidance was we are flowing we're assuming that level of kind of frequency of events, promotion, throughout the rest of the year. So that is and that is, you know, affecting kind of some of the January consumption that you're seeing too. What I will say is and I think you guys are seeing it as well. The consumption is improving. So I think that although we kinda had a little bit of a late start than we expected, lots of learnings there, but we're starting to see a nice increase 6% all channels in January. 16% outside of club. So we are seeing some strong momentum. We expect that to continue. Through and continue into you know, throughout Q2 and further into q into '8 into the second half. As we start seeing our growth drivers become more meaningful. And I think Megan, there was another question in there. Just the expanded shelf set. Any update you kind of have on that at at your largest club customer? Yes. So, you know, as as we said last last call, we expect that it would stay we still expect it to stay. Megan Christine Alexander: Got it. Thanks, Darcy. Operator: Our next question comes from the line of David Palmer with Evercore ISI. David Palmer: Thanks. Good morning. I wanted to ask you about just assumptions and you know, going into the back half of the year or less. Three quarters of the year, I think your guidance contemplates mid to high single digit consumption going forward. And you know, you in January, I know people are gonna look at the most recent trends. It's more like mid single digits. In terms of consumption for Premier Protein. And in that month, you know, you could say that it's looking very promotional, not just by the competitors, but by Premier Protein Looks like it stepped up to 65% volume mix from 45% a year ago. So I'm wondering if you could help us, you know, work with the recent trend and think about why trends would be at or above this going forward. You know, what are your key assumptions going forward? It sounds like a couple new shakes in the back half. Would be one of them. Because I think people are gonna wanna understand your guidance and why that's, realistic. Thank you. Darcy Horn Davenport: Yeah. It's a great question. So, as I said, I think we, you know, we expect consumption to improve in Q2 and further in h two. We said consumption in Q2 would largely track net sales. I do wanna hit your point. There is always weekly consumption noise. Depending on promo timing year ago this year, promos, weather, hard to track weekly, consumption. So I know it is the data we have, but it is just it's it's gonna be bumpy. And so what I would say just to to zoom out is that in Q2, we expect it our consumption to largely track net sales growth. We expect it to increase throughout the the second half as our growth drivers become more meaningful. I'll go through some of those kind of reasons to believe and why, you know, I believe we will see that increase, which is, first of all, distribution and merchant there's really three pieces. Distribution and merchandising, advertising, and innovation. So distribution and merchandising, it's already starting to build. That's what we're seeing in the consumption right now. We're seeing some good momentum starting with our mass partnership. But, also, we have displays in also other food accounts. So that will continue, the next kind Of pulse period is really Q4, but we have some small events also in Q3. The second one is advertising started in late December. You know, the new Go Get'em campaign is to drive household penetration and and relevance to kind of the mainstream audience. I love the campaign. It tested better than any other campaign that we've ever had. But that is a lag. It has a lag on consumption, meaning you know, call it a couple months before you start seeing it impact consumption. So that will more impact kind of the the the back half. And lastly, innovation. So we launched our coffee house already in mass. We are extending that to a club account this month. So that's exciting. That will start rolling out through to the other accounts throughout the year. I talked about some LTOs. That we have coming in that's new that always I mean, it seems like a small thing, but it always generates, a ton of excitement for consumers and, specifically, excitement for retailers because they know these things sell, and there is some bias for action. So we often get a lot of displays associated with the LTOs. And lastly, you know, I kinda teased this idea of a couple new lines And although they're later in the back half, Yeah. They're exciting lines. You know? One we are, you know, hitting kind of the higher protein levels And then the other one, which I was you know, purposely vague on, but it hits at it is a line of products that's just a completely different drinking experience than what we have as our in our 30 gram shake. So, again, lot of activity going on, and that's why you're gonna start seeing the acceleration in consumption, especially in back half. David Palmer: Thanks for that. Passed on. Operator: Our next question comes from Thomas Palmer with JPMorgan. Thomas Palmer: Hey, it's Elsa on for Tom. So you've mentioned in the past that you'd expect some of these smaller brands that I've entered into the club channel to start filtering out, and I think you've already maybe seen that happen in some cases. Could you just give us an update on where that stands today? You know, are you still seeing more entrants coming into the channel, or is it starting to go the other way? Thanks. Darcy Horn Davenport: Yeah. We are seeing, I think, there you know, with a category like this that has the growth and the potential that that we see It is expected to have, you know, more competition The way I have described this before, but it probably would be helpful to just hit it again The way we break down the category is we have about half the category of the leading brands, which includes Premier, Then about call it, 10% of the category are these insurgent and crossover brands, which is really what your asking about. And then about 30% of the category are declining legacy brands, which has been meaningful shared donors over over the years. There's an extra 10% that basically just follow the category growth. But in general, if you think of those three key areas, we the insurgent brands, much like other categories, like energy, there's just a lot of brands that come in and out. We're actively watching repeat rates. We have already seen you know, some brands not make it, especially in club. Because those thresholds are very high. And and so, yes, we've already seen kind of the shakeout. What I expect is that 10% of market share that we're seeing with Insurgent and Crossover brands. That will probably stick. It'll just be a different set of brands that are competing. So I would say that, yes, we're continuing to see kind of the shakeout We are just you know, we're watching. Remember, it this is where low household penetration category you can have, you can have multiple winners. And don't forget that there is kinda 30% of the category. That have been meaningful share donors and will continue to be. Operator: Our next question comes from Jim Salera Stephens. Jim Salera: Darcy. Hey, Paul. Good morning. Thanks for taking our question. Darcy, you you you called out, several of these challenger brands being more promotional. And I wonder do you have any data on the consumer shopping behavior any of these particular brands? The promo rolls off? Is there an instance where consumers are just really being attracted by kind of the prominence of the discounting, but once that's pulled away, they revert back to previous brands. Any commentary you can provide on that would be great. Darcy Horn Davenport: Yeah. I know if I have data on that. I would just say we're watching it. I mean, here's what we do see. You know, we assumed, and I talked about it last call. Given, you know, these insurgent brands, they're going to spend to try to get their foothold in the category. So we knew that this next year, 26, it would be, you know, slightly elevated promotional spending. What I would say you know, what we're what we saw kind of year to date is frequency. So it's less about, like, more depth. It's more about just frequency of events. Especially in club. But also it we're seeing it in mass as well. So I would say, I mean, it's it's early. It's only a few months in. I think weeks we have conservatively embedded this higher number of events throughout the year. But I would say to have specifics about kind of what you're asking about bump and stick, I think, is what we call it internally. I don't think necessarily we have that data. But as you can imagine, we are watching it very closely. Jim Salera: That's great. You. I'll hop back in the queue. Operator: Our next question comes from Alexia Howard with Bernstein. Alexia Howard: Good morning. Can I ask about diamond Ties? Specifically, what's driving the growth in the international market to be higher than expected? And then domestically, how are share trends, moving since the quite favorable consumer reports article about the fact that the brand does not have heavy metals in it to the same degree as the competition. Thank you, and I'll pass it on. Paul Rode: Yeah. Darcy, I'll start with sanitizing and a few can weigh in on her second question. Dymatize International has been performing very well for a long period of time. We saw it really throughout '26 or fiscal twenty five where Dymatize performed well in a number of markets across the globe, Middle East, South America, you know, Central America. So it's performed very well. Have a great sales team, or a great management team over international. Have great distributor partners. Around the world. And so it's just continued to perform well. You may recall, we expected actually had a really strong Q4. We thought some of that was maybe a pull forward ahead of pricing, but Q1 actually came in better than we expected. And so that's why we now think that Q1 will stick, and we've raised our expectations a bit on international. But it's just the brand resonates I think the competitive set perhaps in the international markets is a little bit different, a little less intense perhaps than you see in The US. The shopping experience, I think it's still you know, a lot in specialty channel stores. Whereas I've obviously in The States, it's been pivoting towards online. And and, more in in some of the mass channels. But like I said, it's continued to perform well, and, we expect it to continue. You wanna take the second part of that? Darcy Horn Davenport: Yeah. With regards to US share trends, I mean, it's pretty flat. So you know, we're basically growing with the category. I would just say that, you know, the challenge the brand is a really strong brand. And, yeah, nice to get some acknowledgment in some of this with some good PR. But it but there are challenges on way pricing. I mean, I know that Paul talked about it having some headwinds, but that's facing the entire category. So, you know, we've kind of pulled back on on support for Dymatize just to manage the p and l, candidly. So because the the way pricing is so high, But overall, it's a strong brand, well known, and holding share basically in in a growing category. Operator: Our next question comes from the line of Yasmeen Deswande. With Bank of America. Yasmine Deswandhy: Hey, guys. Good morning. I just had a bigger picture question. So in your slides, you talk about expanding your category definition from convenient nutrition to wellness. So is there any reason we should infer that there has been a change to your portfolio priorities or M and A priorities? As you you know, maybe look into expanding into these categories? Or is it, you know, or is it kind of holding as is? Thank you. Darcy Horn Davenport: Yeah, Yasmin. So just let me just give you a little more context on the category definition change. So, you know, we do a pretty thorough category study with consumers. We the last one we did was I about four years ago. Our category has changed a ton since then. So when we did it, this last time, there were some new types of products that consumers put into this category. First of all, they don't call it convenient nutrition. They call it wellness. And so then we're gonna evolve the name. But other products like some you know, powder products, like hydration powder products, think protein coffee, different types of isotonic protein drinks, Even you've started to see, like, protein sodas around. So like, those types of product and expanded protein treats. So all of those things go into our category, which makes it know, increase about 10%, which is not insignificant. As far as your question around, does it change, you know, how we're thinking about you know, m and a and different things like that. I would say it absolutely I mean, we are a consumer obsessed company, so we are looking at what consumers want and how we can get incremental sales, whether it be through organic innovation, which are some of the things that, you know, we are really focused on internally. But, also, we obviously look at inorganic opportunity as well. Operator: Our next question comes from Brian Holland with D. A. Davidson. Brian Patrick Holland: Yeah, thanks. Good morning. Maybe just to clarify first, Darcy, high level, obviously, the consumption inflection second half December, January was not to where you thought it would be. And, obviously, you've explained some of the reasons that might be. So I just wanted to isolate and ask ask whether the mass merchandise mass retailer merchandising event whether that is performing to expectation and it was maybe impacted by like you said, the the lag in the rollout. Or what's happening in club or is competitive activity in that mass retailer where we're seeing a bunch of rollbacks, etcetera, is that weighing on the actual performance at that customer relative to expectations? And then second part of question, which I guess is kind of totally separate, but just sightlines into similar merchandising events here, as we look over the balance of the year that we can anticipate whether it's in close, which is obviously even a pressure point. Or elsewhere. Darcy Horn Davenport: Okay. I'm gonna answer your first question, and I might you were going in and out a little bit, so you might have to repeat the second one. But let me hit the first one. So in the mass retailer, the delay the kind of delay was the biggest contributor to the softer consumption. Small impact from increased from competition? But the larger was the timing. And I would say now that we are fully set up, the event is is hitting our expectations. So, like I said, the the bigger you know, the bigger reason was just the the delay. So then your second question Brian Patrick Holland: Yeah. I'm sorry. I I'll remove the headsets. Hopefully, this is clear. I apologize for any technical difficulties there. So just the second part of the question was, sightlines into similar merchandising events either at this mass customer or or other customers club, etcetera, over the balance of the year Now as we're, you know, just maybe one quarter in that that we that might similarly catalyze demand. Darcy Horn Davenport: Yeah. We're in the process of if can imagine, I mean, we're on, Feb third, and we just kind of are seeing the kind of impact that it's having. So the team is putting together some materials, to go back in. Obviously, we already have line of sight to kind of our promotional plans. I think now what we're trying to do is going back in and making them bigger. Honestly. So coming with this information, showing what the potential is, showing pictures. Also, you know, I I don't I wanna hit this, like, execution because showing what great execution can look like for us because this execution is much better than we've ever had before. We haven't had these type of displays. We haven't had these type of single displays, and then having people you know, having you know, our brokers come in and making sure that it stopped. So we're now going out with this information and trying to make the the promotions that we have sold into bigger. Operator: Our next question comes from Jon Andersen with William Blair. Jon Robert Andersen: Hey, thanks. Thanks very much. Good morning. Just a quick one. It's kind of related to that last question, Darcy. I think on the last call, you mentioned real focus along with your your merchandising or broker partner. Securing displays for singles and entry price point multipacks. To what extent has that kind of played out the way you would hoped? I know ex the the mass delay, but more broadly, And are there incremental costs that that you as an organization have to absorb to kinda take on this new capability that would have a a longer term effect on profitability or margins in the business? Thank you. Darcy Horn Davenport: I'll hit singles and and progress, and I'll let Paul talk about costs. Yeah. I would say it's early, but it's working. So, you know, I said in my remarks that singles in January were double what they were last year. So I think that it is we're getting these displays out there. We're getting trial. And you know, it is starting to work. But it's early. So I would just say that and we're we're learning, I ton. Learning you know, do do we need do we need people in the store restocking shelves more than we're doing it right now? Do we need them in certain stores in other regions and not in other So it is it is like a very steep learning curve. But it's exciting because I think the most important thing is the consumer pull, and we're seeing that. So we know we have the right product. We know we you know, this is we know getting out of the aisle is key. We know singles, for instance, will get will, you know, get new new trial from consumers in household pen. So now it's just about, you know, really quickly implementing these learnings. Paul Rode: And then I'll pass to Paul and Cost. Yeah. You know, we talked about on the last call that we're obviously making significant significant investments this year, on promotions, merchandising, brand, you know, marketing, so all the brand investments. So, yes, there is some incremental cost to the merchandising. That we believe is obviously gonna help us build continue to build our sales growth and fuel this business. So there incremental, but that's all contemplated in our guidance. It's not a dramatic change on just the merchandising piece alone. There is some incremental cost. Operator: Our next question comes from Kamil Gajrawala with Jefferies. Kaumil Gajrawala: Hi. We're going you know, and I think you've mentioned it a few times as we're, you know, we're going into a major protein boom or trend, maybe bubble, whatever you wanna call it. And I guess I'm trying to work out with all your commentary around promotions and competition, does it feel irrational The big difference perhaps between energy drinks and maybe this category is category seems to be a lot more promotional than energy drinks are. And so I'm just wondering as as you see this race for protein, is it is it happening in a in a sort of a healthy way from a profit perspective? Or do you feel like there's some, you know, irrational actors and we just have to work through the process of them coming and going? Thanks. Darcy Horn Davenport: Yeah. Great question. So okay. Let's get back. So the category actually is usually not that promotionally driven. Now I actually don't know that the energy. You probably know that better, but it's about 25 to 30% sold on deal. So and compared to, you know, a lot of other categories, in the store, that's pretty low. Having said that, this year is higher, as I've mentioned the reason. As far as rational actors, yeah, I would say that some of the insurgent brands are less rational. And I think that we expected some of that. Because they're trying to gain trial. And so they're going to be, you know, spending to do so. So I'll just give some examples. You know, in club, you know, there are these insurgent brands that are spending a ton of money on demos, on you know, promotion, displays, etcetera. I think that I think if you zoom out I do think this is kind of a point point in time. I do not think it is the new normal. I think part of it is what you referenced, which is it's like this protein craze, and it's like a lamp grab. I think that, you know, we fully expect that you know, once retail once retail is kinda consolidate around the best performing brands, this heightened promotion should eventually come down. But as, you know, I talked about reason why for narrowing the guide, was mainly because we're gonna expect it kind of frequency events especially by these insurgent brands will continue for the year. Kaumil Gajrawala: Got it. Thank you. Operator: Our next question comes from Robert Moskow with TD Cowen. Robert Moskow: Hey. I was hoping to to to dig a little deeper, Darcy, into m and a. And just how the you and the board think about you know, risk and reward. So you you mentioned insurgent brands many times. Are any of them that you know, do do you think any of them will stand the test of time? And if so, you know, there is a there there there is it an example of this in the energy drink category with with two big energy brands merging and and creating some real distribution and and marketing synergies. Is there an opportunity for that to happen in the protein shake category as well? Darcy Horn Davenport: Yeah. I think that yeah. There is a as you guys see, this is a super dynamic category. I don't think it's ever been as dynamic as it is now. So many, you know, new brands, new formats, kind of protein and everything. I think we are see there will absolutely be some winners and there will there's there are gonna be some brands that we look back on and don't even remember their names. So, you know, I think that we are watching We are paying attention. We are watching repeat rates. We are evaluating the kind of consumer metrics to see and and increment and interaction with our brands to see if there are any that we think would be interesting, you know, add ons to our business. We're always looking at both organic and inorganic growth. As far as, like, you know, a bigger some you know, something bigger. Hey. I I I would just say in any dynamic category, there is always opportunity. Robert Moskow: K. Thanks. Operator: Our next question comes from Steve Powers with Deutsche Bank. Steve Powers: Great. Good morning. Darcy Paul. Thanks. I wanted to pivot back to some of the innovation that you tease, Darcy, but from a slightly different perspective. And specifically, as you as you do things like envisioning new shakes with more protein and and more notably the the different drinking experience that you referenced. I'm I'm just curious as to what extent you can leverage existing capacity for those initiatives. And any implications that may have on your ability to scale and distribute those those those new products quickly and smoothly or any, implications on up front profit margin contributions relative to the to the core? Thank you. Darcy Horn Davenport: So from a distribution standpoint, well, let's go for capacity first, and I'm assuming you're talking about, you know, man capacity. It depends. So I think, you know, some of our innovation is absolutely leveraging our existing co manufacturers. But some of our innovation is looking at new co manufacturers. I think what is I think you know, exciting for me is you know, we have invested and built an incredibly strong operations function. We have, you know, a network of commands. We know every single you know, command that makes a protein type product. And so and we have a a team that is really good at start ups now. We've done a lot of them. So I think that, so some will use existing Some of them use new. As far as distribution standpoint, we will use existing We'll use our, you know, existing distribution for for all of the new products. I think as we as we go down the path of, you know, working on kind of a DSD solution, obviously, that would we would be able to, you know, sell these products in in those channels as well. But but right now, we are all about using our existing distribution channels. Operator: Our next question comes from John Baumgartner with Mizuho Securities. John Joseph Baumgartner: Good morning. Thanks for the question. Darcy, I'd like to stick with innovation. You know, historically, Premier has focused on flavors, and it's broadening now to protein content and these differentiated experiences you mentioned. But, you know, given your core consumer is this everyday type of consumer rather than someone who's maybe looking for something specialized or or premium priced. How do you think about the incrementality of this forthcoming slate of innovation relative to cannibalization of the baseline And then by product line, you mentioned the focus this year is support of Coffee House. To what extent do you plan to continue investing behind indulgence? Or is indulgence sort of deemphasized here as you support these two new lines or platforms? Thank you. Darcy Horn Davenport: I think the consumer is evolving. So even the mainstream consumer. So I think this is where a portfolio is really helpful. So I think, you know, if you think of our 30 gram product, and all the different flavors are perfect for people just coming into the category. Then they start evolving and start looking for different things. I think some of the new innovation that we're coming with goes after an incremental as well as an incremental occasion. So, again, our innovation strategy is very simple. It's all about incrementality. So as from from a your second question just about coffee house and indulgence, they're very different. So I think, you know, indulgence has been very successful. And, you know, we just launched it a year ago. And it's been a strong a strong contributor. And it is really been mostly around incremental occasions And then, you know, Coffee House, is unique because it has it's kind of you know, flirting with the energy category a little bit with the caffeine equivalent of a cup of coffee. We've had a lot of success with cafe latte. This is kinda taking that, but but running with it. So, no, I it those they have two distinct positions within our portfolio and actually very little overlap. John Joseph Baumgartner: Okay. Thanks, Dusty. Operator: That concludes today's question and answer session. This will conclude today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, and welcome to the Galaxy Digital Fourth Quarter 2025 Earnings Call. Today's call is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Jonathan Goldowsky, Head of Investor Relations. Please go ahead, sir. Jonathan Goldowsky: Good morning, and welcome to Galaxy's Fourth Quarter and Full Year 2025 Earnings Call. Before we begin, please note that our remarks, including answers to your questions, may include forward-looking statements. Actual results could differ materially from those described in these statements as a result of various factors, including those identified in the disclaimers in our earnings release or other filings, which have been filed with the U.S. Securities and Exchange Commission and on SEDAR+. Forward-looking statements speak only as of today and will not be updated. Additionally, we may discuss references to non-GAAP metrics, the reconciliations of which can also be found in our earnings release. Finally, none of the information on this call constitutes a recommendation, solicitation or offer by Galaxy or its affiliates to buy or sell any securities. With that, I'll turn it over to Michael Novogratz, Founder and CEO of Galaxy. Michael Novogratz: Good morning, everybody. We're at New York City. We've got ice in the Hudson, still chilly out here. Listen, I think about this quarter and our year a lot, and I thought in a perfect Dickinsonian way that this is a tale of 3 cities, not 2 cities. And so I'm going to start with the shiny one. Listen, our Data Center business, I couldn't be more excited for it. We're now over 1.6 gigawatts of approved capacity. If you haven't followed our stock as closely as I think you have, we got 830 megawatts of additional power approved recently. I want to give a shout out to the state of Texas. They've proven to be great to do business with. I literally got an extra set of cowboy boots every month. And so we're excited. Listen, there is not a lot of 830-megawatt new sites of power being granted in the United States. We are engaging with potential tenants and hopefully, in the next period of time, have news on who's going to occupy that site. At the same time, we've got over 1,000 employees or 1,000 workers, I should say, they're not employees, building out the site for CoreWeave. We hope to have -- or we will have our first data halls delivered by the end of Q1. And so the data center business will start cash flowing quite quickly. On top of that, we're engaged in conversations with other sites, both in Texas and in other states. And so the Data Center business is growing. It is a macro environment still where the demand for power is strong. You see that in everywhere you're reading and looking. It's usually the same 5 or 6 major players. But underneath that, there are a whole lot of other players that are building out data centers themselves. And so couldn't be more bullish on the Data Center business. The crypto business or the Digital Assets business, that itself is a tale of 2 cities, both internally at Galaxy and broadly macro. So macro-wise, you have the crypto coins: Bitcoin, Ethereum, Solana, you name them, have been in a bear market. When we cracked $100,000 in Bitcoin, there was a lot of price action above that. Ever since then, I thought it's been in a $75,000 to $100,000 range. We're at the lower end of that range right now. If you had told me a year ago with gold at the highs and NASDAQ at the highs and a very friendly administration that we would be lower, I'd have said no way. And so when that happens, you got to think through what's gone on. And I think there's a lot that's gone on. I think people got excited over $100,000 and felt like the race was won. All the hard work over 15 years to get there felt like some relief that the community had done something so amazing, and that somehow allowed people to take profit and then that profit taking became a bit of a virus. And so we are distributing a lot of those HODL-ed coins into new buyers. And I learned early on as a trader, prices are set at the margin. Obviously, there have been more sellers than buyers. And the question just is when does it stop? Do we find sellers exhaustion at one point? And what are the catalysts to turn it around? I do think we're at the lower end of the range. And what I would say is we've been here before. anyone who's been in crypto for more than 5 years realize that part of the ethos of this whole industry is pain and that often when things feel worse, it's time to be very focused and potentially accumulating or at least getting prepared to because when the tide turns, it turns quick. Potential catalysts are if we finally pass this crypto legislation here in the U.S. We just got a new Fed governor. We can talk about that later. He is not as dovish as people had hoped, right? You were hoping that you were going to get someone who would do the President's bidding. And I think the market reaction, both in precious metals and crypto was telling and was not of recognition to Kevin Warsh as a man of integrity. That said, the budget deficit is still 6.5%. Our debt is $40 trillion and the broad story that brought people into Bitcoin as a store of value as a digital gold is intact. And so we certainly haven't given up on our bullishness around the long-term prospects of crypto. So our balance sheet took a hit in the fourth quarter. In some ways, it was unfortunately the mirror of the third quarter where we had a great balance sheet and gave a lot of that back. Our underlying business, however, again, back to my tale of 2 cities within crypto, has had a great year, right? We did over $500 million in operating revenue. And so I can strip out the balance sheet, Galaxy's Digital Assets business is a big business. It's got a great brand. We've got great relationships with a lot of institutional customers. We had record trading volumes. Our loan book has grown immensely, $12 billion of assets on our platform. And so I feel really good about our overall business, and I would say neutral to getting ready to hopefully feel bullish about the overall crypto market. The last thing I'd say is there's a very big and exciting bull market in what I call blockchain plumbing or digital asset plumbing, right? Even before the passage of this market structure bill, every trade by institution that we're in touch with is figuring out in a much, much quicker pace how they're going to participate in this transition to a digital world, where wallets replace accounts. And so if you read about the kind of the stablecoin debates that are going on in D.C. Hopefully, in the next period of time, we're going to have some big announcements about different endeavors we're taking with trade public companies. But Galaxy sees ourselves as a partner for lots of these people. We're going to partner with some. We sit in our office, we're like, are they a collaborator or a competitor or a client, right? They're a little bit of all of them. And so that's a bull market for us, and it feels that way. And so we could go into a period where the old business doesn't do as well, but you're building into the new business. And what is that new business? That new business is going to be more on-chain stuff, but it's going to be traditional assets that use crypto rails. You already see it. There's a protocol called XYZ, which trades on the Hyperliquid platform. In full disclosure, we are long Hyperliquid that is doing $4 billion of revenue already. It did 4% of the CME volume in silver. And so as we see assets that are traditionally not trading on blockchain rails shift to the blockchain, we think that's ripe opportunity for Galaxy and for the whole space. So with that, I will say I'm hoping that Chris or Tony has a literally or metaphor for their piece, and I'm going to pass the ball. Anthony Paquette: Thanks, Mike, and thanks, everyone, for joining us on the call today. It's my pleasure to present the results for Q4 and full year 2025 before turning it over to Chris to provide a little more context on the data centers. First, starting with our full year 2025, we reported a GAAP net loss of $241 million or $0.61 per share. These results were impacted by approximately $160 million in onetime items that occurred earlier in the year, including write-downs and other expenses related to our legacy Bitcoin mining infrastructure, costs tied to our U.S. listing and corporate reorganization and a negative mark-to-market adjustment on the embedded derivative associated with our exchangeable notes, which no longer impacts results following our Q2 2025 reorganization. Despite these nonrecurring charges, our business delivered $34 million of adjusted EBITDA in 2025. This performance came against the backdrop of a 10% decline in the total crypto market cap driven by a 24% drop in Q4. This profitable performance also underscores the growing scale of our business and the increasing contribution of recurring fee and transaction-oriented revenue within our earnings mix. In our Digital Assets operating segment, we generated record adjusted gross profit of $505 million in the year, up from $303 million in 2024, representing a 67% year-over-year growth, an acceleration that reflects both operating leverage and the strength of our diversified business model. Growth was broad-based with strong contributions across trading, investment banking, lending, asset management and staking. In Treasury & Corporate, we reported an adjusted gross loss of $86 million in 2025, primarily reflecting the unrealized losses in our digital asset and investment portfolio during the year as a result of lower digital asset prices. In Data Centers, as we've discussed previously, we expect financial results in this segment to remain de minimis until we begin recognizing revenue under Phase 1 of our CoreWeave lease agreement, which we expect to start later in Q1. Turning to the balance sheet. We ended the year with $11.3 billion in total assets and over $3 billion in equity capital, with roughly 60% allocated to our operating businesses. That mix will fluctuate quarter-over-quarter with movements in our treasury portfolio. But as stated previously, over time, we expect the percentage of allocated to our operating businesses to increase as we scale across both digital assets and data centers. Within Treasury & Corporate, we held approximately $1.7 billion of net digital assets and investments at year-end, down 22% quarter-over-quarter. That decline primarily reflects market depreciation, as Mike discussed, which resulted in unrealized losses across our investment portfolio. We also closed the year with $2.6 billion of cash and stablecoins on balance sheet, up approximately $700 million from Q3. That increase reflects 2 strategic capital raises in Q4, a $1.3 billion exchangeable note issuance and a $325 million equity investment in Galaxy by one of the world's largest asset managers, which together resulted in approximately $1.6 billion of net proceeds to the company. Cash raised in Q4 went to 2 primary uses: continued investments in data center infrastructure to ensure we stay on track for upcoming data hall deliveries, and paying down short-term borrowings. Going forward, uses will be focused on continued data center build as well as general corporate purposes, including ensuring sufficient liquidity for the potential repayment of the $445 million of exchangeable notes that mature in December 2026. Maintaining disciplined risk and balance sheet management focused on strong capital and liquidity remains a critical priority as we execute our multipronged growth strategy across digital assets and data centers. Now shifting to our Digital Assets business. As Mike mentioned, Q4 reflected lower digital asset prices, softer sentiment and reduced activity industry-wide. Coming off a record Q3, that shift was more pronounced, but we maintained strong client engagement throughout the quarter. In our Global Markets business, we delivered adjusted gross profit of $30 million in Q4, bringing our full year Global Markets adjusted gross profit to $423 million, up 88% year-over-year. Our average loan book held steady at $1.8 billion despite broader market pressures, which is a strong indication of the business resilience and sustained client demand. Digital asset trading volumes declined approximately 40% quarter-over-quarter, largely reflecting softer client activity on the back of a record Q3 and lower industry-wide volumes. That said, we're starting to see capital formation migrate onto blockchain rails, and we're deeply engaged with some of the world's largest banks, asset managers and hedge funds across everything from credit and on-chain markets to electronic trading and ETF create, redeem workflows. For a quick update on GalaxyOne, we're continuing to make progress here as well. While it's still early days, we're encouraged by the momentum we've seen over the first 4 months since our launch. We've seen strong adoption of our high-yield products, which offer market-leading yield and serve as a compelling entry point into GalaxyOne. We've also been listening closely to our user feedback on what they want from their accounts. That's already led to the launch of Daily Buys, more accessible account minimums and in-app staking and custody, which are coming soon. Now turning to Asset Management & Infrastructure Solutions. We delivered adjusted gross profit of $21 million in Q4 and $82 million in 2025, up roughly 5% year-over-year. Galaxy ended Q4 with $12 billion in assets on platform, down approximately 15% quarter-over-quarter, reflecting the impact of digital asset price depreciation. While overall flows were more muted in Q4, we continued to expand our product suite to meet the needs of our clients. We partnered with Invesco to launch the Invesco Galaxy Solana ETP. We collaborated with State Street Global Advisors to tokenize a private liquidity fund, which is a step forward toward broader adoption of tokenized investment vehicles. And post quarter end, we announced the initial closing of our debut tokenized CLO, a major step towards building a tokenized credit platform. And on the Infrastructure Solutions side, in Q4, we completed our fifth integration with a leading custodian and closed the acquisition of Alluvial Finance. This acquisition marks a key milestone, bringing us into liquid staking, which we see as essential for institutional adoption given its capital efficiency and alignment with broader DeFi and yield strategies. In all, Galaxy's Digital Asset business made significant strides in 2025 with momentum building both strategically and operationally. In Global Markets, we delivered record trading volumes, including executing one of the largest notional Bitcoin transactions in digital asset history and a record average loan book size. Asset Management rolled out several new ETF and alternative investment products and delivered $2 billion of net inflows during the year, representing a 30% (sic) [ 34% ] organic growth. And in Infrastructure Solutions, we grew our assets under stake by $750 million and scaled our platform, deepening access for clients and solidifying Galaxy's position in institutional workflows. As we head into 2026, we're building with a clear focus, aligning the momentum in digital assets with the long-term needs of our clients. Across our platform, we're seeing deeper engagement, not just access seeking, but demand for infrastructure, product and partnership. As Mike said, the line between traditional and digital finance is disappearing, and we're designing for where institutional demand is going, not where it's been. We're meeting that moment with a unified strategy, scaling structured products like our tokenized CLO, launching targeted investment strategies such as our newly formed fintech fund and delivering on-chain solutions built for institutional scale. We've also realigned our leadership and operating teams behind this strategy, enhancing coordination across product, infrastructure and go-to-market as we serve increasingly sophisticated institutional clients who are looking for integrated solutions across our platform. This is where Galaxy stands apart, investing ahead of the curve with technology, foundation and operational strength to be a full stack partner through this transition. Despite the recent pullback in crypto prices, we entered the year with conviction and the platform to lead. With that, let me turn it over to Chris to discuss the Data Center business. Christopher Ferraro: Thanks, Tony and Mike, I would normally go with, "we are John Galt". But I think today, we're going to go with, "Go west, young man, and grow with the country." I could not be more pleased to share that subsequent to quarter end, we completed a large load interconnect study and received approval from ERCOT for an additional 830 megawatts of power capacity at the Helios campus. This approval more than doubles Helios' footprint of approved power capacity and represents a significant milestone in the long-term expansion of our flagship campus. With 800 megawatts now contracted under our lease agreement with CoreWeave, this recent approval of incremental capacity expands our leasing optionality, providing additional power that can be allocated to existing or new tenants during a period of intense demand for large-scale AI data center capacity. The time line to energize the next 830 megawatts of capacity will depend on several factors, including the completion of certain approved transmission infrastructure, including a private substation. Based on current procurement and construction schedules, we expect to begin energizing this additional capacity in late 2028 through early 2029. With more than 1.6 gigawatts of approved power capacity, Helios is among the largest AI data center campuses currently under development and is projected to be the largest known 100% front-of-the-meter data center campus. We continue to pursue ambitious expansion plans. Beyond the capacity already approved, we have 2 applications totaling approximately 1.8 gigawatts of incremental requests progressing through various stages of the load study process. We are actively engaged with ERCOT and closely following guidance on the time lines and requirements under the new batch process, and we're encouraged by the continued evolution and increased clarity of those procedures. Turning to construction. We're prepared to deliver the first data hall to CoreWeave later in Q1 as part of our Phase 1 project and remain on track to deliver the remaining data halls, representing the full 133 megawatts of critical IT for Phase 1 within the first half of the year. In order to make this possible, the team has been incredibly busy. In the fourth quarter, the building was completely dried in, meaning the structure was fully enclosed and protected from the elements, allowing us to proceed efficiently with interior work regardless of weather conditions. All generators and e-houses to support the first data hall are fully set in place. And importantly, every major component required to energize that first data hall is on site and installed. With materials in position, we transition into commissioning. As a reminder, commissioning is a multilevel process that validates the electrical and mechanical infrastructure is installed, configured and operating correctly. We began commissioning activities in the fourth quarter and have continued moving through the process. Recently, severe winter weather swept across much of the country, including Texas, as winter storm burn and heavy snow and ice moved through the region. During that period, construction was temporarily paused as several inches of snow and ice accumulated across the campus. Even so, the team responded quickly and decisively, protecting critical mechanical equipment and preparing the site for rapid restart. Within 5 days of the storm, more than 1,000 subcontractors were back on site and construction resumed. We remain on track to turn over the first data hall in the first quarter with the remaining data halls coming online by the end of the second quarter. Looking ahead, we've kicked off earth, concrete and steel work associated with our Phase 2 development of the Helios campus. We've issued purchase orders to secure critical long lead equipment to support the additional building development that will house the 260 megawatts of incremental critical IT capacity for Phase 2. Overall, execution remains strong, construction is tracking well, and Helios continues to transition from a large-scale construction project into an operational AI data center campus, positioning us to be recognized as one of the few companies that has proven its ability to execute on a hyperscale AI data center development. Turning briefly to Phase 2 financing. We're continuing to evaluate various debt financing structures and are having productive conversations with a select number of potential partners. Our focus is on maintaining a disciplined capital structure that supports long-term scalability at Helios. Scaling Helios is just the first step in our vision of building Galaxy's Data Center business into a multi-gigawatt, multi-tenant, multi-campus platform. Beyond Helios, we continue to evaluate a robust pipeline of expansion opportunities across a range of possible developments. We've evaluated more than 100 campuses across the U.S., including many in Texas, given our deep familiarity with ERCOT and existing development footprint. At the same time, we are actively exploring additional markets where power availability, permitting time lines and grid dynamics may offer more attractive paths to accelerate time to power. We're seeing tremendous opportunities to scale the business, and we'll be focused on that growth in a measured and disciplined manner. We're entering 2026 now from a position of strength. We've laid the foundation, physically, operationally and organizationally to transition Helios from construction into an operating campus. The work over the past year has been about preparation and precision. The work ahead is about execution and scale. In starting off 2026 by doubling the approved capacity -- power capacity at Helios campus and preparing to power on our first data center development, we expect this year will be a pivotal one as we continue to relentlessly execute on our plans. We are confident in the team, the strategy and the progress we've made, and we're excited about what 2026 will bring for Helios and for Galaxy. Now back to the operator for questions. Thank you all. Operator: [Operator Instructions] And today's first question comes from Patrick Moley with Piper Sandler. Patrick Moley: Mike, maybe to start things off, I would love to get your thoughts on everything that's been going on in Washington around the crypto market structure bill. What are you hearing about the chances that bill passes? Is this a bill that you think is necessary to kind of advance that transformation of the digital asset plumbing this year? And then as you look at the bill as it sits today, what aspects are you most excited for as it relates to Galaxy's business? Michael Novogratz: Yes. Great question. First, I would say we have spent a lot of time on this. We've got a great team in D.C. I have been down myself a bunch and have literally spent more time with senators, both on the left and the right in the last 8 weeks than I have in my life combined. I guess the top line is I think a deal gets done. If you had to put a percentage on it, I would say it's 75%, 80% right now. And that's for a bunch of reasons. Both parties feel the necessity to get it done, right? The Republicans kind of took all this crypto money and ran that they were going to be the party of crypto and get stuff done. And so they have a tremendous amount of pressure on their side. And quite frankly, Democrats realized last election cycle that being anti-crypto was a really dumb political strategy. And the whole party didn't have enough knowledge about crypto. It was really being driven by a small faction led by Elizabeth Warren and Gary Gensler. You've heard that story. But broadly, the moderates in the party now say, Hey, this should be a bipartisan issue, and we want it off the table politically. And so the politics lines up. I would say we're on the putting green between the Republican version and the Democratic version. There have been a couple of really controversial pieces to it. I think there's agreement now on most of those, the last one being interest on stablecoins. And there was a meeting in D.C. yesterday. Both sides laid out their cases again. The White House is putting pressure and say, guys, you're going to come up with a solution yourselves. And I do think the crypto industry when you think about it, the revolutionary transformative technology would be an interest-bearing stablecoin. That's not going to happen. Some version of that and no interest is going to be the compromise. And so I do think we'll get to a compromise in the next 2 to 6 weeks and you'll get a bill passed. It's important for a lot of reasons. I said earlier, all the trade public companies are already working on their transition, right, to where. I mean, listen, Paul Atkins says I want every market on chain. And you're seeing a bunch of on-chain activity, both in sandboxes and actually on public chains. That's going to wildly accelerate post the clarity that comes with the Clarity bill. And so DeFi is a space to watch, right, how DeFi impacts the traditional exchanges. I already talked about both Hyperliquid and XYZ and just the explosive growth those things have. A, there's a regulatory arm in that, right? They have less overhead if they have a different regulatory environment, very similar, quite frankly, to what we're seeing with prediction markets and traditional gambling and sports betting. And so I do think that's like the flag, the checkered flag going down. I think there's a lot of trade public companies that probably feel short. And so you'll see a pickup in M&A post that bill passing. Operator: And our next question today comes from Brett Knoblauch with Cantor Fitzgerald. Gareth Gacetta: This is Gareth on for Brett. I was just wondering if you could go into kind of the future potential build-out at Helios. So I know you guys recently talked about the incremental 830 megawatts with ERCOT. We were wondering if throughout that study, you can provide kind of how it went and if there were any glaring constraints. And also, I know you talked about kind of 2 applications totaling 1.8 gigawatts in process, maybe if you could kind of touch on if you think that process to go similarly with this incremental 830 you just received. Christopher Ferraro: Sure. I will -- yes, I'll take the first crack at that. So we have had between the prior interconnect requests put in from the Helios campus that we purchased from Argo back in 2022, plus some incremental interconnect requests that we've accumulated through land acquisitions adjacent to Helios. We've had north of 3.5 gigawatts in total our 800 approved plus the remaining amount with ERCOT at various stages of either internal study on our side or study with ERCOT and we have to get done. The 830 that we received firm approval for ERCOT was part of actually a larger request that ultimately ERCOT in looking at where we were in the queue and the current grid capacity at the time, concluded through various stages of study that the grid could accept an additional 830 megawatts today, which is what we got firm approval for. We -- as I said in my comments, we currently have various different studies and request into ERCOT for an incremental 1.8 gigawatts on top of now our 1.6 that is already -- over 1.6 that's already approved. That 1.8 gigawatts of incremental load is now very clearly -- which is different than our 830 that we just received is now very clearly going to be part of a new set of frameworks that ERCOT has worked out and is still sort of working through, which is this batch processing where they're going to look at various batches of requests given the -- how large the queue has grown in ERCOT for request and sort of look at groups of requests together and in each group, look at what the grid can absorb today, where those requests are coming, what infrastructure upgrades need to be made and then sort of pro rata part out new approvals in a step-by-step process. And so it's a little -- the timing on the next incremental load approvals for us or anyone else in the queue is still a little unknown, and we think is going to take a lot of time for ERCOT to really sort out the process on. And so from our seat, getting the 830 in one large chunk fully approved from us before the new batch process is in place was sort of worth its weight for us. And so we're very excited about that. I think on a go-forward basis, us and everyone else in the queue are going to have a number of new processes to go through. And so we're very focused on now working through and understanding what is important to ERCOT and where those stand in the queue. Michael Novogratz: Let me just add, given those dynamics, first, a shout out to our whole mining team, data center team, both here in New York and in Texas because in lots of ways, we got in under the line, and that was because we were prepared way ahead, and we were very diligent in the whole process. And so couldn't be more thrilled. It makes that power more valuable. There are not a lot of 830-megawatt chunks of power available in Texas or the United States. There's a lot of people building for the future behind the meter. And so I think we'll see how the negotiations go with our next group of tenants, but it leaves me pretty bullish. Operator: And our next question today comes from James Yaro at Goldman Sachs. James Yaro: Mike, I really appreciate your comments on the crypto backdrop. I just wanted to expand on one element of what you touched on in your prepared remarks. You've been through a lot of cycles here, are we heading into another crypto winter or not? How long until the cycle could begin to recover? And then you're a trader, you look for these signals. So what should we be paying attention to, to Mark the cycle, either continuing to deteriorate or potentially inflecting? Michael Novogratz: Yes, it's a great question. I mean, listen, it feels pretty chilly right now given that we were at -- what was the high $130,000 and we're currently -- I haven't seen the market in the last 2 minutes, $70,000, $80,000 or something. when you look on the charts, it feels to me we're kind of a $70,000 to $100,000 range until we take out $100,000. There is -- like the idea that Bitcoin is now a macro asset, I think, is solidified, right? There are too many people that have owned it, that have bought into it, that believe in it, that have institutions built around it. And so this is not going away. You're having a supply-demand imbalance. And when I think about potential catalysts, you think about this market structure bill and really turning on Wall Street. And I said this before, Wall Street is a selling machine. That's what Wall Street is built to do. If it's mortgages or equities or government bonds, the structure is set up to sell. And as you start putting crypto through the traditional Wall Street selling machine, you're just going to see demand pick up from pockets that we haven't seen yet. And again, that is what has kept crypto, the 2-way price action you've seen, because it has been a one directional move has been more broader distribution coming in against big chunky positions, big whales getting out of their long-held positions. And so again, my instinct is we're closer to the bottom of the range than the beginning of a bear market. I think we've had a bear market. Could things go lower? Of course, they could. But what I learned about painfully in 3 cycles now is, you don't necessarily have to pick the bottom, but you've got a sense of when it turns. And like pornography, you know it when you see it, right? There will be a catalytic event. And so that's Judge Learned Hand for you guys who think I made that quote up. And so again, like I said, I think we're closer to the bottom. I'm not sure we've reached it yet, but we'll tell you what we think we have. Operator: And our next question comes from Devin Ryan with Citizens Bank. Devin Ryan: Question just on kind of market structure clarity. You talked about that, Mike. I mean as we try to map this out and we're getting questions from investors, trying to understand kind of where Galaxy meets blur between crypto and kind of TradFi over time. And obviously, the large banks are going to need to participate in this world of tokenizing markets, and that will probably bring them closer to trading the tokens themselves. On the flip side, it's a very technical space. So it's not going to be easy for many of them to just enter. And so curious kind of how you think about Galaxy's position in that, the moats and then kind of what role you want to see Galaxy play as we move to a market where more assets are tokenized and you probably have more of the large banks involved in the same space as you. Michael Novogratz: Yes, it's a great question. We think about it a ton. I think a couple of areas where we think we need to win and have a right to be significant players. One is credit. right? We've got a great credit business, and you're going to see an on-chain credit world explode, right? There already is an on-trade credit world, and we're participating. But I think in the next 3 years, it could be one of the big growth areas for both the market and for Galaxy. One of the complaints in D.C. was, well, if we allow interest-bearing stablecoins and you get deposits slight, what does it do for credit creation? And I'm like credit creation is already starting on chain, and it's going to explode on chain. And so I could see a future, not in the next few years, but in the next 10 years, where on your cell phone, you've got your bank account, i.e., a stablecoin that pays some kind of interest and you've got your lending account, right, where you're picking your -- from a menu of potential places to lend money. And that's already in existence in what I'll call like a beta stage in the market, but that's going to be a big part of it. And the second piece is really infrastructure, right? All of these financial market players, banks, FinCos, neobanks need staking, they need wallet infrastructure. And our infra team is growing. We're adding to it, and we're engaged in conversation around how do we help. And like I said, hopefully, we get some announcements publicly in the next period of time. But that has to be a big business for us, and we're really focused on it because they're coming. Listen, at one point, JPMorgan will trade Bitcoin derivatives and Bitcoin, and that's going to make our Bitcoin derivative and Bitcoin business, it's going to be competition for it and it's going to be more difficult. And so we're hoping the pie expands, but that we're skating to the edges where those guys aren't. We use our domain expertise to help those players into the market. Operator: And our next question today comes from James Faucette with Morgan Stanley. James Faucette: I wanted to follow up on kind of what's happening beyond just the allocation and approvals of power. I really appreciate the color there. And certainly, you guys have done good work. Wondering if you can give more color on how we should be thinking about the engagements with potential tenants and kind of how they're looking at it. I get the sense that they want to do bigger pieces if they can, particularly the hyperscalers, but just love to hear any more details you can provide around that and how you're thinking about potential partners, et cetera, and timing? Christopher Ferraro: Sure. Thanks for joining, James as well. The -- I think you're right that, a, for us, the major tenant category we are focused on, I'll call them hyperscalers, but I think that, that term is actually broadening out a little further as it relates to traditional hyperscalers, now neoclouds who are getting larger and larger, maybe the direct model builders themselves, et cetera. Like that's the universe of tenants and perhaps even some equipment manufacturers. That's the universe of tenant that is out there who we are talking to and looking at who are looking for large chunks of power capacity that they can put to work in the billions and billions and billions of dollars and gigawatts of size, because this truly is a -- the new modern space race for control of who's going to have the most frontier model and the smartest brain offering to power the sort of the future of automated everything. And so the ambitions have not shrunk at all. In fact, they've grown on the tenant client side. And we've seen reiterated and elevated CapEx expectations from a lot of companies already sort of supporting that data. For us, we've talked over and over again about our decision-making on the first 800 megawatts to partner with CoreWeave, who themselves, I think, have emerged sort of without debate as a one-on-one partner for most of the large model builders and hyperscalers themselves as an expert in arranging and automating and running ever more complex large GPU clusters for those end clients. For the next 830 megawatts, I think all potential tenants are on the table. We do recognize with extreme clarity that availability of capital and credit on economically attractive terms is paramount to being able to develop a multibillion-dollar data center campus on time, on budget, et cetera. And the credit markets have had a little bit of a tough go in 2025, absorbing the sheer amount of this first wave of capital that's come into the markets. And you've seen a real divergence first in non-IG credit with CoreWeave, although there's been some let up recently, and I think their continued partnership with NVIDIA and the large investment NVIDIA made helps a lot on that front. But you've also seen it creep into IG concerns initially in 2025 with Oracle. And yet, I think just last night, overnight, after the close, Oracle successfully punched out close to $30 billion of new bonds and preferred equity at pretty attractive rates. And so for us, already having such a large exposure to CoreWeave means a natural focus on higher credit quality tenants on the go forward. And I think that's not a comment at all about CoreWeave and their position. I think they would be happy with us working directly with IG tenant counterparties, which also offers them an opportunity to be an orchestration agent and a GPU cluster management partner as well, which we value a lot going forward. So that's how we're thinking about the landscape. Operator: And our next question comes from Martin Toner with ATB Capital Markets. Martin Toner: So -- and we -- the last deal we saw, I believe it was from Cipher was on the best terms we've seen yet. And we haven't yet got into a stage where each successive HPC deal is on improved terms. The terms have really varied depending on partners and customers. But if data centers in space makes sense, then data centers in Texas must make a lot of sense. And so should CoreWeave -- sorry, should Galaxy be driving a harder bargain on new HPC deals? Michael Novogratz: I'll answer this one because I'm a markets guy first and foremost. Listen, the market is going to dictate. We want strong partners that we have a long-term partnership with people that feel comfortable working with us and that we feel comfortable working with, and we're going to balance that versus the best price. We watch the market like hawks. And certainly, it's not all apples-to-apples. And so Chris has this very elaborate spreadsheet with his team where he tries to make it apples-to-apples. And we -- listen, on CoreWeave, we took a risk, the first train, I think it's going to be a great risk that we got paid extra because we took credit risk with CoreWeave, right? They were at a time of their development and we were that we thought it was the right bet to make, and I think we're going to be proven out to be a winner on that bet. And so we'll look at rate plus counterparty and get the best price. There are enough players around the table that there's attention. If there was one, it's a very different story, but -- and you don't need 10. Christopher Ferraro: And the only thing I'll add is I think you did rightly point out a dynamic which probably has surprised us a little to the upside, which we're happy about, which is initial instinct way back when -- was the dollar per kilowatt rental per month rental price would start out high and then over time, sort of go down and normalize to a market clearing level as bigger and bigger potential clients come in. But as you pointed out, there isn't actually a very good downward trend. And in fact, given that there's a real choke point in available future capacity for electricity at scale, we've actually seen base rental prices go up in a lot of cases and with Cipher as well. And so that's a dynamic that I think actually plays very favorably to what we were initially underwritten way back when we started this journey. Operator: And our next question then comes from Ed Engel at Compass Point. Edward Engel: Just another follow-up on Helios. I guess, if you were to secure a new tenant there, could construction be done concurrently with CoreWeave's existing build-outs? Or do you think you kind of need to complete Phases 1, 2 and 3 before really starting any new developments? Christopher Ferraro: Yes. So there's a couple of different dimensions to the answer to that question. So one, the new 830-plus megawatts that were approved require infrastructure build, not just on the Galaxy side, but also on the grid side as well. And so the availability of that power regardless of if we could snap our fingers and move mountains ourselves, still cannot -- won't come online until late 2028 on the earliest. And so we're -- we will be doing everything we can along the way to parallelize the site work and the concrete and the ground clearing and development for all of the adjacent land that we've acquired over the last few years that allows us to actually execute on this. But the practical reality is we will be fully developed and delivered on the CoreWeave Helios 1 site, largely in advance of the practical ability to come online for the next 830 megawatts. So we will parallelize, but it will come at like, I'll call it, sort of the back end of the CoreWeave Phase 1 project anyway. Michael Novogratz: So yes, we can have multiple tenants. Operator: And our next question today comes from Greg Lewis of BTIG. Gregory Lewis: I did want you to kind of talk about, if you could, the step-up in the loan book. I guess kind of curious, maybe if you could provide any color around maybe what was driving that, how that might have looked in a recovery in the market? Is it largely with incremental customers? Are we adding any new customers? Any kind of color you're comfortable sharing around the loan book would be helpful. Anthony Paquette: Yes, Greg, it's Tony. I'll take that one. I mean as we mentioned, the loan book grew pretty healthily throughout the course of 2025. We ended the year at $1.8 billion, a little over $1.8 billion in average total for Q4. That was up slightly from Q3. And I guess the way to contextualize that is in a market where the underlying asset class was down 24%, 25% on average, it tells you that the loan originations and loan quantums were up to offset that value because these are obviously backed by crypto. There wasn't a ton of change underneath the surface. I would say the net interest margins, as we mentioned, I think, last quarter, did compress a little bit earlier in the year. They have roughly held steady over the last kind of period of time. We have continued to grow our client base. The loan originations were up. And overall, we see it as a healthy business. We've talked about the collateralization on the book being somewhere 130% or north of that. That has all been fairly consistent. So it can be a fluctuating business as a function of the underlying market cap for crypto. But I would say our demand in that space has remained pretty healthy, which lends to the point Mike made around our confidence in on-chain credit continuing to become a more stable and more visible path forward for the industry. Christopher Ferraro: Yes. The only other thing I'll add to what Tony said, being a lender at my core by background is growing the loan book as a KPI is a real double-edged sword for most companies. Like giving money away to grow your loan book is actually a pretty easy thing to do, growing your loan book while maintaining the right over-collateralization and risk weighting so that you don't lose the money you give away is the most important thing. And so like that's at the core of our DNA from when we started this business. We are very focused on growing the loan book. We're very focused on growing the loan book without taking any incremental net risk along the way because it's just -- it's not worth it at the end of the day. So that has never -- we've never wavered from that, and that hasn't changed. Michael Novogratz: Yes. If you guys -- if this was on video, you would look at both Tony and Chris' outfits and you'd realize that this is a pretty conservative firm. Operator: The next question today comes from Joseph Vafi with Canaccord. Joseph Vafi: Congrats on the new Helios announcement. Just maybe we go back to price action here in Bitcoin and some of the other coins real quick. I know, Mike, that you had the big OG profit taking. We've heard things about maybe a little over leverage in the system. Is Bitcoin a risk asset? Is the store value? Is it trying to be both? Just it was a little surprising to see, and I think it was surprising to everyone to see that price action. Maybe just some more color on where maybe you were seeing selling? Was it broad-based across all these groups? Or was it over leveraged? Are OGs really kind of maybe profit taking a little more than we thought? Just whatever you might want to add. Michael Novogratz: I think the OG profit taking more than we thought is a real thing. And I think the psychology is -- if you've ever been like a speculator, once you start selling it becomes like an idea, a reaction function, then you sell a little more, you sell a little more. And it is so hard to HODL to literally hold a position and ride it for a long, long trend. And there were a tremendous amount of kind of religious believers in this concept of HODLing, of holding and not letting go of your Bitcoin. And somehow that virus or that fever broke and you started seeing some selling. Quantum has been the big excuse for people. Now you're seeing some reaction function from the industry. I think the industry has been slow to kind of like fund the quant of institutes to say, "Hey, this is the real story, right?" The story in layman's terms, which has always been told to me by the "smart guys," who in and around the Bitcoin core developers is, as we get closer to quantum, we're going to get closer to quantum resistant and you will have the Bitcoin code changed in time. So the risk, of course, to the Bitcoin ecosystem is the developers all get ops in it and they fight amongst each other and they don't and they nihilistically blow themselves up. I just don't see that happening. And so I think in the long run, quantum will not be a huge issue for crypto. It will be a big issue for the world, but Bitcoin especially will be able to handle it. But that's been the excuse. And I think that selling has to end -- listen, we had one customer alone who sold $9 billion worth. And to put that in context, that was 1/4 or 1/3 of all of IBIT's inflows last year, right, the biggest player in this market. And so these big chunky positions take a while to work their way through. Someone wrote an article that's like distributing an IPO, price usually goes down, then the distribution ends and it goes back up. And I think that's the part of the cycle we're in right now. And I said earlier, I don't know when the seller's exhaustion happens. There is not a lot of leverage in the system anymore. And so Bitcoin specifically and crypto in general, always need a new story, a new catalyst, something that happens. And it's always hard to predict what it's going to be and it shows up. And then all of a sudden, like a wildfire, everyone kind of gets excited again. And I'm blowing smoke on the embers, hoping the wildfire picks up. It's not here yet, obviously, by the price action. Operator: And our final question today comes from Chris Brendler of Rosenblatt Securities. Christopher Brendler: I'm actually going to ask two quick ones, if that's okay. The first one is on the new 830 megawatts of power, -- does the time line of late '28, early '29 sort of slow the pace of current negotiations? Like is this something that could take place over the course of a year? Or do you expect it to be shorter than that just given the voracious demand out there for power? And the second question I wanted to ask was on GalaxyOne, the 8% yield that, that product is offering, is that in any way at risk from the Clarity Act and the compromise on stablecoins rewards? Christopher Ferraro: Sure. I'll take the first one at least on the 830 megawatts. If the negotiations with the tenant goes a year, I'll be somewhere between fired and/or tied up in a closet by Mike, I think. The -- we do have a lot of time, and we want to be prudent and thoughtful about who our next partner or partners will be and the economics associated with that. That being said, it is clear that all the market participants have the capital available today and are in a race to secure future capacity. And the time lines that we were originally looking at when we started with Helios and people looking at very focused on, well, '26 and '27 power have very quickly moved to '28, '29, '30 power in terms of all the major players looking to lock that up for themselves. And so we're going to balance that very strong voracious demand that we see with a little bit of prudence and making sure we make the right decision. But I think we're in no ways looking to watch the market for the next year or a couple of years to see how it develops in terms of partnering, in particular, because the reality is '28, '29 power, given the lead times for the large electrical infrastructure that need to get built, those lead times today sort of push you up into early '28 at a minimum anyway. And so you got to pick your partner quick. You got to make your decisions on what you're going to do and you got to start locking up supply chain so that you can actually deliver that far out. And so that's how we're thinking about prosecuting that opportunity. On the GalaxyOne side, I'll pitch it to Tony, and I'll kick in if I can be helpful. Anthony Paquette: Yes, Chris. So the short answer is you're talking about the premium yield, 8% that we're offering on the GalaxyOne platform right now. Short answer is no, that is not at risk from the Clarity Act, at least it is our understanding the way anything in the Clarity Act is proposed. That is a -- it's an offering that is available to accredited investors only. We have certain customer limits and a total portfolio limit on how much we're offering there. But it is really in the interest of growing our overall client base as that business gets off the ground. That rate is obviously subject to change with a period of notice. And that will be driven by sort of broad supply and demand. But we also think about it more generally as diversifying our funding sources for the markets business more broadly, obviously, within a box of disciplined asset liability management. But it's not -- it's a rate that we control, and it's not subject to the Clarity Act at all. Hopefully, that answers your question. Operator: Thank you. And that concludes your question-and-answer session. I'd like to turn the conference back over to Mike Novogratz, Founder and CEO, for any closing remarks. Michael Novogratz: Thanks a lot. We appreciate all the insightful questions and your support. I just want you all to know that we're working our tails off here and our eye is certainly on the prize. And so hopefully, come back next quarter with better numbers and a better story. Have a great day. Operator: Thank you, sir. 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 Fourth Quarter 2025 Ingredion Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Noah Weiss. Please go ahead, sir. Noah Weiss: Good morning, and welcome to Ingredion's Fourth Quarter and Full Year 2025 Earnings Call. I'm Noah Weiss, Vice President of Investor Relations. Joining me on today's call are Jim Zallie, our President and CEO; and Jim Gray, our Executive Vice President and CFO. The press release we issued today, as well as the presentation we will reference for our fourth quarter and full year results, can be found on our website, ingredion.com, in the Investors section. As a reminder, our comments within the presentation may contain forward-looking statements. These statements are subject to various risks and uncertainties and include expectations and assumptions regarding the company's future operations and financial performance. Actual results could differ materially from those estimated in the forward-looking statements, and Ingredion assumes no obligation to update them in the future as or if circumstances change. Additional information concerning factors that could cause actual results to differ materially from those discussed during today's conference call or in this morning's press release can be found in the company's most recently filed annual report on Form 10-K and subsequent reports on Forms 10-Q and 8-K. During this call, we will also refer to certain non-GAAP financial measures, including adjusted earnings per share, adjusted operating income and adjusted effective tax rate, which are reconciled to U.S. GAAP measures in Note 2, non-GAAP information included in our press release and in today's presentation appendix. With that, I will turn the call over to Jim Zallie. James Zallie: Thank you, Noah, and good morning, everyone. Despite unforeseen challenges throughout the year, we are pleased to share that we delivered record full year operating income and earnings per share growth driven by continued strength in Texture and Healthful solutions and solid results from our Food and Industrial Ingredients LatAm business. Although the largest facility in our Food and Industrial Ingredients U.S./Canada segment faced operational difficulties, we have taken steps at the Argo facility to systematically address the issues. While we expect a gradual recovery, the actions we are taking should lead to steadily improving performance throughout 2026. Turning to the next slide. Let's start with a summary of our net sales volume growth for the fourth quarter. Texture and Healthful Solutions posted its seventh straight quarter of volume growth, up 4%, led by clean label ingredients and solutions. Clean label ingredient volumes experienced significant growth in both the fourth quarter and throughout the year across Asia Pacific and U.S./Canada. Clean label remains one of the food industry's fastest-growing areas, emphasizing its critical role in meeting consumers' preference for authentic ingredients and simple food labels. Ingredion continues to be a leader in the clean label texturizing space due to the breadth and strength of its portfolio, which is supported by proprietary technology, patents, consumer insights and years of formulating expertise. Furthermore, our solutions selling approach continues to deliver robust growth, outpacing the segment's overall net sales performance. This comprehensive way of engaging customers is driving greater intimacy at a time when food companies are pursuing more reinvention and reformulation. These higher margin sales are also expected to be margin accretive to the segment over time. In our Food and Industrial Ingredients LatAm segment, we started to see brewing adjunct volume demand recover from our long-term contracted customers. However, the region continued to face challenges in the confectionery and paper and corrugating sectors, where demand remains soft. Partially offsetting this softness, food ingredient sales experienced modest growth. Lastly, our Food and Industrial Ingredients U.S./Canada segment saw a 7% decrease in net sales volume in the most recent quarter, primarily driven by ongoing production challenges at Argo, which limited our ability to produce inventory available for sale. In addition to this operational issue, our business and the industry faced overall softness in beverage sweetener volumes, further contributing to lower sales. As we move to segment updates, I want to highlight progress against key growth investments and strategic initiatives. Starting with Texture and Healthful Solutions. Our focus on the customer has never been stronger, delivering sales volume growth of 4%, NOI growth of 16% versus prior year. In addition, strategic capital growth and cost savings investments were completed. At our flagship Indianapolis facility, our starch modernization project completed in quarter 4 will reduce our modified starch production costs through more efficient product flows and debottlenecking, which will drive the release of new capacity. In addition, we completed the expansion of our blending center of expertise in Belcamp, Maryland, which increases customized solutions revenue potential by $30 million a year. The range of solutions capable to be produced from this facility support clean label, plant-based protein and fiber fortification, sugar reduction and affordable formulating. Turning now to our Food and Industrial Ingredients LatAm segment. Against a backdrop of regional, economic and political volatility throughout the year, our team managed to deliver record operating income and margins of greater than 21% for the year, up 140 basis points. Mexico specifically demonstrated resilience to offset challenging unforeseen economic conditions, delivering another record year of operating income. In pursuit of more profitable growth, Mexico repurposed a portion of its grind to strategically diversify its customer and product mix towards higher-margin ingredients that serve food and confectionery customers. We successfully completed a complex network optimization move in Brazil for long-term cost competitiveness. We closed our Alcantara facility and successfully expanded polyol production at Mogi Guacu, our largest facility in Brazil. This investment was supported by long-term customer volume commitments. Now turning to our Food and Industrial Ingredients U.S./Canada segment. Operational issues at our Argo facility stubbornly persisted throughout the fourth quarter. Despite being encouraged by a strong September, we experienced intermittent grind shutdowns, which resulted in higher maintenance costs, lower yields and fixed cost absorption, which reduced both our salable finished product inventory and our co-product valorization. Furthermore, industry volume demand for sweeteners was down throughout the second half. The 2025 full year operating income impact of Argo's operational challenges was approximately $40 million. With the majority of the first quarter still ahead of us, our team remains focused on executing an achievable recovery plan. Despite the unforeseen challenges and headwinds described, Food and Industrial Ingredients U.S./Canada delivered greater than 15.5% operating income margins for the year. Let me now update you on progress against our 3 strategic pillars. Let me start with driving profitable growth. By continuing to prioritize solutions and clean label offerings, we have significantly enhanced the results of our Texture and Healthful segment. As mentioned previously, sales in both ingredient solutions and clean label categories have outpaced the overall segment's net sales growth during the second half of 2025, and we have a strong pipeline and growth momentum in both areas going forward. Furthermore, we are excited to report that our protein fortification business delivered a record year, with net sales growth exceeding 40%. As you know, we have been working diligently to optimize this business for several years. In 2025, we doubled production and were able to increase the average selling price through new product innovation. We see this business representing a viable long-term growth opportunity for us, supported by strong and clear consumer pull. Looking at our second strategic pillar, innovation. We have developed a new family of ingredient solutions that help customers readily replace ingredients that have been impacted by shortages and rapidly rising raw material costs. For example, our suite of solutions to replace cocoa and product reformulations have seen steady sales increases throughout 2025. Furthermore, we are advancing our proprietary sugar reduction taste modulation platform in collaboration with Oobli through a strategic commercial partnership. Our sweet proteins and stevia blends improve the quality of natural sweetness while offering a cost-competitive clean taste solution. Regarding innovation, texture elevation represents the next level in value delivery that we are offering to select customers. This co-creation approach combines proprietary consumer insights, sensory science and rapid formulation expertise to help customers predict overall liking and deliver consumer-preferred textures faster and with higher success rates. Our 2025 customer engagements proved very effective and are leading to customer successes in the marketplace. We are extremely excited by this opportunity and what it represents to grow customized solution sales with the potential also to generate new service revenues. Lastly, I'd like to comment on our operational excellence pillar. In 2025, we delivered $59 million of Cost2Compete run rate savings, exceeding our previously stated $50 million savings target. This achievement reflects our ability to optimize across manufacturing -- our manufacturing network, as well as deliver procurement and SG&A savings, leveraging our scale. Building off the success of Cost2Compete, we are transitioning our operational excellence strategic pillar toward long-term enterprise productivity. We look forward to updating you on our enterprise productivity progress in the future. It is also worth highlighting that despite the volatile trade and tariff environment in 2025, Ingredion was minimally directly impacted. This was due to the fact that more than 80% of our production is locally made and locally sold. Turning to the next slide. Our results this year demonstrate how Ingredion's diversified portfolio continues to drive stronger and more consistent profitability. While navigating volatile market conditions, we delivered record gross profit and expanded margins to over 25%, a clear testament to our agility and operational discipline. This performance also reflects the ability to leverage the strength of our global network, adapt quickly to shifting demand and our focus on higher-value solutions. As we continue to optimize our mix and execute against our strategy, we are building a foundation for sustained long-term growth. Overall, 2025 stands out as a year where disciplined actions and portfolio balance enabled us to perform well in a challenging environment. Before I turn the call over to Jim to discuss our financial results, I do want to take a moment to comment on our CFO transition. Last week, we announced that Jim Gray will be retiring on March 31, 2026, and we have begun a comprehensive search to identify his successor. The Board, the executive leadership team and I are incredibly grateful for Jim's leadership during his more than 9 years as a CFO of Ingredion. He's been an invaluable partner to me and has made significant contributions to our success. I wish Jim all the best in retirement. And with that, I'll turn the call over to Jim Gray for the financial review. Jim? Jim Gray: Thank you, Jim, and good morning, everyone. Moving to our income statement. Net sales for the fourth quarter were $1.8 billion, down 2% versus prior year. Gross profit dollars decreased by 4%, with gross margin slightly lower at 24.5%, as cost of goods sold was impacted by higher manufacturing expense in U.S./Canada Food and Ingredients. Reported and adjusted operating income were $220 million and $228 million, respectively. Turning to our Q4 net sales bridge. The 2% decrease was driven by $40 million in lower volume, $39 million in lower price/mix, offset partially by $36 million of favorable foreign exchange. Moving to the next slide. We highlight net sales drivers for the fourth quarter. Texture and Healthful Solutions net sales were up 2%, driven by sales volume growth of 4% and foreign exchange favorability of 2%, partially offset by price/mix attributable to pass-through of declining tapioca input costs and greater volume mix of lower-value tapioca-based sweeteners sold locally in Thailand. Food and Industrial Ingredients LatAm reported net sales up 1%, largely driven by favorable foreign exchange, partially offset by weaker volumes. Food and Industrial Ingredients U.S./Canada net sales declined 9%. Sales volume fell by 7%, primarily driven by less available inventory for sale as our Argo facility faced operating challenges, and we met customer demand by sourcing from other plants. Turning to our earnings bridge. On the top half, you can see the reconciliation from reported to adjusted earnings per share. Operationally, we saw a decrease of $0.23 per share for the quarter, driven by a decrease in operating margin of minus $0.22 and volume of minus $0.10, partially offset by foreign exchange gain of plus $0.08 per share. Moving to the change in nonoperational items, we had an increase of $0.13 per share. Shares outstanding had a favorable impact of $0.08 per share, and a lower tax rate equivalent was $0.06 per share favorable. Moving to our full year income statement. Net sales for the full year were $7.2 billion, down 3% versus prior year. Gross profit dollars increased by 2%, with gross margin increasing to 25.3%. Reported and adjusted operating income were $1.016 billion and $1.028 billion, respectively. Turning to our full year net sales bridge. The 3% decrease was driven by $144 million in lower price/mix, $75 million in lower volume, offset partially by $8 million of favorable foreign exchange. Moving to the next slide, we highlight net sales drivers for the full year. Texture and Healthful Solutions net sales were up 1%, driven by 4% sales volume growth and foreign exchange favorability of 2%, partially offset by price/mix. Food and Industrial Ingredients LatAm reported net sales down 4%, driven by weaker volumes across brewing adjunct. Food and Industrial Ingredients U.S./Canada net sales declined 7%. Sales volume fell 4%, primarily due to previously mentioned challenges at our Argo facility and weaker sweetener demand. Now let's turn to a summary of results by segment. For full year 2025, Texture and Healthful Solutions net sales was up 1%, and operating income was up 16%, which translated into a higher operating income margin of 16.9%, up more than 200 basis points from the prior year. The increase for the full year was driven by lower raw material and input costs as well as improved margin volumes, partially offset by unfavorable price/mix. In addition, one comment regarding Texture and Healthful Solutions' quarter 4 operating income. Last year's fourth quarter had onetime benefits from SG&A, which we were lapping. We anticipate that Texture and Healthful will continue to generate positive operating income growth. In Food and Industrial Ingredients LatAm, net sales were down 4% versus last year. However, operating income increased to $493 million, and op income margin reached a record 21.1%. Moving to Food and Industrial Ingredients U.S./Canada, full year net sales were down 7%. Operating income was $315 million, down 16%, driven by production challenges at our Argo plant and lower-than-expected beverage and food volume demand. For the fourth quarter, we estimate that operating challenges have had a $16 million loss impact and that the total 2025 impact is approximately $40 million. For the all other group of businesses, the 2% increase in net sales was driven by growth both in our sugar reduction and protein fortification businesses. Operating loss improved by $20 million versus prior year, driven mainly by significant gains in protein fortification. Turning to our full year earnings bridge, where we illustrate a 4.5% year-over-year increase in adjusted diluted earnings per share. Operationally, we saw an increase of $0.13 per share, driven by an increased operating margin equivalent of $0.39 and other income of $0.15, partially offset by volume of minus $0.47 per share. Moving to the change in nonoperational items. We had an increase of $0.35 per share. Shares outstanding had a favorable impact of $0.23 per share, a lower tax rate equivalent of $0.09 per share and lower financing costs of $0.03 per share. Moving to cash flow. Full year cash from operations was $944 million, which includes investment in working capital of $75 million for 2025. Full year CapEx investments, net of disposals, was $433 million. The company continues to invest in organic growth opportunities that provide a significantly higher return than our cost of capital. We repurchased $224 million of outstanding common shares, exceeding our $100 million share repurchase target announced at the beginning of the year. Furthermore, we paid out $211 million in dividends and increased the dividend per share to $0.82 during the third quarter, which represents our 11th consecutive annual dividend increase. Now let me turn to our 2026 outlook. For the full year 2026, we anticipate net sales to be up low single digits to mid-single digits, reflecting greater volume demand. We anticipate the reported and adjusted operating income will be up low single digits for full year 2026. Our 2026 financing cost estimate is in the range of $40 million to $50 million and a reported and adjusted effective tax rate of 25.5% to 27%. Our full year adjusted EPS is expected to be in the range of $11 to $11.80, reflecting continued sales volume growth in Texture and Healthful Solutions and relatively slower operating income growth from our Food and Industrial Ingredients segments as we face industry volume demand softness and higher manufacturing inflation not fully offset by pricing. This adjusted EPS range is based upon a share count of 64 million to 65 million shares. We anticipate our 2026 cash from operations will be in the range of $820 million to $940 million, reflecting slightly more working capital investment as net sales are expected to grow. Capital expenditures for the full year are anticipated to be between $400 million to $440 million. Please note that our guidance reflects current tariff levels in effect at the end of January 2026. In addition, this guidance excludes any acquisition-related integration and restructuring costs as well as any potential impairment costs. Turning to our full year outlook by segment. For T&H, we estimate net sales to be up low single digits to mid-single digits and for operating income growth to be up low single digits to mid-single digits, driven by sales volume growth. For F&I LatAm, net sales are estimated to be up low single digits to mid-single digits and operating profit to be flat to up low single digits, reflecting sales volume growth, partially offset by foreign currency transactional headwinds, specifically in Mexico. As a reminder, we are dollar functional in Mexico. Therefore, a stronger pace of inflates local manufacturing and costs and operating expenses. For F&II U.S./Canada, our outlook for net sales is in the range that is generally flat year-over-year, and operating income is projected to be flat. While we have near-end confidence in Argo's recovery, we anticipate continued challenges through the first quarter, in line with the previous quarter. Furthermore, while contract pricing covered raw material cost changes, we were not fully able to cover anticipated manufacturing cost inflation. For all our all other businesses, we expect the combined net sales to be up high single digits and operating income to improve between $5 million to $10 million. Lastly, for the first quarter of 2026, we expect net sales to be down low single digits and operating income to be down mid-double digits, primarily due to the strength of first quarter 2025's 26% operating income growth. With regards to my announced retirement, it has been a privilege to host 35 quarterly calls with you, our shareholders, analysts and employees. Ingredion has an amazing leadership team led by Jim Zallie and will continue to be supported by a very, very strong finance team. As a shareholder, I look forward to Ingredion's continued success as the company navigates any challenges with proven agility and seizes future growth opportunities to deliver solutions that make healthy taste better. That concludes my comments, and I'll hand back to Jim. James Zallie: Thank you, Jim. In closing, 2025 was another year where we displayed meaningful progress against our strategic pillars, led by the strong sales volume momentum we saw from our Texture and Healthful Solutions segment. We believe the clear customer focus that has resulted from the resegmentation completed 2 years ago, along with our advanced approach to solutions selling, positions us well for continued growth in this segment in 2026. We are also encouraged by the continued benefits we expect to see from the nearly $60 million of Cost2Compete run rate savings we delivered by the end of last year. Our commitment to cost competitiveness will continue forward as we pursue enterprise productivity for long-term effectiveness and efficiency. We anticipate Food and Industrial Ingredients in U.S./Canada to meaningfully overcome its operational setbacks as we remain laser-focused on stabilizing Argo, and we expect steady improvement from the facility throughout the year. Finally, our financial position remains a source of strength. We delivered nearly $950 million of cash from operations in 2025 and returned $435 million to shareholders. And as Jim explained, we expect cash flow from operations to continue at these levels, providing flexibility to pursue growth. Now let's open the call for questions. Operator: [Operator Instructions] Our first question is going to come from the line of Kristen Owen with Oppenheimer & Co. Kristen Owen: And Jim Gray, best wishes. Thank you so much for the help over the last several years. So kicking off then with the outlook. You sprinkled some breadcrumbs throughout the prepared remarks about the Argo facility. Just help me understand how much in the fourth quarter was Argo versus the volume decline? And then how we should think about that playing out in 2026? Because I would have thought with the $40 million headwind from that facility that maybe the op income guide would be a bit higher in F&I North America. So maybe help me bridge all those pieces together that you left for us throughout the call? Jim Gray: Yes, sure. So obviously, in Q4, the primary issue was the operational challenges there. As we said and to remind you, we felt that, that was about $16 million impact as we're kind of estimating between idle and yield loss and some incremental maintenance costs. That was the impact to the U.S./CAN F&I segment in Q4. So -- and then for -- in total for 2025, the impact to the U.S./CAN F&I segment was about $40 million. As we roll forward and we look at kind of the 2026 guide for that segment, we also then -- we had some lapse when we go from -- back up to 2024 versus 2025, right? So we're down about, let's call it, $58 million. So $40 million is Argo. We had a couple other earlier events in the year, kind of more manufacturing events related. We had a small train derailment in Cedar Rapids. And let's say that was about $10 million. And then from '24 to '25, we had probably about $8 million in terms of just volume softness. So through 2025 and probably more June on, you saw some response by some of our customers to tariffs. We saw some pricing increases across some categories, soda beverages, beer and cans, et cetera, where we provide a lot of sweetener volume or adjunct volume into. And naturally, those categories are elastic. So you're going to see some volume softness in really in the second half. Maybe that started May, May-June, but throughout summer, and throughout fall. So as we go into 2026, we'll still have some Argo costs, and those will be mostly impacted in Q1. But we will probably get back some of the Argo onetime impacts in the back half of 2026. So then what says to -- so that should say, hey, you should be up year-over-year at '26 versus '25 on your op income and maybe you should be up $15 million, $20 million. And what I think what we're really seeing is that when we looked at contract pricing, we absolutely were able to cover any change, anticipated change in the net cost of corn. But we do have some manufacturing inflation. We have some higher nat gas and we have some higher labor rates. And so those are playing against our COGS rate of change in U.S./Canada. And that's in our guide. So our upside to our guide would be that our inflation is less. Maybe there's a stronger volume that shows up in the second half. And all of those would be pluses. But we felt it kind of prudent to guide kind of flat year-over-year. James Zallie: And Jim, just to answer the question regarding the percentage or say, the apportionment of the decline in the quarter, Argo vis-a-vis sweetener volumes, we say 2/3 Argo, 1/3 sweetener volumes? Jim Gray: Yes, 2/3, 3/4. James Zallie: And then in addition to that, the impact for the full year of $40 million for Argo. Of course, if you look at that as limited to 2025, and I would say January's been a little bit of a rough start to January. And so... Jim Gray: And pretty cold. James Zallie: It's been pretty cold. It's been pretty cold in January. And as we sit here right now, the plant is running well. It actually ran well from a standpoint of through the very severe cold spell, but January was not as strong as we had anticipated. And I think that in addition to everything else that Jim just said, is the reason why we're putting forward, say a flat year-on-year projection for the full year. Jim Gray: Yes. And maybe, Kristen, I think it's helpful to then say, well, what do you anticipate U.S. CAN F&I's potential to be. I think once through Argo's recovery and we look at some of the investments that we've made and how we're positioned with customers, this segment can definitely still achieve a 16% to 17% op income margin. Kristen Owen: Okay. That is super, super helpful. I'm going to ask one here also on Texture & Healthful Solutions. Because I think, Jim, you called out maybe some tapioca headwinds here, maybe some mix headwinds. One of the questions that we get about Ingredion is through this Texture & Healthful Solutions, really looking to see that ASP per ton move higher, help contribute to that OI income outgrowth. Maybe pencil out for us the onetime items there? And then the price/mix headwinds that you're expecting in 2026, just help us unpack those a little bit? Jim Gray: Yes. Look, I think if you looked at just the print on the op income margin for Texture & Health for fourth quarter, right, it will show op income down year-over-year by a slight percentage. That was all really driven by some op -- some benefit in op expense in Q4 of 2024. One timers, as you adjusted, there was some comp benefit, and we had to take that in the Q4 and accrue for that. And so we really -- it's kind of just the year-over-year cleanup when you're getting to how you're looking at 1 year's finishing side. So I really didn't see that because I want to highlight the gross margins for Texture & Healthful for Q4. Gross margin -- gross profit had grown and gross margins have expanded, right? So I think that's always a better measure of the health of the product mix in Texture & Healthful. As we look forward to 2026 and we talk a little bit about what's the expectation for price/mix to finally move positive, right, and to finally show kind of year-over-year gains in ASPs, that's absolutely going to be reflected by some of the comments Jim made on solutions growth, on texture elevation. These are all very much positives that are driving much higher average selling prices per ton and I think are reflected in value to the customer. I do want to remind everybody, though, that -- so we're in -- we just finished the second year of this resegmentation, and we're going into 2026. And we still have some little pockets of business that may not be at that higher average ASP. And so one of those businesses is in Thailand, and we still have a tapioca glucose syrup business. It is pretty big volume relative to our more higher value tapioca texture solutions. And so when it has a lot of demand, and it moves up, it's going to have an impact on price/mix, and/or we had a healthy tapioca crop and tapioca prices came down. And so again, we're going to reflect those changes in the raw materials, we pass those through. We'll always try and call that out. But I think we're pretty confident and pretty excited about the texture solutions growth and what it implies for ASP as we go forward year-over-year. James Zallie: Yes. And it's noteworthy, I think, for the full year, Texture & Healthful operating income margins were up 210 basis points. Operator: [Operator Instructions] Our next question comes from the line of Josh Spector with UBS. James Cannon: You have James Cannon on for Josh. I wanted to ask on the LatAm business. You had some mix management from business rationalizations earlier in the year. And you talked in the quarter about underlying demand there being improving. I was just wondering if you could kind of break out some of the volume movements that you saw there, kind of like you did with U.S/CAN earlier? Jim Gray: Yes. Quarter 4 net sales were up 1%. For the segment, quarter 4 sales volume declined by 3%, but that was largely attributable to the brewing adjunct volume declines. More than 100% of the downside was attributed to brewing adjunct, whereas there was sales volume growth for food and beverage, and that was positive. And because the brewing adjunct business represents 18% of net sales and a larger percentage of our volume, we've been actively pursuing alternative paths to utilize the grind more profitably by trading up to support higher-margin products in food and confectionery. And this really represents an exciting incremental opportunity to diversify beyond brewing and valorize our grind much more profitably. Just for some additional color, Mexico food volumes were up 3%, and beverage volumes were up 1%. James Cannon: For the quarter? Jim Gray: For the quarter. Yes. So we've started that -- James, we started that transition, right? So we still have -- Mexico still has, I would say, at least 1 to 2 years of ramp from the volume that is sort of released by kind of rightsizing and managing through the customer change, but it's starting well. So we're excited about that. James Cannon: Okay. Great. And then I just wanted to poke one thing on THS as well. You talk about the solutions business being higher margin than the rest of the segment. Could you just give us some quantification of like how much of the mix is sold as solutions today, what that margin differential looks like? James Zallie: Yes, sure. Go ahead. Jim Gray: Yes. So the solutions has been something where we've been working on establishing a baseline and really tightly defining that and really completed that work in 2024. And in 2025, we're able to -- Jim and Patrick Kalotis and Michael O'Riordan were able to kind of set some real objectives for the sales teams. So that business right now in '24 and '25 is just over $1 billion. And the gross margins are definitely higher than the segment average, and they're like 30%, 35%. James Zallie: I'd say 5% higher than the segment's overall average, and it's about 40% of the revenue approximately of the segment. Jim Gray: Yes. Operator: [Operator Instructions] Our next question comes from the line of Ben Theurer with Barclays. Benjamin Theurer: Jim, I'll talk to you later on, but enjoy your retirement. Two quick ones. So number one, just picking up on Texture & Healthful Solutions a little bit. Can you help us maybe understand within the framework of the guidance, where you stand in terms of like contracting pricing for 2026? Is there anything off cycle in terms of like the pricing mechanisms going out to? I guess, if I remember right, I think you said something like flat for the beginning -- at the beginning of '25 and then kind of like ended up somewhat negative mid-single digits. So just understanding a little bit the drivers and things you've already talked about, tapioca and those factors. So how should we think about '26 nonetheless on your current expectations as it relates to T&H. That would be my first question. James Zallie: Yes. So let me take that and then let Jim add some color commentary. I would say that contracting for TH&S in the U.S. was completed with pricing slightly down, and we anticipate that we covered any changes in the cost of corn and other raw materials. We are anticipating volume gains year-over-year. That said, some large customers were communicating that unit volumes might be lower given their pricing actions and the fact that U.S. consumers continue to struggle with affordability. We anticipate that we will not fully cover the expected manufacturing cost inflation, and that will hold our gross margins basically flat in general for that segment. Jim Gray: And Ben, just for Texture and Healthful, right, so slightly higher semi-variable and fixed costs in that business, right, as we use more production lines to create value. So manufacturing cost inflation, 2%, 2.5%. Some of that reflected in energy cost change year-over-year, some of that in labor costs. And as you go into your pricing, clearly, you're having a conversation with the customer about any change in the raw material. But you're always trying to price in enough to cover that manufacturing cost inflation. And I think this year, we are looking at the outlook and saying, well, some of that manufacturing cost inflation is going to show up. And we'll see. Clearly, our operations team will always take up the mantle to work enterprise productivity, to lower that. Our procurement team is going to go and work against any rate changes year-over-year, but that would be upside to our guidance for Texture & Healthful. Benjamin Theurer: Okay. Perfect. And then, Jim, for you, on the outlook. I mean, clearly, cash from operations, expected another strong year, close to $1 billion, with CapEx a little less than, call it, $0.5 billion. So that leaves me with like $0.5 billion free cash flow. You've spent a little over $200 million for repurchases and then there's a little over $200 million on dividends. How should we think for '26 in terms of repurchases of stock, and that maybe in context to M&A, what you might have in your pipeline or not? So what are the key preferences here between one or the other, given where the stock price is currently at? James Zallie: Yes. I guess right now, the view that we have is, as we have done in previous years, we've established a share repurchase commitment of at least $100 million for 2026. The cash on the balance sheet does, as you indicated, remains strong by this year, generating nearly $950 million of cash from operations. And we think it's important to remain flexible and retain optionality for strategic M&A opportunities. And clearly, our balance sheet provides us that opportunity to do that. So -- but that's the view for the buybacks. Just a reminder, I think, Jim, in '24, we also bought back more than $200 million of shares as well. So -- but for '26, we've established the same target we've had in previous years of at least $100 million. Jim Gray: Yes. And maybe just for everyone listening because when we think about capital allocation priorities. We're putting out there that CapEx will be between $400 million and $440 million, tongue-twister. But within that, it's still a healthy budget for growth, anticipating between like $80 million to $100 million in growth for 2026. Pretty excited about those projects. Jim highlighted a few projects that we've completed in 2025. We still see opportunities around the world that really support us having the capacity as well as the product lines to continue to drive growth, supporting solutions and supporting some of our other sectors where we see growth. And then we also have about $40 million or so in kind of large cost savings and infrastructure improvement projects. And so those will finish up in '26. But for example, at our Indianapolis plant, we're working on a new cogeneration, and that project will finish in 2026. So we have some very discretionary discrete opportunities that we're pursuing in our CapEx budget that we think is a great deployment of capital to create returns for shareholders. Operator: [Operator Instructions] Our next question is going to come from the line of Heather Jones with Heather Jones Research LLC. Heather Jones: Thanks for the question. And Jim, I'm really going to miss working with you. It's been a great pleasure. I'm sure you'll enjoy retirement. I guess my first question is on LatAm. Given this recent surge in currencies, I think you called out the peso and -- the Mexican peso. And then some of the tax regulatory changes that we've got going on this year in Mexico, just wondering what are the positives that will offset those potential risks and drive growth in that segment in '26? Jim Gray: Yes. Maybe let me take some upsides and downside maybe to what is currently in our forecast with regard to LatAm. So you're right. So as I mentioned in the remarks, so we're dollar functional in Mexico, which means that a strong peso increases our operating expense and increases some of our manufacturing expense. And so we're feeling that right now. And so that will be the transactional cost headwind as we go into 2026. Now there are opportunities. We're going to watch the value of the peso versus the dollar. But if that peso gets stronger, that's kind of really the downside estimate. And so the opposite is we have upside if we saw moments where the peso was weaker versus the dollar, then that's something that we can go in and kind of secure for the balance of the year. I think within LatAm, what we're really, I think it's encouraging to see at least is that there is some of like the food and maybe the beverage category volume at retail. So more the Nielsen data was showing volume up in Q4. And so there's been a bit of noise economically around Mexico in terms of its GDP growth, where might inflation wind up. And so hopefully, what we'll see in 2026 is a slightly stronger consumer in Mexico once kind of wage impacts are felt. So that's a little bit of what we're watching probably mostly in LatAm is the volume pull that we see in Mexico. James Zallie: Yes. And I think it's noteworthy also, we got asked about this on one of the prior calls, that the sugar tax on sweetened beverages went into effect on January 1. And essentially, the amount is approximately 7% to 8% on single-serve full-calorie sodas and a new tax of 3% to 4% on lighter diet beverages. And in the past, what we have seen this type of tax has an early negative impact on volumes in the first few months, and then after implementation, then those impacts subside. So we're going to watch that. Now also, it's noteworthy to point out, and we've seen this repeatedly every 4 years, is this is a World Cup year. And so we are expecting incremental volume from the World Cup, which should benefit volumes in Q2 and Q3. And that goes for beverages as well as brewing as well. Heather Jones: Okay. That makes sense. And can you remind me, in Mexico specifically, what's the rough breakdown of your sales that are food versus bev so we could just -- because you're talking about like stronger volumes now in food, and just how -- as we think about the risk of that new tax? Just would help frame it in our minds if you could give us a rough breakdown of the food versus bev. Jim Gray: So I'm going to say -- I'm going to -- and Noah, maybe will update this, but I'm going to guess that between kind of brewing adjunct and beverages that, that volume is about 40%. And that the food as well as industrial and confectionery and all other would be the remainder. James Zallie: But also, Jim, the breakdown of soft drinks vis-a-vis in Mexico vis-a-vis brewing is much smaller. Jim Gray: Much smaller proportion. James Zallie: Much smaller. And so we're not a big exporter into Mexico of HFCS because we produce locally. And so we've talked about that in years past on how we strategically diminish that exposure. So it's more weighted towards brewing and less so towards soft drinks exposure. Heather Jones: Okay. And then my follow-up, is -- and you mentioned that you expect to get some of the Argo effect back in the second half of this year. Just was wondering in like your base case for the U.S./CAN business, what is your assumptions of how much of that $40 million you'll get back in the back half? Jim Gray: I -- I mean, I think it would be fair to say, look, look, I think in Q1, we're probably going to have another anywhere between $10 million and $15 million of impact. And so that won't lap, and so you might see $20 million of Argo benefit come back in the second half. Heather Jones: Thank you so much. Jim Gray: There's a range around that assumption, right? James Zallie: It's just worth reminding everybody in relationship to quarterly phasing. That quarter 1 operating income last year was up 26% versus 2024. And in particular, Argo was running quite well in 2025 first quarter. And also in first quarter last year, LatAm had a record quarter 1. So that also is impacting the phasing for quarter 1. Operator: [Operator Instructions] Our next question comes from the line of Benjamin Mayhew with BMO Capital Markets. Benjamin Mayhew: And Jim Gray, congratulations on retirement. We're going to miss you a lot. So my -- you're welcome. So my first question has to do with the long-term algo that you put out at the Investor Day for operating income growth. And I'm just wondering, given all that's been said on the call so far, when would it be possible to kind of get back to that algo level, to reach that algo level? Would it be in second half '26 where you're growing again at 5% to 7% operating income growth? Or -- how should we think about accelerating towards that run rate? Jim Gray: Yes. Ben, let me set the stage a little bit because I mean, I think 2025 in the first part of the year had some surprises for all of us within the U.S. marketplace. So our Investor Day in September was based upon 2024 full year actuals, and at that time, kind of our first half 2025 momentum. So 2025 introduced new challenges to the business environment, which had secondary effects on the rest of the world through tariffs had impacts on immigration in the U.S. and changing dietary guidelines within the U.S. And these changes impacted our customers, our customers' costs, our customers' pricing actions, our customers' volume demand. And our long-term strategy and the direction of the 3-year outlook that we laid out at Investor Day kind of remains intact. But given these factors, we're going to sass whether and how best to update the current 3-year outlook. And we're getting our heads around how we completely finish '25, making sure that all of our contracting information is in, our forecasting tools for '26. And so we'll share our latest thinking with you at CAGNY. I think the 1 perspective though, that I would share with you now with regard to Food and Industrial Ingredients U.S./Canada specifically, is that I would characterize our outlook as more kind of measured versus September. We will likely kind of reset to 2025 space results. And then I think that this segment can return to a 17% to 18% op income margin, probably more evident in 2027 and maybe 2028. And again, our business targets are really delivering across cycles, right? So at any point in time, there may be like one time when you're kind of taking a little bit more of a flat year versus the chance and the opportunity where all of your growth bets are coming into place and you have at least favorable wins in terms of managing your cost inflation and pricing and customer and product mix is working in your favor. And so that very much allows this business to kind of hit those mid-single digits and high single digits types of year-over-year op income. I hope that characterizes a little bit. Benjamin Mayhew: Yes. No, that's great. My last question is more kind of broad-based here in terms of what we're seeing in the CPG industry in terms of like portfolio shift. And I'm just wondering, how do you guys view your positioning as we kind of absorb the secular shift in packaged food industry? Like how do you view your capabilities in the true opportunities that you might have to help your customers reshape their portfolios? And also, you mentioned earlier the advantage of both producing and selling locally, that stood out to me. So if you could just kind of tie that all into maybe your competitive advantage there moving forward as your customers look to really shift their offerings for the consumer? James Zallie: Yes. Thank you for the question, Ben. I think one of the things that we feel very good about -- and it's been enhanced by the work that we did with the resegmentation is our work on customer segmentation and something that we call customer channels for growth and really understanding where the consumer is moving within those customer channels, along with who are the customers that are most well positioned to benefit from those channel shifts. So what we are improving each and every day is the opportunity across what we call global key accounts, which we have a program and we have a leadership team that manages, multinational and multinational accounts regional leading accounts, companies that are in foodservice. And then most recently, we're doing an exhaustive amount of work to map the whole private label channel for growth. And the co-packing network, co-man network that produces for private label as well as reaching where the innovation starts for those companies, either the consultants, the advisers that are partnering with some or many of the large private label producers that have made significant investments to be not just producing themselves and vertically integrated, but to be thought leaders in this space. Example, you saw Kroger most recently come out with data on the consumer that they're becoming a thought leader. So we're doing an awful lot of work to map that whole ecosystem. And we have hired specialists and resources to enable us to kind of skate to where the puck is going in relationship to the consumer across these categories. And we're looking at where the growth is coming. So for example, dairy category was one of the few categories that showed positive unit volume growth. And of course, that's always been a strong suit of ours. So that's how we're approaching this. And the solutions selling approach marries very well to that. The other thing also that we're looking at is how do we sequentially continue to strengthen our partnerships and relationships with our distributors. Because typically, our distributor margins are very attractive, very attractive. In fact, higher than our average margins. And so we're looking to be really smart in how do we maximize those partnerships as well. So hopefully, that gives you a little bit of insight into customer channels for growth and customer segmentation that we think -- again, we've been doing this now for a number of years, but we've really intensified the focus across foodservice and private label just within the last 2 years and bolstered it with resources, and we're seeing the dividends paying off. Operator: [Operator Instructions] Our next question comes from the line of Pooran Sharma with Stephens. Pooran Sharma: Congrats on the retirement, Jim. It's been good working with you. Just wanted to maybe start off and understand how broader industrial starch demand trends have been faring? I think on the last call, you mentioned you're starting to see momentum there. Just wondering if you could give an update on that? And then kind of on that, are you able to give us a little bit of clarity as to how much what kind of benefit you're going to expect here and maybe like a cadence or a pacing to that benefit for the Indianapolis starch modernization project? James Zallie: Okay. Let me take a little bit of the industrial. And then it's distinct and different than the Indianapolis because the Indianapolis produces exclusively for food. But let me address your industrial starts demand question. First of all, it's a business that we don't really talk about a lot, but we probably should because it's done exceptionally well in recent years, not just from a standpoint of organic growth, but also in margin growth and overall operating income contribution. I would say this past year in contracting, pricing was a little bit more intense than it had been in prior years. And typically, it's obviously an indicator of overall economic health for the industry, for the macro economy. And I would say that volumes in the second half were a little bit softer than we saw in the first half. But as you know, we announced, I think it was early last year, a $50 million investment in Cedar Rapids to expand capacity and modernize some of our drying capacity. And it's because the business has done exceptionally well, and we needed to solidify our position as a reliable supplier to customers. So when that is going to I think, complete in the second half of this year and position us well for 2027. So we feel very good about our position there. The other thing that we're doing in industrial is working with customers capitalize on the trend and requirement for what we call advanced packaging materials. And these are materials that would have a value proposition around sustainability or biodegradability. And they could be corrugating adhesives, which we have a niche market that's growing nicely, or for binders for compostable bowls. And so this is different than just starch for potential strength or wet end strength or coding. And so very well positioned, pursuing pockets of growth there, but the underlying base business is very solid, very strong customer relationships, exceptionally strong. I think, Jim, you may want to comment on the Indy modernization and the commissioning of that and where that's trending? And maybe you may want to make a comment on even our cogen investment there as well? Jim Gray: Yes. So what we did analysis that we had an opportunity to really kind of debottleneck, to take out some awkward product handoffs that were occurring across the plant really with just continuous flow of product, and then also kind of really upgraded a lot of our drum drying unit within Indy. And it's just when you come into this and these complicated investments in an older plant and you see once it's gone and the beauty of the engineering and the debottlenecking. So first, it's a much safer and cleaner environment; two, it's lower costs; and three, it slightly expanded our capacity. And so glad to have that part of our modified starch, one of our modified starch units completed. And then separately, we have -- kind of because of the infrastructure investment tax opportunity, we jumped into becoming more sustainable, self-sustainable at Indy with regard to our cogen unit. And that is making very nice progress. And we will be commissioning that, I think, in the third quarter of this year, and it'll just allow us to then kind of really look at our own nat gas supply, allow us to hedge, allow us to reduce future profit volatility around energy costs and really drive some just continued savings with regard to energy at Indy and look forward to that really in Q4 of this year. Pooran Sharma: Great. Appreciate the color there. And then just -- my follow-up here would be around the -- you've given good commentary around contracting. You mentioned the pricing declines. You mentioned kind of the tariff impacts and then just consumer affordability/economics. Just wanted to get a sense if GLPs came up in your discussions with consumers? Does that growth in kind of GLP-1s or just interest in that, has that been sending people more to spot? Would just love to hear your commentary on GLP-1s. James Zallie: Well, I mean, I think everybody is waiting to see what the -- trying to get some quantification around what they think the impact will be. It's no doubt, having some sort of an impact. But what I can tell you on a positive note is in relationship to our protein fortification business, which we haven't talked about in a number of quarters, but we decided to obviously emphasize the full year performance of the double-digit increase in sales that we saw with revenue growing 40%. And it's also noteworthy that for that business, the reduction in operating income loss was greater than $20 million in 2025. And we have active programs in place to increase the valorization of pea starch, pea fiber, along with the growth of pea protein isolate. And so we're fully contracted for 2026, which again shows the strength we think on the back of the GLP-1 effect for protein fortification and anticipate another year of notable revenue growth and operating income improvement for protein fortification. So we're, like everyone else, monitoring GLP-1, but I can tell you it's having an impact for our protein fortification business. Jim Gray: Positive impact. James Zallie: Yes. Operator: Thank you. And I would now like to hand the conference back over to Jim Zallie for closing remarks. James Zallie: Thank you, operator, and thank you all for joining us this morning. We look forward to seeing many of you at our upcoming investor events, with the next significant engagement being CAGNY on February 17. At this time, I want to thank everyone for your continued interest in Ingredion. Thanks very much. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
Operator: Welcome to the presentation of Sartorius and Sartorius Stedim Biotech on the Preliminary Results 2025. Please note that the call is being recorded and streamed on Sartorius' website. Your participation in this implies your consent with this. A replay will be available shortly after the call. I would now like to turn the conference over to Petra Müller, Head of Investor Relations of Sartorius. Petra Muller: Thank you, operator. Hello, and a warm welcome from my side. I'm joined today by our CEO, Michael Grosse; by Florian Funck, our CFO; by René Fáber, Head of our Bioprocessing Division and CEO of Sartorius Stedim Biotech; and by Alexandra Gatzemeyer, Head of our Lab Products & Services division. As always, we will start with prepared remarks followed by the Q&A session. As the call is scheduled to 1 hour, please limit your question to 1 so that as many participants as possible can take part. Please note that management's comments during this call will include forward-looking statements that involve risks and uncertainties. For a discussion of risk factors, I encourage you to review the safe harbor statement contained in today's press release and presentation. With that, I'm pleased to hand over to Michael Grosse, CEO of Sartorius. Michael, please go ahead. Michael Grosse: Thank you very much, Petra, and a warm welcome also from my side, and thank you all for joining us today for our preliminary full year 2025 results. Before we begin, I would like to sincerely thank all of our colleagues across Sartorius for their commitment and dedication over the past year. Their passion, professionalism and strong focus on execution are clearly reflected in our results we are presenting today. I would also like to personally thank everyone who has made it such a smooth and rewarding experience for me to step into my role as a CEO, and particular thanks as well to my colleagues here, Alexandra, René and Florian from the executive team. It has been really a great journey up to now, fantastic work on the strategy and great things to come. And I don't want to miss out as well on saying thank you to the team here from Investor Relations, Communications and Finance because I think the workload over the last couple of weeks and days have been tremendous in order to get us all prepared and get our reporting in place. Thank you all for that. Now let me briefly summarize key messages that we would like to share with you today. First of all, 2025 was characterized by return to normal demand behavior for consumables and continued cautious investment activities by our core customers. Combined with an active operational management in a still challenging environment, we delivered improved operational and financial performance. Okay. All right, supported by the improvement -- improving demand trends, mainly on the consumable side and the operating leverage inherent in our model, Sartorius achieved considerable profitable growth. For the full year, we delivered results slightly ahead of our upgraded full year 2025 sales guidance. Profitability landed in the upper half of our initial guidance from April and exceeded our October EBITDA target, with a margin of 29.7%. This performance reflects growing volumes, operating leverage and strong execution. Now growth was once again driven by our recurring business across both divisions. In Bioprocess Solutions, strong double-digit growth in recurring revenue more than offset continued softness in equipment, which, however, stabilized over the year. In Lab Products & Services, performance improved gradually as expected. Growth in H2 was driven by recurring business, while instruments showed positive momentum also supported by product launches in bioanalytics. Our operating performance allowed us to further reduce our leverage ratio, underscoring our commitment to financial discipline and a strong balance sheet. Overall, in 2025, we laid a solid foundation for the year 2026. For the group, we expected sales growth of around 5% to 9% with an underlying EBITDA margin slightly above 30%. Let me now turn to actions we are taking to enable future growth. Let's talk about innovation and partnerships. We have made tangible progress in 2 key areas: innovation and the expansion of our resilient global R&D and production capacity. We launched several new solutions across both divisions. In Bioprocessing, we made progress in more sustainable product design with the launch of Sartopore Evo, a PFAS-free filtration solution, which addresses growing regulatory and customer expectations around the elimination of persistent substances while maintaining the high performance and reliability our customers require. We also launched the Sartocon cassettes, further strengthening our offering for efficient and scalable downstream processing, particularly for viral vector purification. Now on the equipment side, we introduced the Pionic Continuous bioprocessing platform developed with Sanofi, which faces high customer interest. This platform supports the industry's transition from traditional batch production to continuous processes, enabling faster, more efficient and more sustainable manufacturing workflows. And our teams advance our bioanalytical portfolio, including the only live-cell imaging system with confocal microscopy inside an incubator, a really important step forward for the work with complex 3D cell model. We further strengthened this area also through the acquisition of MATTEK, expanding our portfolio of advanced 3D cell models that more closely mimic human tissue, deliver more predictive and reproducible results and help reduce the need for animal testing. And we entered into a partnership with Nanotein Technologies, enhancing our capabilities in cell expansion and activation to support next-generation biologics. In parallel, we continue to invest in a resilient global manufacturing footprint. We completed the expansion of [ Aubagne ] and progressed with the expansion in Germany, as well as with the construction of our greenfield site in Songdo, South Korea, ensuring scalability, supply reliability and proximity to our customers. Taken together, these actions strengthen our ability to support customers as markets normalize and position for Sartorius for sustainable innovation-led growth over the coming years. With this, let's take a closer look into our numbers. Florian? Florian Funck: Yes. Thank you, Michael, and a warm welcome also from my side to everybody out there. I'm happy to take you through our numbers that's reflected, in my perspective, a consistently strong performance in the year 2025. So let's start with top line performance. Our sales revenue increased by 7.6% in constant currencies and 4.7% in reported currencies, reaching slightly more than EUR 3.5 billion. This positive development was driven by mid-teens growth in our recurring business in 2025, which represents, by far, the largest part of our business, as you know. Our nonrecurring business remains soft on a full year basis, but clearly stabilized in H2 and was above H1 in absolute numbers as respective. The difference between constant currency and reported growth was primarily driven by U.S. dollar weakness, which represents a headwind of almost 300 basis points to reported sales growth in fiscal year 2025. Our full year performance was also influenced by U.S. tariffs. The successful implementation of tariff surcharges contributed approximately 1 percentage point to sales revenue growth. Order intake developed strongly, growing faster than sales. And as a result, our 12-month rolling book-to-bill ratio remained consistently above 1 throughout the year '25, although as expected and also communicated in our last quarterly call, it declined slightly sequentially in Q4 due to a very strong prior year comparison. In absolute terms, order intake in Q4 was roughly on par with the exceptional strong Q4 2024. You remember that above EUR 1 billion figure that we posted there. And that was the quarter with the highest absolute order intake in 2025. And therefore, we entered 2026 on the back of a strong order book. Looking at our divisions in more detail. Bioprocess Solutions delivered another strong quarter, bringing full year sales revenue growth to 9.5% in constant currency. Growth was driven by mid-teens growth in consumables throughout the year, while equipment remained soft, as Michael already mentioned, but was clearly stabilizing with H2 '25 sales being double-digit percentage above H1 '25 sales. Lab Products & Services delivered a resilient performance in a challenging market environment. Sales were essentially flat at 0.2% in constant currencies plus, supported by solid momentum in consumer goods and services. The acquisition of MATTEK contributed slightly more than 1 percentage point to growth. Instrument sales were impacted by constrained CapEx spending in life science research and market. However, we are seeing encouraging signs of stabilization supported by positive momentum in bioanalytics in the second half, driven in part also by the launch of several updated instruments in that market space. Let me also quickly elaborate on our regional performance. EMEA sales performance remained robust with growth of almost 6% in 2025. As a reminder, the recovery in EMEA started earlier than in other regions and therefore, faces higher base effects compared to the Americas or APAC. The Americas outperformed, growing by 8.9%, like APAC, which also grew by 8.9%. In APAC, China continued to stabilize with early signs of improvement. Excluding China, the APAC region delivered low double-digit growth in the year 2025. Let's now turn to our profitability. In addition to robust growth momentum, we achieved a strong improvement in profitability over the past 12 months. Underlying EBITDA increased overproportionately by 11.2% to EUR 1.052 billion, with the margin expanding by 170 basis points to 29.7%. This margin improvement was driven by positive volume and product mix effect as well as economies of scale, further underpinned by cost discipline, more than offsetting FX and tariff-related headwinds of around 1 percentage point. Looking at the divisional profit distribution, profitability in our BPS division developed strongly. Underlying EBITDA increased by 15.2% to EUR 907 million, and the margin improved by 240 basis points to 31.7% based on the effect just mentioned also for the group. In LPS, margin declined year-on-year to 21.5%, roughly 50-50, reflecting an unfavorable product mix on the one hand side as well as FX and tariff-related impact on the other hand side. Now let's take a look at the performance below underlying EBITDA, where both net profit and cash flow developed well. The strong increase in underlying EBITDA of 11% translated into overproportionate growth and underlying net profit of 18% and reported net profit of 84%. As a result, underlying EPS also grew at a very strong 18%. Turning to cash-related items. Operating cash flow amounted to EUR 837 million, below the exceptionally strong prior year level of EUR 976 million, which was positively impacted by significant one-off inventory reduction measures in the year 2024. While business volume improved strongly in 2025, working capital remained largely unchanged. Going forward, we remain committed to keeping net working capital growth below our sales growth. Free cash flow amounted to EUR 390 million, reflecting the development of our operating cash flow. In addition, free cash flow is also reflecting the slightly increased CapEx spending from EUR 410 million to EUR 441 million. Accordingly, the CapEx ratio was 12.5%, which is exactly in line with our guidance throughout the year. To conclude our section on 2025 financials, let us now look at the development of the balance sheet-related key figures. We see a strong equity ratio of 39.8%. The increase versus year-end '24 is mainly due to some repayments on financial instruments using our strong cash position and therefore tightening the balance sheet total. Net debt remained largely unchanged, while gross debt has been reduced by EUR 277 million and despite payout of the acquisition of MATTEK in summer 2025 of EUR 70 million. The leverage ratio, defined as net debt to underlying EBITDA, improved as expected from 3.96x to 3.55x in 2025, despite the acquisition of MATTEK, which added approximately 0.1 turns to the ratio. So we are well underway on our planned deleveraging path. And as you can see in the title, we stay committed to our investment-grade rating. With that, I would like to hand back over to Michael. Michael Grosse: Thank you, Florian. So overall, we are very pleased with the strong performance Sartorius delivered in 2025, supported by improving demand trends, mainly on the consumable side. In addition, the results demonstrate the resilience of our business model and confirm the attractive long-term opportunities in the biopharma and life science markets. We will remain focused on disciplined execution, targeted investments in innovation and capacity and operational excellence. Looking at 2026, it is clear that our industry is back on track, but has not yet fully reached its long-term growth level, especially in terms of demand for equipment and instruments. Since the year is still young, we have deliberately set a broad guidance range to account for continued high macroeconomics and industry-specific volatility. The lower end of the range reflects the cautious scenario in which market conditions weaken. However, we currently expect market dynamics to continue normalizing and positive trends to continue. For 2026, we expect to continue our profitable growth trajectory with a continued positive development in the Bioprocess Solutions division and a recovery in the Lab Products & Services division. For the group, we expect sales growth in constant currencies of around 5% to 9%, including a positive effect from the market acquisition and U.S. tariff-related surcharges totaling approximately 1 percentage point. And for the underlying EBITDA margin, we expect an increase to slightly above 30% in which a technical margin dilution of around 50 basis points from tariff surcharges is already reflected. In Bioprocess Solutions, we anticipate sales growth of around 6% to 10%, mainly driven by the recurring business, while we expect equipment business to remain at least stable. The underlying EBITDA margin should be slightly above 32%. In Lab Products & Services, sales growth is expected at around 2% to 6%, including a growth contribution of 1.5 percentage points for MATTEK. This reflects the continued growth recurring business and an at least stable instrument business. We expect underlying EBITDA margin to be slightly below 21%, mainly influenced by deliberate investments in advanced cell models with additional headwinds from unfavorable mix, ForEx, and the dilutive effect of the existing tariffs. CapEx ratio should be around the prior year level as we will continue to invest selectively and with discipline in expanding our global research and manufacturing footprint. Net debt to underlying EBITDA should decrease to slightly above 3x at year-end. As usual, we will provide some additional information for modeling purpose. As you can see, with the Euro-U.S. rate of 1.2, there, we would be a headwind of around 2 percentage points on the reported versus constant currency growth in full year 2026. In Q1, the headwinds would be around 4 percentage points at Euro-U.S. rate of 1.2. Taken together, we are confident that Sartorius is well positioned to benefit from continued recovery. With that, I would now like to hand over to René, who will walk us through the financials of Sartorius Stedim Biotech in more detail. René, over to you. Rene Faber: Thank you very much, Michael. Also from my side, welcome, and thank you for joining us on the call today. In 2025, Sartorius Stedim Biotech achieved considerable profitable growth driven by improving demand, particularly for consumables and operating leverage. This allowed us not only to achieve our updated October 2025 guidance, but also to exceed our top line expectations. Overall, we are very pleased with the results and would like to sincerely thank our all colleagues across the Sartorius Stedim Biotech for their commitment, dedication and really hard work in making 2025 a success. Looking at the numbers. Sales for the Sartorius Stedim Biotech Group increased by 9.6% in constant currencies, reaching nearly EUR 3 billion. Growth in reported currencies was 6.7%, primarily due to the weaker U.S. dollar, which represented a headwind of almost 300 basis points. The successful implementation of tariff surcharges contributed approximately 1% of sales revenue. Our high-margin recurring consumables business remained very strong, delivering mid-teens growth more than offsetting the soft but increasingly stabilizing equipment business. Order intake grew faster than sales, keeping our 12-month rolling book-to-bill ratio consistently above 1, while the ratio declined slightly sequentially in Q4, as Florian explained, due to a very strong prior year comparison. Q4 order intake was roughly on par with the exception of Q4 2024, making it the highest absolute order intake quarter in 2025. We therefore entered 2026 with a strong order book. Underlying EBITDA increased by 17% to EUR 914 million, driven by volume, product mix and economies of scale. Consequently, the underlying EBITDA margin improved significantly to 30.8%, an increase of 2.8 percentage points compared to the previous year. Looking at the top line performance from a regional perspective, EMEA made a solid momentum, delivering 7.3% growth. This robust performance came despite a higher comparison base resulting from an earlier recovery cycle. The Americas grew by almost 12% followed by Asia Pacific growing almost 11%. In APAC, China stabilized and was only slightly dilutive to the overall growth. Excluding China, the growth the region delivered was in the low double-digit range for 2025. I'm also quite pleased with the more recent development in China beyond stabilization as the year progress, we are now seeing really early signs of recovery. Looking at the net profit and cash flow, underlying EBITDA growth of the strong 17% translated into an overproportional increase in underlying net profit of 26.7% to EUR 428 million and reported net profit of nearly 52% to EUR 266 million. Underlying EPS rose by 26% to EUR 4.4. Operating cash flow remained solid at EUR 692 million, although below the high level recorded in the prior year, which was positively influenced by the pulling of inventory that Florian already touched upon. Free cash flow stood at EUR 295 million, and the CapEx as a percentage of sales came in at 13.3%. A quick look at our balance sheet metrics. Our equity ratio improved to 51.7% in the end of 2025 with the increase being driven by some repayment of financial liabilities and therefore, tightening the balance sheet total. Net debt decreased by EUR 18 million versus year-end 2024 and gross debt reduction. Deleveraging is progressing as planned with the net debt to underlying EBITDA ratio improving to 2.38 by the end of 2025. So we are very well on track on our deleveraging path. Now before we move into the Q&A, let me also quickly elaborate on our full year guidance for the Sartorius Stedim Biotech Group. As mentioned earlier, we are very pleased with the strong performance of Sartorius Stedim Biotech has delivered across all key financial dimensions. The 2025 results demonstrate the resilience of our business model and confirm the attractive long-term opportunity in biopharma market. We will remain focused on disciplined execution, targeted investments and innovation and capacity and operational excellence. Looking in 2026, same is true for Sartorius Stedim Biotech and for Sartorius AG when it comes to the overall environment and industry trends. Therefore, we also have deliberately set a broad guidance range with the lower end of the range reflecting a cautious scenario in which market conditions weaken. However, we currently expect market dynamics to continue normalizing and positive trends to continue. We expect to stay on our profitable growth path and for 2026 sales revenue growth in the range of around 6% to 10% in constant currencies, including a 1 percentage point contribution from the U.S. tariff surcharges. Growth will be mainly driven by the recurring business, but against high costs, while the equipment business should remain at least stable. The underlying EBITDA margin should increase to slightly above 31%, in which a technical margin dilution of around 50 basis points from tariff surcharges is reflected. Our CapEx ratio is expected to stay around previous year level at around 13%, reflecting our ongoing investments into research and resilient production footprint. Our commitment to deleveraging remains unchanged. We anticipate the leverage ratio, the net debt to underlying EBITDA to decrease to slightly above 2 at year-end. Our modeling assumptions, Michael already explained, expected headwind from FX on Sartorius AG level, same is true for Sartorius Stedim Biotech. With this, I will hand over to the operator to begin our Q&A session. Operator: [Operator Instructions] The first question comes from Subbu Nambi from Guggenheim. Subhalaxmi Nambi: What does your guidance assume in terms of U.S. onshoring build-outs in 2026? What could drive upside to these expectations? Michael Grosse: Yes. So I'll take that. Subbu, thanks for the question. I mean, right now, as we've been seeing that there is a lot of plans, some of them really committed, some of them still a bit on the horizon. As we see as well the lead times for order particularly on the equipment on a larger system side for greenfield or for larger expansions, we think that the impact from large -- from relevant reshoring activities will most likely not contribute with revenue in 2026. So we've not baked anything of that in our current expectation and assumptions. This would rather be for the year 2027 and beyond where this may have a larger impact. However, we are very closely connected, of course, with all our customers, supporting them on their plans, discussing opportunities as we move forward. It goes up from this, of course, very short near-term activities on brownfields and expansions of existing capacity. Subhalaxmi Nambi: Perfect. And a quick follow-up. How did equipment orders for BPS and LPS, respectively, trend for the quarter for Q4? And are you starting to see any early signs of recovery? You spoke about comparison and orders, but I was just trying to figure out what about equipment orders separately for LPS and BPS. Rene Faber: Thank you for the question. Although we are not giving further information on that very detailed level. But what I can tell you is, on the one hand side, we have been talking about H2 sales being much stronger than H1 sales. And the same holds true when we look at order intake where the order intake in H2 was also well within double digits above H1, which, of course, then speaks to the quality of the order book and therefore, our cautiously optimistic outlook then also into '26. Operator: Next question comes from Richard Vosser from JPMorgan. Richard Vosser: One question, please. So you talked about market conditions not fully back to normal for equipment. So just a little bit of elaboration on changes of customer sentiment here. You've talked a little bit just now about equipment orders suggesting improvement. So just thinking about, first, your confidence in the stabilization of equipment revenues, what's underpinning that in '26? But also, when do you think equipment could move more back to normal levels? We've seen that happen for consumables in '25. What's your thinking there? Rene Faber: Yes. Thank you for the question. I'll take it. Let me first get back to 2025. You will remember when we talked about stabilization of equipment like in Q3, we said for H2 '25, we expect to be in revenues for -- with equipment at least on the levels of H1, maybe slightly above. And you could hear from Florian that H2 came out as stronger, so confirmed the stabilization stronger compared to the H1. So I think that's a clear kind of confirmation of our view and expectations and visibility and the discussions with our customers that the equipment is stabilizing. And now looking, of course, into the 2026, we continue to see the positive discussions and have positive discussions with customers. They are tangible projects, sizable projects on the horizon. The order book is healthy as we mentioned in the -- a few minutes ago. So as Florian [indiscernible], cautiously optimistic looking into the 2026. We believe that the portfolio we have is well positioned to help customers quickly adjust their capacity, single-use technologies are designed to make -- to do -- to provide flexibility. So yes, we're very encouraged about the current -- the sentiment as well as the -- our position and discussions we had with our clients. Michael Grosse: I would like to expand even that from Rene's perspective, I think the similar situation is true as well for LPS division on the basis of equally, I would say, strong development interest levels in needs and opportunities, particularly on the biolytical instrument side, as well a trend that we see in the second half of the year, particularly in Q4, coming and resulting into a good level of contribution in both sales and order intake. And again, so same sentiment for us. But again, I think it will take, for sure, the full quarter Q1 for us to have simply better visibility, better understanding the continuation of the order intake trade in order to have a better view whether this requires further refinement of our perspective for the full year at that point in time. Operator: The next question comes from Doug [indiscernible] from Schenkel. Douglas Schenkel: It's Douglas Schenkel from Wolfe. I'm going to try to do 3 really quickly. One, I just want to confirm, based on your responses to the earlier questions that your 2026 guidance does not currently assume an improvement in bioprocessing equipment demand. So that's the first one. The second, can you please bridge to your margin guidance for the year? Specifically, what would be helpful is, what's the impact of foreign exchange, tariffs and operating efficiencies as you incorporate those into your guidance? And then third, [Technical Difficulty] many companies in your peer group have taken a more conservative approach to guidance than had been the norm given market challenges over the past several years and given ongoing policy uncertainty. With that in mind and also recognizing that this is issuance as CEO, how would you describe your initial guidance philosophy? Florian Funck: So maybe I start to give a little bit more perspective on the margin guidance here. So what we know as of now, of course, is roughly the impact of the tariff on the year 2026, which is to be around 50 basis points. What we do not know is the full FX impact. The weaker the U.S. dollar the higher this impact might be, although we think we are in a good position to a certain extent also to compensate certain headwinds on the FX side in the margin. The, let's say, broad improvement in margin that we are seeing, if we are taking out tariff and FX impact, is definitely a 3-digit basis point number, so above 100 basis points and should be driven to a majority from ongoing operational leverage that we've seen. Michael Grosse: Yes. Maybe to add to Florian's point there just because you may have really in mind as well our fantastic margin contribution that we delivered in 2025. And of course, there are other effects that I think are relevant in my mind to keep in mind there. Of course, on the operating leverage, since we are now already throughout the last year on a different level, the effect of this is, of course, diminishing to a point. Keep as well in mind that when it gets to our activities that we launched in the year even before on our cost reduction programs that the main effect there as well was visible, particularly in 2024 and 2025, still continues in 2026, but less so. So with this and as well a bit of the question mark, how much of the equipment will be there in the year 2026. If that is a higher degree of recovery, of course, the margin mix, the mix effect that we have seen in 2025 was probably as well a bit more favorable compared to 2024 than it may be in 2026 compared to 2025. Then you talked as well a bit about the guidance philosophy. Yes, I think we try to express that in our wording already. On the one hand side, it's early in the year. We felt like, okay, we're feeling confident enough in order to quantify our guidance. But given the fact that it's early in the year, given the still the level of uncertainty that we have there in terms of macroeconomical and geopolitical aspects, as you mentioned, I think we want to as well, therefore, be prepared for this and the lack of full visibility for the full year on the basis of order intake and the book and the market trends, we felt the philosophy is indeed that we have decided for a wide range with the 4 percentage points we have there. We don't feel that we are neither over aggressive nor over conservative with what we put out there. However, we feel that we will not celebrate if we achieve only a 6% growth for 2026. That's equally clear. At the same time, the level where we will land on versus the mid or even beyond the midpoint is so much dependent now on what will happen. So I think we will be in a better position after the first quarter to give more clarity as the year progresses. And that is why I think the philosophy remains, I would say, remains balanced, remains balanced. Operator: The next question comes from Harry Sephton from UBS. Harry Sephton: [Technical Difficulty] consumables. So we're seeing a more comfortable high single-digit to low double-digit growth across the big players in the industry on the consumable side. Based on your guidance, that you're expecting to be more in line with market growth. So what do you see in terms of potential upside or downside risk to market share in the near term on the consumable side? Rene Faber: Yes, I take it. So a question on consumables. As you will know, the consumables is very much -- the majority represents the majority of our revenues for the -- I'm talking for the Bioprocess division. You will know that most of that recurring revenues, consumables revenues are linked to commercial manufacturing and consumption of our customers of the products in making commercial drugs, adding late-stage clinical material production, it comes to around 80% of the consumables revenue are linked to that late-stage plus commercial manufacturing. So -- and that's more or less kind of also gives you an idea about what dictates the growth of consumables. Looking forward, it's very much about the volumes, manufacturing volumes of our customers. We can do little about that, of course. But then once new drugs are being approved or enter these late-stage clinical phases, yes, that drives additional volumes for these consumables. So looking forward, I think we have been working consistently over the years with the teams in all regions to make sure we are early with customers and place these consumables spec in, validate when the decisions are made and validations are done and also working hardly with customers to convert wherever possible in an ongoing and existing processes towards our products. The highlight of that was, of course, during the pandemic where mainly due to our ability to supply and the customers, we gained market shares and kept or we were able also to protect roughly 1/3 of this gain moving forward. So we are, I think, on a very healthy and successful track record to drive that above market -- above drug volume growth of our consumable revenues. Of course, as we mentioned in presenting our 2025 results, we have seen a strong mid-teens growth of our consumables in 2025. So comps are higher now looking in 2026, but we are very confident that these fundamentals and the volumes driving the growth of consumables are there are intact and are positive about the outlook in '26 and beyond. Operator: The next question comes from James Quigley from Goldman Sachs. James Quigley: I've got one on China, please. So you said in the slide and in the comments that China is starting to show some encouraging signs of growth. I think some of your peers at a recent conference still sounded a bit muted on China growth. So what are you seeing here in the region that's driving those encouraging comments from you across the BPS and the LPS divisions? Michael Grosse: So I mean I can get started a little bit. I mean, highlighting perspective again, I think China has really a few years back that I think we've seen a really difficult market environment with as well, very strong level of guided preference with regard to local players and for local production. We feel now that a little bit this notion of rebaselining the market has come to an end. We feel now that we are able to, right now, keep market shares in China and benefit from probably the still modest level of the growth that the China market demonstrates. At the same time, there's, of course, a lot of innovation activities that we are part of and want to equally, I think, being asked by customers to be part of the rollout of out-licensing and bringing some of their pipeline development into other regions and markets. Our expectation for the market, however, overall is still a rather flattish or rather very modest level of degree of growth expectation given as well the prior year performance that we've seen. So we don't see and we don't expect naturally a big turnaround of that momentum. It's still probably there to come later. At the same time, there's a big overhang and a high capacity buildup on the equipment side. So particularly on the equipment side, we feel as well that China will, in the year 2026, be a rather muted market. But on consumables, we think will be part of the game. And yes, as we said, we are -- we have modest expectations here on the market. Operator: The next question comes from Charles Pitman-King from Barclays. Charles Pitman: A quick question, please, on just the guidance again. Just trying to relate the kind of 2 separate statements of the low end of your guidance range, reflecting kind of deteriorating market outlook. But also your commentary around the strong order book and equipment being at least stable. Can you confirm, therefore, that the low end of your guidance range reflects equipment being stable, supported by your existing backlog and other market deteriorations impacting consumables? And then just a quick clarification on margins. Just wondering why you're only providing a kind of bottom end of that range. And is it the implication that at the top end of the range, you have rising equipment, which will offset the margin such that your only confident to provide at the bottom end of the range? I'm just trying to -- yes, just thinking about how you're setting this out. Michael Grosse: So first part, yes, I mean... Unknown Executive: Charles, you broke up a little here technically. That's why we are a little puzzled. Could you repeat the first part of the question? Charles Pitman: Sorry. My question relates to trying to triangulate the 2 guidance commentary, one being that your sales could be at the low end of the range upon worsening market conditions, but did you separately expect equipment to be at least stable? I'm just wanting to confirm that your order book means that you have this confidence in your equipment being at least stable, and that in the scenario where you hit the low end of the range, that's driven by consumable deterioration more so than any downside to your equipment outlook? Michael Grosse: Okay. So I mean, yes, I mean, again, I think on the lower end of our guidance as we try to express, we see some level of, I would say, market situation overall. So we would see that there is no impact, no positive contribution there from the equipment and possibly as well a slight deterioration even on the consumable side. We see the total mix. It depends on how you see the 2 elements of that coming together. But as we say, I mean, if we see the momentum that we've seen right now based on, as you said, the order intake generated in equipment, and at least, stable situation plus the continuation of the current trajectory of the consumables that would be slightly above the bottom part of the guidance. So we would assume some level of deterioration of that condition. Then I think the other question was on the margin. Florian Funck: Yes. While we have not given a range for the margin, we have said that we want to reach slightly above. So this is in a way open to one side. Now let's assume we would be on the lower end of our guidance range. The 5% for the group, we would definitely aim to see margin improvement against prior year, but we might not fully reach that. So the margin corridor that we are indicating to was slightly above -- the 30% was more towards the midpoint of the guidance. If we then come to the upper part of the guidance corridor on top line, of course, there's way more potential on the back of more operational leverage. Operator: The next question comes from Charlie Haywood from Bank of America. Charlie Haywood: Charlie Haywood, Bank of America. I have 2. So first one in '26, is it fair to expect typical seasonality on the bioprocessing side? So I think you've previously commented to 4Q, 1Q, 2Q, 3Q. Or given equipment phasing and what looks like a strong fourth quarter for those orders and a 6- to 12-month order book, might that distort to possibly fueling a stronger second half? And then the second question is just a bit more on midterm. Now that you spent a bit of time in the business. You previously sort of commented to Merck's 9% to 10% market outlook not far from your thinking. I guess how are you currently seeing the bioprocess midterm market growth in the end markets there? Michael Grosse: Thanks for the question. So I think we can maybe kick off a little bit on the basis. I think, as you know, we don't really break down and guide on the basis of quarterly perspective. So I think in this case, we would like to leave a little bit the breadth of the way of how we look at the year to come in more the total perspective. So we will not provide any specifics as we see the quarters moving forward. Again, I think it is probably more in the nature of the business. If you think about -- and it's probably a similar pattern that we've seen during the last year, given the lead times of equipment orders, particularly we now see that, okay, we generated the order intake in the second half of the year, Q4. So things now with the lead time, 6 to 12 months on the Bioprocess side, of course, then we would expect sales realization in all these orders to rather hit the second half of the year than the first half of the year. So that's natural by the lead time of those orders. Yes. Then in terms of the market. Yes, I think we hold to that. I mean we basically took a look at the market. We'll get back a little bit more interesting insight on the market analysis that we've done for the capital market that we will provide and bring up in March. However, as we said, we think that the assumption there for the market to be around a 9% growth, I think, is something that's very much in line with our views and with our analysis. Again, depending a little bit also on the specific market segment and then the exposure to the market segments. But that corridor is well in line with our analysis that we've done. And that is well what we believe that in our minds, we will measure us against from a mid- and long-term perspective. Operator: The next question comes from James Vane-Tempest from Jefferies. James Vane-Tempest: Just on LPS, actually. You mentioned in the presentation that the rolling book-to-bill is now more than 1, but now you specifically stated in both divisions. So I was just kind of curious whether the LPS book-to-bill turned in Q4 to be above 1? And if so, where you're seeing accelerating orders from either certain customer or product groups? And then related to LPS, I mean the guidance that you've given is marked the fourth year of margin decline in a row. I know we're going to hit more in March. But conceptually, how realistic is it from here to get back to levels seen a few years ago? And what would it take to get there? Michael Grosse: Okay. So the first part of the question was about the book-to-bill. Sorry, do you want to take that? Florian Funck: Exactly. James, as you know, we would not like to go specifically into that. But let me put it that way. We were quite pleased with what we have seen than in Q4. Let us leave it on that level. Michael Grosse: And then one was related to profitability. James Vane-Tempest: LPS margins, yes, in terms of the fourth year of decline and just thinking about what it would take to get back to where it was? Florian Funck: Yes. I think this is a question that we should discuss more in detail around the Capital Markets Day, if you don't mind. James Vane-Tempest: Okay. No, that's fine. One quick follow-up, if I can. And that is just about the business flow within BPS. Historically, you've kind of alluded to consumables equipment normalized being 75%, 25% approximately. And I know at 9 months, I think you sort of said it was around 85%, 15%. So just as an approximation, I was just kind of curious where that sort of number for the full year. Michael Grosse: Okay. Just maybe a short point of clarification. So I think, let's say, the numbers you're referring to on the 75%-25% would be on the group level. If we look at BPS, I think we see the rough proportion over the last half year, we've more talk about 80%-20% on that ratio. And again, I think, yes, that is where we see the current state. We don't necessarily believe as well, given the discussion earlier that, that will be as well roughly the level that we will see as we continue into the year 2026 now. Operator: The next question comes from Charles Weston from RBC Europe. Charles Weston: You've talked about Europe being ahead or EMEA being ahead in terms of the recovery curve. Does that also mean it's ahead in terms of the equipment order recovery curve? So have you got sort of proof of those orders turning into -- that interest turning into orders and revenue in Europe? And just a clarification question. You said you have good discussions with your customers to understand their CapEx plans. Can you give us any insight into whether the big investments that they're making is more about them shifting CapEx from other parts of the world into the U.S. or whether they are genuinely adding additional capacity into the U.S. over and above what they would be normally planning? Michael Grosse: No, thanks for the question. On EMEA, I think the situation is not that we see any difference here. Yes, the recovery overall happened earlier there, but we cannot now say that we have data that suggests on the equipment recovery that EMEA is ahead of the other regions. So that's not really the case. Florian Funck: Yes, and the discussions we have with customers on the equipment, they are mostly not today related to the onshoring or reshoring in terms of tangible projects, investments, either replacing old instruments or adding capacities. The discussions are with -- around onshoring, it's more about understanding really what is relevant of the -- what has been published from the headlines from our customers, what is of relevance for us, of course, you will see a lot of R&D investment being included in these headlines. You will see also investment in classical pharma facilities, final field drug product facility, so all less relevant for us. So trying to understand what's really in for Sartorius, and then also trying to understand really what the timing will be and when the discussions about the equipment, the providers will start. So this is more about where the onshoring discussions are today. So the very tangible projects are still less related to that topic. Operator: Next question comes from Odysseas Manesiotis from BNP Paribas. Odysseas Manesiotis: First, to better understand the growth deceleration in Q4. I have EMEA around 4% CER for Stedim. Could you give us a feeling of how that's different between equipment and consumables or just whether that's the growth we should be expecting for the region as the new normal? And secondly, in order to have a better feeling of the conservative business embedded in your guide, is it fair to say that your book-to-bill for the entirety of the year was pretty much close to your pre-pandemic average of around 1.05? And last quick one, biotech funding has been -- has been quite strong. What's the usual lag that you see between a biotech funding recovery and a pickup in your order intake? Florian Funck: So let me maybe start with the growth regarding BPS recurring versus nonrecurring in H2 because I think really looking only at 1 quarter doesn't make sense in looking at the matter, it's already really short term. But just to give you a feeling, the growth that we've seen in the nonrecurring business was very similar to the growth that we've seen also in the consumable business in H2. So this is also a reason besides the effects that we've seen in the order intake while we are taking that confident stance towards 2026. When it comes to book-to-bill, we are not communicating on the level of book-to-bill. Sorry. Operator: [Operator Instructions] The next question comes from Thibault Boutherin from Morgan Stanley. Thibault Boutherin: Just to come back -- can you hear me? Michael Grosse: Yes. It's okay. Thibault Boutherin: Just to come back on the topic of onshoring and the last CapEx plan that has been announced. There is a question that comes back often from investors, which is, is there a risk that because we see CapEx being skewed towards the U.S. in the next few years to see an imbalance between you and your competitors? So I think the idea from some investors is maybe U.S. peers would be better positioned to benefit from CapEx being skewed to the U.S. So just wanted to know if you could comment on your competitivity in the U.S., the market share relative to other regions and give an answer of how a shift of investments to the U.S. in terms of equipment and CapEx for biopharma would impact you? Rene Faber: Yes. So I'll take that question. Look, the -- in our industry, and I think it's been always the case, still is the case. The main decision criteria is the technology and the performance. Their customers don't make really compromises when it comes to how they equip their facilities, if it's for preclinical small scale manufacturing or even commercial. So I think there we -- and this is where we really see ourselves being ahead with a lot of focus on innovation. So I think for us, the positioning to benefit and participate in the potential onshoring wave is very strong. We have a facility to assemble equipment in the U.S., in the Boston area, in Marlboro, as well to be close to customers in case of the factor acceptance that and so on for more complex equipment. So I think, yes, we are ready to take all the opportunities, the feedback from customers is strong, so positive about the outlook here. Operator: Next question comes from Oliver Metzger from ODDO BHF. Oliver Metzger: It's one more structural question on equipment. So we know from the past, normally, equipment and consumables should grow at a similar rate over the cycle. So we now see consumable demand healthy for a while, while equipment is at least lagging behind. Can you comment about the reasons for this reluctancy? Is it more like still an overhang from, let's say, the time during the pandemic or post the pandemic? Or could it be that there is a more structural change as higher quality consumables might have increased the efficiency of the tighter of a production process and therefore, some structural lower or slower demand for equipment might be the case for a quite longer period of time before we see more expansion or new manufacturing facilities? So that's, to say, upgrades and lower expansion. Rene Faber: Yes. Thank you for the question. I try to kind of give you more color to think about why this reluctancy to invest, you addressed or you asked how much of that is coming with kind of a post-pandemic would call macroeconomic cash-driven impact or development. I think that's very much more on that side, plus the overcapacities, which have been built during the pandemic in some areas versus how you call it kind of a structural change in a way that by technologies improving, it would require less of this equipment. Actually here, over years and decades, we have seen exactly the opposite. The better the technology gets, the more of it will be used, especially in single-use manufacturing, the [ cake ] of what you can address with single use increases or grows, the better the technology, the higher the titers, the better the yields are. So I think that's very much a positive ongoing trend with this improvement. So again, back to your question, I think it's very much on the cash post-pandemic macroeconomic impacts rather than any different structural technology-related. Operator: The next question comes from Falko Friedrichs from Deutsche Bank. Falko Friedrichs: My question is on the LPS margin. When do you expect these investments in Advanced Cell Models to begin contributing positively to the margin of the segment again? And then just a very quick housekeeping one. Is a 27% tax rate a fair assumption again for the Sartorius Group in 2026? Florian Funck: Yes. Let me start with the housekeeping question. We currently think that the 27% is still okay for the year '26. And on the margin, as I said, it's connected a lot, of course, to our engagement in Advanced Cell Models, which is an emerging business, but should not be impacting on a sales side very soon, but rather we are building up for the more long-term perspective, more to elaborate on at our Capital Markets Day. Operator: Next question comes from Harry Gillis from Berenberg. Harry Gillis: I have one clarification regarding an earlier question on guidance. I'm sorry, I didn't quite catch that. Does the 6% guidance at the low end of your for BPS growth, does that assume a further decline in equipment sales, sorry? Or does your expectation for at least stable equipment hold here and it's deterioration in growth in consumables? And secondly, could I just ask you. Do you expect your CapEx ratio to remain stable at around 12.5% into '26? How should we think about that over the midterm as some of your larger projects start to roll off? Florian Funck: Should I start with the last question on the CapEx rate. So of course, you are asking more the midterm perspective, but I think we have always quite consistently communicated that we are -- we should see from the year '27 onwards, an overall reduction in our CapEx ratio. '26 is, therefore, the last year, where especially also driven by our expansion projects in Korea. We are seeing elevated levels of our CapEx ratio to then come down afterwards, more on the Capital Markets Day. Rene Faber: Then again, on the guidance, just to repeat, we said at least flat, so we are not considering any decrease in equipment revenues for 2026 in our guidance. Operator: Next question comes from Shubhangi Gupta from HSBC. Shubhangi Gupta: So just a clarification for your guidance or the upper end of your sales growth, does it assume recovery in equipment sales? And if yes, what is the time line? And how should we think about the phasing of growth in 2026, given H2 have tough comps, especially from strong growth in consumables? Florian Funck: Yes. Again, so now the question is about the upper range of the guidance. Here, as we said, of course, in that case, we would expect the contribution of both consumables, continued healthy growth as knowing and considering the higher comps coming from this -- from 2025 as well as at least a moderate growth in equipment revenues. So that's kind of our current thinking. And again, very positive what we have seen so far, the order book, the trends we see. So quite confident we are heading there. But as Michael said in the introduction, still early in the year and more to come with our Q1 results. Michael Grosse: Yes. Give us a bit more time on that, please. So on that. However, I think just to add on, I mean, as we said at the other stage, given a bit as well if we think that one of the contributing or deciding factors towards the upper end, it will indeed be a more strong recovery and growth contribution as well from the equipment instrument side. Again, on the lead times that are there, of course, assumption is probably fair to say that this is something that happens rather later in the year than earlier. So it's something that we would expect to rather beyond Q1 to happen, if it happens in the degree that we may hope for, but we don't know. Shubhangi Gupta: And just a quick follow-up, can you comment... Petra Muller: I'm sorry, Shubhangi, but we have 3 more people in the queue. I'm sorry, we have to head on because we are over time already. Sorry about that. Happy to take your question afterwards. Operator: The next question comes from Anna Snopkowski from KeyBanc. Anna Snopkowski: This is Anna on for Paul Knight. I just was wondering, you mentioned on your last call, you were having some early conversations with small CDMO customers. How has this progressed in the quarter? And are those early conversations around equipment broad-based or concentrated in any customer group or certain types of equipment like those that help your customers reduce costs? Florian Funck: Yes. Thank you for the question. So yes, absolutely, that was a kind of an ongoing development we have seen in 2025. Towards the second half, we've seen the smaller CDMOs also becoming more and more active. We've seen them, their pipelines filling, their projects coming and discussion started, and it's both really about -- its equipment and consumables. So preparing for delivering on the project, it's all about getting ready to make the batches, preparing to get an order in consumables to be -- to have them on -- to build inventories as well as where needed, add equipment to prepare the capacity as well. So that's been the development we've seen with them, and it didn't change so far. So also kind of contributes to our positive outlook. Operator: The next question comes from Naresh Chouhan from Intron Health. Naresh Chouhan: Just on BPS. When you talk about double-digit consumable growth, can I confirm that this is more like low teens if we exclude China, just to give us a sense of where underlying demand is in Western market and the kind of state of the Western market recovery? Florian Funck: Yes. So consumables kind of, yes, low teens is a fair assumption in a positive outlook, right? And yes, that's how we are looking forward, not only '26 but ahead as well. Yes, so you're right. Operator: The last question comes from Delphine Le Louet from Bernstein. Delphine Le Louet: Yes. I'm sorry because I really don't understand the guidance regarding LPS when it comes to the margin. And so I know when you're trying to push back about the CMD and probably you're right, but that makes me think, is there anything and especially when we look at the Q4, where we had the margin gain versus the Q3, is there anything more structural that you're planning? And this is a new way where probably we should think about the division in the future, meaning a complete reorg internally of the LPS division that could justify not having any execution gain coming over the sales growth even at the midpoint of 4%, which is quite nice for that division, by the way. So any more clarity on that? How should we think about that margin in the context of back to growth and a scenario, which is not that bad at the end? Florian Funck: So Delphine, maybe I'll start, and then Michael, especially to add on, on that. But first of all, we definitely think that the LPS business is a 20% plus margin business going forward. On the other hand side, on the current position that we are at, at a margin of 21.5%, knowing that the tariff impact overall in the group is roughly 50 basis points in 2026, knowing that there are unknown on the FX side and knowing that we are ramping up our investment through the P&L into ACM, we thought it is appropriate to guide then for the year '26 with a slightly below 21%. Michael Grosse: Yes. And over and above what Florian said, of course, we want to give you an incentive to join the Capital Markets Day here, very clearly, any strategic type of consideration about how we see the business, the divisions as we move forward. You're welcome in March to our Capital Markets Day. Operator: There are no more questions from the phone. I would now like to turn the conference back over to Petra Muller, Head of Investor Relations. Petra Muller: Yes. Thank you very much, Valentina. This concludes today's call. Please reach out to the Investor Relations team in case of any open questions. We thank you for joining us and wish you a pleasant rest of the day. Take care and see you next time. Thank you. Goodbye. Michael Grosse: Thank you. Bye-bye, all. Many thanks. Operator: You may now disconnect.
Operator: Greetings, and welcome to the Ball Corporation Full Year and Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brandon Potthoff, Head of Investor Relations. Thank you, sir. You may begin. Brandon Potthoff: Thank you, Christine. Good morning, everyone. This is Ball Corporation's conference call regarding the company's full year and fourth quarter 2025 results. During this call, we will reference our fourth quarter 2025 earnings presentation available through this webcast and our website at investors/ball.com. The information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied. We assume no obligation to update any forward-looking statements made today. Some factors that could cause the results or outcomes to differ are described in the company's latest Form 10-K, other SEC filings and in today's earnings release and earnings presentation. If you do not already have our earnings release, it is available on our website at ball.com. Information regarding the use of non-GAAP financial measures may also be found in the Notes section of today's earnings release. In addition, the release includes a summary of noncomparable items as well as a reconciliation of comparable net earnings and diluted earnings per share calculations. References to net sales and comparable operating earnings in today's release and call do not include the company's former aerospace business. Prior year-to-date net earnings attributable to the corporation and comparable net earnings do include the performance of the company's former aerospace business through the sale date of February 16, 2024. I would now like to turn the call over to our CEO, Ron Lewis. Ron Lewis: Thank you, Brandon. Today, I'm joined on our call by Dan Rabbitt, Senior Vice President and Chief Financial Officer. I will provide some brief introductory remarks and discuss full year and fourth quarter 2025 financial performance and our outlook for 2026. Dan will touch on key metrics, and then we'll finish up with closing comments and a question-and-answer session. With this being my first call as the CEO of Ball Corporation, I'd like to take a minute to share my background and our vision for our company. I grew up on a farm in Central Montana, working alongside my mom and dad, and that's where I learned the value of hard work, teamwork and treating everyone with dignity and respect, values that define Ball today. I spent 20 years in the Coca-Cola system, leading supply chains and buying cans from Ball. And over those years, I was asked several times to join Ball, and 6.5 years ago, I did. And since then, I've led our EMEA business, served as our COO and most recently led our global supply chain and operations. I'm honored to step into this role because I believe in Ball. And I believe Ball is well positioned to win, not only do I believe this, but the numbers back it up. It starts with the fundamentals of the beverage packaging market. Packaged liquid volume continues to grow globally and aluminum cans are taking share as consumers, customers and retailers favor a package that is convenient, functional and increasingly aligned with sustainability goals. This backdrop creates a long runway of demand for our products. Within that growing market, Ball is outperforming. Across our regions, we are consistently outpacing the can market in shipped volumes supported by strong customer partnerships, innovation and formats and a commercial and operational footprint that is unmatched. Our long-term volume range remains intact. And in 2025, we exceeded it. We paired that commercial momentum with financial strength. In 2025, we delivered record adjusted free cash flow and record comparable diluted EPS. We also returned more than $1.5 billion to shareholders through buybacks and dividends. Our disciplined capital allocation remains rooted in EVA, deploying capital only where it earns returns above our cost of capital. And operationally, we've never been stronger. Our plants are executing at a high level, driving meaningful improvements in profit per can through cost management and standardization. Our utilization rates across our business are as strong as they have been in multiple years, and our unmatched global scale is a competitive advantage. While we've made meaningful progress, we continue to see significant opportunity for further improvement. That opportunity is energizing our teams and provides additional operating leverage and cost performance upside as we look ahead. When you combine industry tailwinds, commercial outperformance, financial discipline and the operational excellence through our Ball business system, the result is a company that is exceptionally well positioned to win today and over the long term. As I've met with dozens of customers and investors since assuming my role, I've been asked a lot about what will change. I want to reinforce that our strategy is intact and it is working. It's about executing every day, staying close to our customers, accelerating the substrate shift to aluminum and managing complexity to our advantage, and we are doubling down on profitable growth. This will be a significant focus for us in 2026 and beyond. We execute our strategy through our operating model, the Ball Business System. The Ball Business System is simple and powerful. First, are we listening to our customers? Are we their indispensable business partner? Are we the easiest can maker to do business with? You can see that our commercial excellence agenda is working as we're growing faster than the market across all of our regions. Second is our laser focus on operational excellence. Every shift, every day in 67 plants around the world, we are bringing stability and standardization to our business so that we can all continuously improve. Then we are leveraging these efficiencies and our scale to fuel our growth. This allows us to reinvest back in our business to compete and win in the marketplace. And purposefully at the center of the Ball Business System is our people and our culture. I'm privileged to have the opportunity to drive and lead this company because our culture is one where we are not only focused on what we do, but also how we do it. This is a low ego, high collaboration environment where we are focused on empowering our people to work shoulder to shoulder to help our customers and our company to win. I believe that the team with the best people and the most motivated people is the team that wins. In short, people matter and leadership matters. And while the Ball Business System is the backbone of our operating model, EVA remains our North Star. It's more than a metric. It's a mindset that ensures disciplined capital allocation and returns above our cost of capital. This focus underpins our long-term algorithm, 10-plus percent annual comparable diluted EPS growth, strong free cash flow and consistent returns to shareholders. Through the Ball Business System and our EVA mindset, we will continue to work as a team to leverage our scale, strengthen customer partnerships and create fuel for growth. These principles position us to deliver sustainable results in 2026 and beyond and maximize value for our shareholders. Now let me turn to our performance on Slide 8. 2025 was a record year for Ball, reflecting the strength of our strategy and disciplined execution. We delivered strong volume growth across our global aluminum packaging businesses with fourth quarter global ship volumes up 6% and full year growth of 4.1%. We achieved record earnings per share of $3.57, an increase of 13% from 2024. Adjusted free cash flow reached $956 million, a new high watermark for our company and up 2.4x year-over-year. We returned significant value to shareholders through $1.54 billion of combined share repurchases and dividends. And we are also pleased to close late last week on the previously announced acquisition of 2 Benepack beverage can facilities. These European plants enhance our regional footprint and strengthen our ability to serve growing customer demand in both the near and long term, while remaining fully aligned with our disciplined EVA-based approach to capital allocation. Looking ahead to 2026, we expect another strong year where we deliver our financial algorithm of 10-plus percent comparable diluted EPS growth. With that outlook in mind, I'll let Dan walk you through the details of our fourth quarter and full year financial performance and provide more color on our expectations for 2026. Before I turn it over, I want to congratulate Dan on being named CFO. This was my first leadership decision as CEO, and it was an easy one. Dan's extensive knowledge of Ball and the industry, coupled with his financial expertise and strong leadership, made him the clear choice for this role. Over to you, Dan. Daniel Rabbitt: Thank you very much, Ron. Like you, I'm also humbled by and ready for this role. Two important mentors earlier in my career, Ray Seabrook and Scott Morrison served as Ball's CFO, and I'm honored to sit in the same seat as they did. Let's walk through our strong full year and fourth quarter 2025 results beginning on Slide 10. Fourth quarter comparable earnings were up 6.8% and full year 2025 increased by 5.6%. And as Ron mentioned, our comparable diluted EPS of $3.57 is a 13% increase and a record for our corporation. In North and Central America, segment comparable operating earnings increased 12% in the fourth quarter and 3.3% for the full year 2025. High single-digit percent volume growth in the fourth quarter and 4.8% growth for the full year was led by continued strength in energy drinks and nonalcoholic beverages. Our team is executing at a high level, successfully meeting elevated demand, navigating the complexities of Section 232 tariffs and mitigating risk for us and our customers in a volatile environment. We remain vigilant in monitoring the evolving geopolitical landscape and tariff developments, and we are actively managing these dynamics to protect our business and support long-term growth for Ball and our customers. In 2026, we expect volume to grow at the low end of our long-term 1% to 3% range. As we bring new capacity online in Millersburg, Oregon to support contracted growth, we anticipate start-up costs to begin in the back half of the year, consistent with what we've historically seen when commissioning new plants. Additionally, we expect some direct tariff cost in 2026 as we work to domesticate some ends production in the United States. These costs combined are approximately $35 million in 2026. And while these temporary costs will be a headwind this year, they reflect our commitment to growing and delivering long-term operating leverage. In EMEA, segment comparable operating earnings increased 36.7% in the fourth quarter and 19% for the full year in 2025. High single-digit volume growth in the fourth quarter and 5.5% growth for the full year is indicative of the favorable demand trends we continue to see across the region. The work our team has done in EMEA is world-class. We are thrilled to add the Benepack assets to our best-in-class European footprint, and we welcome our new colleagues. These 2 plants will give us ample opportunity to grow volumes in the coming years as well as operating leverage as we fill the facilities up with volume. With the Benepack assets, we expect to deliver volume growth above the top end of our long-term 3% to 5% growth range and deliver operating leverage of 2x in 2026. In South America, segment comparable operating earnings increased 1% in the fourth quarter and 10.5% for the full year 2025. High single-digit percent volume growth in the fourth quarter resulted in 4.2% growth in the full year 2025. Our teams across the region continue to execute well, positioning us for sustained momentum into 2026, where we expect volume growth at the low end of our long-term range of 4% to 6% and operating leverage of 2x. Across the businesses, our team has done a tremendous job of growing volumes and increasing profitability on a per can basis. Since 2019, our EMEA and North American businesses have expanded profit per can by more than 30%, with EMEA reaching an all-time record. We achieved this through disciplined cost management and operational excellence, focusing on stability, standardization and ensuring every plant is executing at a high level. I'm proud of the work our team delivered in 2025. This is one of our best years in Ball's history. That strength is reflected across our financials. We achieved record adjusted free cash flow of $956 million, a 2.4x increase year-over-year and delivered significant shareholder returns. Net debt to EBITDA ended the year at 2.8x, in line with our expectations. We are focused on getting net debt to EBITDA to 2.5x in the coming years while still returning value to shareholders through share repurchases of 4% to 6% of our shares outstanding per year. We purchased $1.32 billion of shares in 2025, reducing shares outstanding to 265 million, a 16% reduction over the past 2 years. Our strong balance sheet, disciplined capital allocation and operational execution give us confidence in our ability to sustain growth and maximize shareholder value. Our future is as bright as any point in my 20-year history at Ball, and we are well positioned to deliver on our commitments in 2026 and beyond. Focusing on modeling details for 2026. As Ron noted, we expect to be on track with our algorithm of 10% plus comparable diluted EPS growth. We anticipate free cash flow of greater than $900 million in 2026. Our 2026 full year effective tax rate on comparable earnings is expected to be slightly above 23%. Full year 2026 interest expense is expected to be in the range of $320 million. CapEx is expected to be in line with GAAP depreciation and amortization in 2026. Full year 2026 reported adjusted corporate undistributed costs recorded in other non-reportable are expected to be in the range of $160 million. We anticipate year-end 2026 net debt to comparable EBITDA to be around 2.7x, and we will purchase at least $600 million of shares, which will bring our total capital return to shareholders to $800 million in 2026. And last week, Ball's Board declared its quarterly cash dividend. With that, I'll turn it back to Ron. Ron Lewis: Thanks, Dan. 2025 was one of the strongest years in Ball's history. We exceeded long-term volume growth ranges globally, delivered 6% comparable operating earnings growth and achieved 13% EPS growth, in line with our commitments throughout the year. We also marked another year of EVA growth, reflecting disciplined capital allocation and operational efficiency. Looking ahead to 2026, our focus is clear: leverage our customer partnerships and footprint to grow in line with long-term volume ranges, deliver record volumes, operating earnings and EPS and continue to ride the global substrate shift to aluminum. We will maintain EVA as our core financial lens with capital spending aligned to depreciation, growth CapEx backed by long-term agreements and continued cash returns to shareholders. These priorities position Ball to deliver profitable and sustainable growth and maximize shareholder value in 2026 and beyond. Lastly and most importantly, as we close a record year, let me thank those who made it possible: our customers, our suppliers, our shareholders and our Ball team who make a difference every day. Thank you. And with that, Christine, we are ready for questions. Operator: [Operator Instructions] Our first question comes from the line of Ghansham Panjabi with Baird. Ghansham Panjabi: Congrats again on your new roles. I look forward to working with you both. For the beverage North America and Central America segment, the volume growth in 2025 of 4.8%, that really follows 3 consecutive negative years for that segment. How would you disaggregate that improvement between industry growth last year versus the 3 years prior? And then specific initiatives on your end? And also, what are you embedding for volume growth in 2026 for this segment and the other 2 segments as well? Ron Lewis: Ghansham, thanks for the question, and thanks for the congratulatory remark. As it relates to North America volume growth, 2025, we grew 4.8%. And as far as we know from the published data, the can industry grew about 2%. So the can is growing, which is fantastic, and we are growing faster than the can industry. And I credit that really to all of the customers in our customer portfolio we have that is really unrivaled. We have excellent customers in every category, be it energy, soft drinks or in the beer category. And those customers won, and we feel like we help them to win as they drive innovation, but -- be it different liquid or different can size that we have the opportunity to provide for them. So really, it's our unrivaled network, our ability to serve them with different size packages, different kinds of packages, and we're happy and proud to be a part of their ecosystem. Ghansham Panjabi: And then as it relates to the outlook for 2026 for volumes for the 3 segments? Ron Lewis: Yes. Thank you for that further follow-up question. In 2026, for North America specifically, quite frankly, we're sold out, and we are a bit capacity constrained until we can get our Millersburg asset up and running. So we think the can industry will continue to grow in a similar low single-digit percent, and we'll be towards the bottom end of our 1% to 3% long-term growth algorithm that we share with you and all of our people that cover us. So that's where we'll be until we get Millersburg up and running. As it relates to the categories, I really can't speculate too much on where the categories will be this early in the year. But so far, we started the year really well, and we're happy, and we're on plan. Operator: Our next question comes from the line of Anthony Pettinari with Citi. Anthony Pettinari: Ron, I was wondering if you could talk a little bit more about Benepack and how that fits into the existing European footprint? And anything you can kind of share in terms of customer exposure, can sizes, maybe profitability versus the existing business? And if you could compare it to Florida Can, which was obviously another acquisition. Ron Lewis: Sure. Thank you, Anthony, for the question. We're really excited about closing on our Benepack acquisition late last week, which we're announcing here on the call today. The plants are in Belgium and Hungary where we don't have plants today. So we think this is really a great opportunity for us to plug those 2 facilities into our European manufacturing network, and it really further optimizes our network and supports our long-term volume projections and growing our EVA dollars. We were able to acquire these assets at a really attractive price, certainly at a price below where replacement costs are. And so we have a great long runway for strong utilization of these plants in the future. So quite frankly, we were on the top end of our range even before we made this acquisition. So where we say we'll be in the 3% to 5% growth range, we exceeded that in 2025 in EMEA, and we would be towards the top end of that range even before we made this acquisition. So quite frankly, it's a great opportunity for us to lean into some great customers, which are, quite frankly, right in line with our most important strategic customers. That's who we'll serve from those assets. And just like Florida Can, we plugged Florida Can in early last year, and it's up and running as a part of our network, 24/7, and we're really, really pleased with that asset as well. Daniel Rabbitt: Go ahead. Sorry, go ahead. You can go ahead. Anthony Pettinari: No, no, I was just wondering in terms of sort of profitability, I mean, very roughly, is there a time frame? Are you pretty close to being there or maybe a few quarters? Or just how you think about profitability versus the existing business? Daniel Rabbitt: Yes. This acquisition is similar to Florida Can and that we are buying 2 newer facilities that have never run continuously that will require improvement to ramp up. So think of it as we have 2 plants where we'll spend the year really getting the labor and the procedures put in -- operational procedures put in place. This year, we think it's going to do around about $1.7 billion of volumes. And operating earnings, the comparable operating earnings are really projected to be pretty close to flat. So it's not going to contribute a lot on that. And we really see it as an important part of our 2027 go forward here. The EVA for this looks terrific though, we're getting it at a very good value. That's similar to Florida Can. And we know these markets really well, so from a customer and labor and really optimistic about it. Operator: Our next question comes from the line of George Staphos with Bank of America. George Staphos: Ron, Dan, congratulations again as well. Look forward to working with you. And also, thanks for the slide deck. It's a nice help here. You mentioned during your formal remarks that you want to double down on profitable growth. And certainly, all companies want to do that. Why do you make a point of emphasizing that given that should be always what you're working on? And related to that point, we appreciate the guidance on the European and South American earnings for next year in terms of the leverage. Given the start-up costs, we appreciate you calling that out. Could we see North and Central America actually sort of flattish to down? That wouldn't be a surprise to us, but I just want to sort of put some stakes in the ground there in terms of EBIT growth for 2026. Ron Lewis: Okay. Thanks, George, and thanks for the congratulatory remarks. We look forward to working with you as well. Maybe I'll tackle the first question, and then we'll take it from there. Why are we calling out the doubling down on our driving profitable growth? Well, because, quite frankly, we're seeing the growth in our algorithm. Again, our long-term growth algorithm is the 2% to 3% volume growth and doubling that from an operating leverage perspective, buying back 4% to 6% of our shares, and that gets us to our 10-plus percent EPS. That is our long-term algorithm. We are confident we will deliver that in 2026, the 10-plus percent EPS. But the fact of the matter is we need to really focus on getting to the 2x operating leverage. So I'm happy to have shared that color with you on the prepared remarks, but our -- that strategy that we're executing, being close to our customers, executing with excellence every day, riding and driving the substrate shift change from other packaging substrates to aluminum, which continues at pace and managing complexity, that's how we're going to deliver that driving profitable growth. It's just -- it's a rallying cry and a focus for our business to really focus on our strategy and how we're going to execute that strategy. And how we're going to execute that strategy is through that Ball Business System, our operating model, excellence in execution every day, every single plant, every single shift. So that's how we're guiding ourselves as well as our EVA mindset. Daniel Rabbitt: George, this is Dan. I just wanted to overlay that we did call out that there's around $35 million of ramp-up cost to get the system -- the North America system, in particular, reconfigured with the ends and then more importantly, the Millersburg plant started up. So I think you are thinking about the North America segment right, with how you positioned it. George Staphos: Dan, I appreciate that. Just one follow-on and then a question on volume, and I'll turn it over. So in the fourth quarter, again, you're in line, maybe a bit ahead of our numbers, but nonetheless, the leverage wasn't there in North and Central America. Can you comment a bit in terms of whether it was the tariff-related headwinds or something else, what was preventing you from getting that leverage given the volume growth you saw in fourth quarter in North and Central America? And then as we look to 2026, I realize it's going to be all of the above. But in particular, whether it's World Cup, mini can, something else in terms of innovation, what from an end market or idiosyncratic event for '26 drives the volume outlook and the optimism? Ron Lewis: Thank you, George. So for the fourth quarter, we are really proud of our results. We delivered high single-digit volume growth in North America in the fourth quarter, and our operating earnings growth was 12%. So we were sequentially better on an operating leverage perspective in the quarter. It was our strongest volume quarter in the year, and it was our strongest operating leverage quarter in the year. So we did great, and we were just shy of that 2x operating leverage. And yes, the fact of the matter is we had some incremental tariff costs that if it weren't for that, bringing ends into the U.S. from across the border, we would have hit our 2x operating leverage. And it's just a very minor amount of money that we missed it by. So that's the first answer. On the second answer, yes, we're really excited about not only World Cup, and it will depend on who gets to the finals, obviously, and how well each country performs. We're hoping for Brazil to do really well. And I can hope for America to do really well. But if they don't, let's hope for maybe England or Germany to do well. And I don't think we should forget that this is America's 250th birthday. There are going to be an amazing amount of celebrations throughout the summer coming. And I can imagine that will also be at the very least neutral, and I bet it will be slightly positive for all of us that sell beverages or help to sell beverages in the U.S. Thank you, George. Operator: Jeffrey, your line is live. Perhaps you're on mute? Jeffrey Zekauskas: Natural gas prices in Europe have sharply elevated. Is this something that you can easily pass through in the coming 6 months? Ron Lewis: Yes. Thank you for the question. The answer is yes. We are broadly a pass-through business. Our contracts allow for us to pass through inflationary cost pressures. And we also, where we can, have the ability to hedge our gas pricing, which to the extent that we can do that in any given country or a plant, we do. So we don't view that as any major headwind for us in 2026. Jeffrey Zekauskas: Are you experiencing any inflation in beverage can coatings? Or is that raw material relatively flat for you? Ron Lewis: We have a long-term contract with all of our input costs, including beverage can coatings. And there are inflationary mechanisms in those or deflationary mechanisms in those contracts, but it's all very manageable. And again, this is all part of our -- both of our buying and selling contractual relationships where we largely pass on all of those costs. There could be some timing issues here and there, but we pass on these costs. Operator: Our next question comes from the line of Edlain Rodriguez with Mizuho. Edlain Rodriguez: Again, congrats on the new roles, guys. In terms of Europe, like your operating leverage there was extremely high. I mean, as you say, 37% profit up on high single-digit volume growth. But can you talk about like what drove that big jump? And how should we think of that leverage in 2026? Ron Lewis: Thank you for the question, Edlain. I appreciate your congratulatory remarks as well. Yes, we're really proud of our European business. It has been an incredibly stable business for us for many years, and it continues to be a land of opportunity for us. Can penetration is relatively low in some categories, and that's why we continue to see us and others achieving the high end of the range from a volume perspective. So while we grew above algorithm in the year, more than 5%, we intend to do that again this year, especially with the acquisition of our business now that's a part of our Benepack. As it relates to 2026 and operating leverage, all I can say is when we have the capacity, which we have and we grow into that capacity, that's when you see real operating leverage, and that's what we've got. We've got -- we had some capacity to grow into in Europe. We did that in 2025. That helped us to deliver the amazing operating leverage. We used up our capacity even faster than we had intended, and that's why we're buying these Benepack can plants. So you can expect us to deliver at least the 2x operating leverage on the volumes that we will sell in Europe in 2026. Edlain Rodriguez: Okay. Great. And also, Ron, I mean, now that you are the CEO, should we expect any change or deviation in strategy at Ball? Like what's your primary -- what's your big focus and anything you plan on doing differently? Ron Lewis: Yes. Thank you for the question. So the great news is -- and I said this in our prepared remarks, but our strategy is intact, and it is working. Again, it's about excellence in execution every shift, every day in all 67 plants we have around the world. It's about staying close to our customers and really helping them to win by solving big opportunities for them. We continue to see the overall aluminum can industry grow, and that will continue at pace. And we have the most enviable network, and we have the most enviable SKUs and portfolio of cans to offer to our customers. So that strategy isn't changing. What we are doubling down on, again, is how can we operate even more effectively so that we can squeeze out the fuel to grow our business through our Ball Business System and our operational excellence journey and our commercial excellence journey. So that's really what you should see from us is a maniacal focus on just running our business extremely well. Operator: Our next question comes from the line of Arun Viswanathan with RBC. Arun Viswanathan: Congrats on the new roles as well. So I guess I just wanted to get your thoughts on -- you mentioned tariffs in the prepared remarks. So I guess, how are you managing through that? And then also the rising aluminum price environment, what are your customers saying there? I know it's a pass-through in North America for you. But obviously, at some point, they're going to have to raise prices or deal with that in some way. So I guess what are you hearing on those 2 fronts? Ron Lewis: Thank you, Arun, and thanks for your congrats. We're really proud to be and humbled to be in these roles, and we're really proud of the results we've delivered in 2025. Tariffs are certainly something that every company is monitoring. But as we sit here today, like there's no direct impact from -- on our business beyond the ends piece that we've mentioned, and it is a pass-through, as you say. The -- where it shows up for us is in the Midwest premium. That's what has really spiked for all of the aluminum industry. So we're watching this. But so far, the U.S. consumer has been able to continue to keep buying our package. The can, as we said, in 2025 in the U.S., grew at roughly 2%, where all other substrates declined by more than 2%. So the can is a value in any sort of economic environment, and that's what we're hearing from our customers. They're continuing to lean into selling multipacks of cans because it represents real value for the consumer. Arun Viswanathan: Okay. And if I could just ask a follow-up on the category mix. So obviously, energy had a really strong '25, and I think you saw growth in some of your other verticals as well. But maybe you can kind of give us your thoughts on how you face those tough comps. I know you're sold out in North America, but do you see the energy market kind of continuing to outpace the rest of the can market? And what do you kind of see for beer and CSD and some of the other categories as well? Ron Lewis: Thanks, Arun. We love all our customers, and we're focused on helping them to win regardless of category. And the other thing I think it's important to note here is all of our customers are -- it's blending and turning into much more of a total beverage company. You hear that from all of our customers regardless of where they began. As it relates to energy specifically, we continue to see innovation. We continue to see different can sizes. We continue to see a shift to functional elements of those products and you name it. So I expect that they've been winning for a long time, and we expect them to continue to keep winning, and we're really happy to keep supporting them. Operator: Our next question comes from the line of Mike Roxland with Truist. Michael Roxland: I'll just echo what everybody else has said and congrats, Ron and Dan, on the roles. My first question is, to the extent you can comment, can you talk about any potential changes in customer relationships, business wins the company has experienced really as a result of the recent management changes and/or going back to basics with the customer? Ron Lewis: Thanks for the question, Mike. I appreciate your comment. Look, I'm really -- we've said we want to focus on supporting our customers and helping them to win, and we're really happy with that. And I've had amazing customer interactions before I had this role and even more so now, it's one of the funnest parts of this job is learning about their businesses. The other thing I think it's important to know is like not only are we kind of sold out in 2026, we are well contracted into 2027 and in some cases, with our strategic customers out into the next decade. So we're really pleased with our long-term strategic partnerships with our anchor customers. Michael Roxland: Got it. And then just one quick follow-up regarding the Ball Business System, how much of the $500 million in savings have you realized thus far? And are you still on track to complete that by year-end, 1 year earlier than you initially targeted? And have you -- basically, it sounds like you've standardized operating practices across your plants globally, but I just want to confirm that, that's what has been accomplished thus far. Ron Lewis: Thank you, Mike. That's a question that's near and dear to my heart. We will deliver the $500 million of cost savings that we projected that is the fuel for growth for our business in the 3-year time frame versus the 4-year time frame. So that was 2024, 2025 and 2026. So more than 2/3 of it has been delivered, quite frankly, more like 3/4 of it has been delivered in the first 2 years. But we're not going to stop there. We're going to keep working as again, as a part of us focusing on getting our operating leverage. That means we have to run even better, and that's what our 67 plants and the overwhelming majority of the people that work in this business are focused on. So yes, every single one of those plants has rolled out the Ball operational excellence platform, and it's really exciting for us, and that's really energizing for us. So maybe someday, we'd love to take you to a plant and show it to you, Mike. Michael Roxland: I'll definitely take you up on that offer, Ron. Ron Lewis: Go to Rome, Georgia. Let's go. Operator: Our next question comes from the line of Stefan Diaz with Morgan Stanley. Stefan Diaz: Congrats on the promotions and looking forward to working together. Can you please talk to the year-to-date trends across all regions? And then maybe specifically in North America, has the winter storm at all helped some of the volumes here early in the year? Ron Lewis: Stefan, thanks for your comments, and we appreciate reading your material. Thank you for it. Honestly, the year -- the first month of the year, it started as planned, more or less across all the regions, small puts and takes here and there, but generally as planned. North America, you see the -- you published the data this morning. So I could read back to you what you published, but it's really, really quite good. And I wouldn't say anything other than it's a good start to the year, and it's kind of as we planned and better to start the year this way than in a whole, and it's pretty good. So we appreciate it. We'll go from there. Stefan Diaz: Great. And then does -- I guess, does ABI repurchasing their stake in Metal Container Corp mean anything to the industry? And maybe just thinking, taking a step back, what are the chances that brewers and beverage CPGs start to backward integrate a bit? Ron Lewis: Yes. That's honestly, them buying back their portion of their vertical really has no impact on the -- on us or the industry because that capacity was there before. And we're really happy that they did that, quite frankly, and they're a great customer, and we work with them very closely. So it really doesn't have any impact, and it was sort of a nonevent, and they kept us informed all along the way what their plans were. So we're really happy with them as a customer and we're really happy with them and working with them. As it relates to backward integration, quite frankly, I don't think anybody is really focused on that or we see any of our customers wanting to deploy their capital to expand massively the desire to make cans. I think they're really focused on innovating and marketing and selling their products. And hopefully, they're relying on us as a great supply partner to them. Operator: Our next question comes from the line of Phil Ng with Jefferies. Philip Ng: Ron, Dan, congratulations on the role. And Ron, your tone and excitement is clear to everyone on this call. There's a lot of mention around EVA and staying close to the customer and just doubling down on the execution side of things. You certainly have had your hand on the operations front and been successful. But what are some of the tangible things that you want to share with us in terms of what that actually means in terms of doubling down on cost? Are you retooling the layers in the organization, reshuffling leadership, realigning incentive comp? Like what are you doing? Just give us like 1 or 2 examples on the cost and execution front, how are you guys going to approach it perhaps a little differently and then getting closer to the customer. Ron Lewis: Thanks, Phil. I appreciate the congratulatory comments, and I look forward to working with you as well. I appreciate reading your material. Look, in my first 90 days in this job, I certainly have had top-to-top conversations with the top of the leadership of all of our major customers. So I would say certainly more than 75% of what we sell, I have either met with in person or had extensive conversations with. And that, as I said, is really exciting for us. Now what does it mean as it relates to how are we going to run our business better? It starts first with like being really disciplined and repeatable manufacturing fundamentals in our plants. Second, how do we leverage our network more efficiently so that we have production closer to demand. That's what Millersburg is about. That's what buying these 2 assets from Benepack is about. And then we're going to be really deliberate about how we run those plants and how we flex capacity. The third thing is our operating model is at the very core about our people and the culture and the people of this business are what make a difference for us. So you wanted some -- a specific example. In every single Ball plant everywhere around the world at 6:00 a.m., at 8:30 a.m., at 1:00 p.m. and then do the opposite of that because we're on 12-hour shifts, we have a shift handover meeting, we have an operations meeting and then we have a pulse check meeting. And our entire leadership team got to witness that last week when we went to one of our plants, and it's really impressive and inspiring to see. Our goal is to keep reinvesting in our business. That's what Florida Can was about. That's what Millersburg is about. That's what Benepack is about because when we're making those investments, we are committing to returns higher than what we can get in our EVA model. And that's how we become a serial compounder and just continue to generate cash and then allocate that to the right places in our business. Philip Ng: Super. Great color. Back to old-school Ball ways in terms of EVA, so that's great to hear. A question for Dan. I think last quarter, perhaps maybe I misinterpreted, but I think there was some commentary perhaps that the operating leverage of that North America business could perhaps improve in the back half of 2026 and put you guys in a really good position for 2027. Do I have that right, just because some of the commentary today, I thought you kind of pointed to start-up costs perhaps be more back half weighted in '26. So is that perhaps a pushout on the timing side of things? And then I think you mentioned there's some can-in dynamics in Mexico around tariffs, you're going to reshuffle capacity. Can you give us a little more color on the timing of that and what that could transpire to in terms of profitability? Daniel Rabbitt: Sure. I'd be happy to. We do see more of the start-up costs really being in the back half of the year. So I think you said it right in your question, and it does really become an opportunity to start to show improvement in 2027 for the operating leverage. As far as the question about tariffs, really, the thing we might have called out is that we are moving in production, some smaller amounts of in production out of Mexico into the United States. A lot of that is happening in the first half of the year, but the Millersburg is the bigger contributor to the headwinds that we're talking about. Philip Ng: Okay. Helpful. And just one last quick one. On the Latin America, Brazil side, certainly excitement around the World Cup. But Ron, any on-the-ground color in terms of what you're seeing there in terms of your customers and any shifts in consumers just given in past cycles when the macro is a little more choppy, there might be some trade down to resellable glass. I'm just curious what you're seeing on that front. Ron Lewis: Thanks, Phil. For sure, we grew high single digits in the quarter. And in 2025, we delivered on the low end, but we delivered on our volume algorithm in South America, and we delivered more than the 2x operating leverage. And we intend to have confidence in and plan to deliver exactly the same in 2026. We'll deliver in that 4% to 6% volume range, and we'll deliver on the 2x operating leverage at a minimum. It's early days to know how big it will be, but we're excited about it and the consumers are excited about it. We're going to get a chance to go see our colleagues there in a couple of weeks and learn more, but we're really hopeful for a great tournament. Operator: Our next question comes from the line of Matt Roberts with Raymond James. Matthew Roberts: I'll echo everyone else's positive sentiments on the roles, congratulations. Dan, if I may, somewhat related to Phil's prior question. Could you parse out, I believe you called $35 million cost headwind. Is that still $10 million to $15 million first half from the tariffs and the remainder from Millersburg in second half? Or any changes on the ends cost impact? Additionally, any other considerations for cost in '26 from PPI resets? And lastly, in EMEA, as Benepack ramps, should that operating leverage improve sequentially throughout the year? Or any timing considerations on when you expect to get that full can benefit from Benepack? Daniel Rabbitt: Sure. Thank you, Matt. As far as the $35 million, I think it's safer to think of more of that in the back half of this year and then really setting us up nicely for the following year in North America. And I would say that the EMEA question regarding Benepack is similar in many regards. We just closed on it. We're setting -- we were competitors. So really, the work starts now. And so I think you're going to see a back half kind of ramp up and it really more about next year as well. So they both look very similar to me in many respects. Operator: Our next question comes from the line of Josh Spector with UBS. Anojja Shah: It's Anojja Shah sitting in for Josh. I just wanted to ask about capital deployment in 2026. You were pretty clear about share repurchases and dividends. But are there any other priorities besides capital return with maybe more bolt-on M&A in one of the regions? Daniel Rabbitt: Yes. Well, let's just start and talk about the -- how we filter everything. We're filtering all of our opportunities with our cash flow and investments through the EVA lens, first of all. This is a year where we really are balancing all of our levers. We're building a new plant out. We are still going to continue to buy back shares. We made the investment in Benepack. And really, with all of that, we're going to keep our leverage and even bring it down a little bit as the guide down to 2.7x. So we're looking at all the levers always, always looking at what's the best EVA returns. And right now, we see opportunity in all of them. Ron Lewis: Christine, we'll take one more question, if you don't mind. Operator: Our final question comes from the line of Gabe Hajde with Wells Fargo. Gabe Hajde: Ron, Dan, congrats. I'm trying to get a little surgical on North America. I'm trying to reconcile kind of the commentary low-end growth of the 1% to 3% target, and we're coming off of 4.8%. First question is the Florida Can acquisition, is that 4.8% an organic number? Or would we say half was kind of from Florida Can and half was organic? And then did we see any evidence or have you seen any evidence of pull forward by customers? We've asked this in the past. I recognize it's not customary for customers to inventory cans, but it's also not customary for aluminum cost to be up 30%, 40%. And then I guess to be clear on kind of the guide for '26 and [ NACA ], are you taking into account any benefit from World Cup and recovery in beer, could you tap into maybe any sort of latent capacity in south of the border to service that, if possible? Ron Lewis: Thanks for the question. So Florida Can, as it relates to the volume in 2025, there was a small element of that, that was Florida Can of the 4.8%. That's for sure. That's not all the organic number. But it was not immaterial, but it was relatively small. Did we see any pull forward in 2025 in Q4? No is the answer. And you can see it in the -- I guess you can see it in the published data. The can market continues to grow in the first month of the year, and we're no different than that. We're seeing kind of on plan what we expected. And I just think the opportunity south of the border, given the amount of tariffs, the cost of bringing those cans into the U.S., it's so prohibitive that I don't really see that as an opportunity for us. And that's why, quite frankly, we've given you the lower end of our volume range because we absorbed all of the latent capacity for the most part that we had in North America in the U.S. anyway in 2025 with the 4.8% growth. We're really happy that we bought Florida Can because it allowed us to grow that much, and Millersburg will make a big difference. So until we get that up and running, we're a bit capacity constrained. So thanks for that question. Gabe Hajde: Real quick follow-up, Ron. The contribution from the Oregon facility, if it's sort of operational midyear, I'm assuming we're kind of counting on maybe 2 billion units-ish, which would equate to about 4%. Are we really talking about, again, taking into account the start-up cost contribution coming in '27? And it was one of the other analysts that kind of put this out there, but is it possible then kind of operating earnings is flattish in North Central America and then we see a pretty big acceleration in '27? Ron Lewis: Yes. I think you're thinking about it the right way. The volume will be relatively immaterial in 2026 with the start-up and the earnings as well that we won't have earnings effect, we have the start-up costs. The only thing I would say is it's a one-line plant, it's not a 2-line plant. So you could expect more like 1 billion cans out of that facility until we really ramp into it. And that would be actually probably aspirational in 2027. Let's see how we start it up. So thanks for the question. And Christine, I think that's all the questions we have time for today. So I just want to thank everybody for your interest in us. We appreciate it. We look forward to talking to you more, sharing our story. We are excited about what we did in 2025, and we're even more excited about what we're going to do in 2026 and beyond. So thank you very much for your time, and look forward to seeing you and talking to you soon. Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Peter Pudselykke: Good afternoon, everyone, and welcome to the Conference Call for Demant's 2025 Annual Results. My name is Peter Pudselykke, and I'm heading up the Investor Relations activities here in Demant. With me here today, I have the usual team, our President and CEO, Soren Nielsen; our CFO, Rene Schneider; as well as Gustav Hoegh from the IR team. For the call, we will do a presentation, which will be followed by a Q&A. We expect the session to last no more than 1 hour in total. [Operator Instructions] before we dig into the presentation, please do pay notice to the disclaimer on Slide #2. And with that, I will go to Slide #3, we'll pass the baton to Soren, to kick-off the presentation. Søren Nielsen: Thank you very much, Peter, and welcome, everybody. The agenda for today is key events for 2025 financial takeaways, and then comment on sustainability advancement. More details on business area reviews, not the least the fourth quarter. Then Rene he will do group financial and also take us through outlook and initiatives to improve profitability. And if we take a 2025 in total, at group level, we delivered 2% organic growth, 5% in local currencies. Of course, a significant element from acquisitions, headwind from currencies leaves us with 2% reported growth and biggest, you say, expansion is in Hearing Care, which now is the biggest business area, as you can see in the business mix split. Gross profit, up 2%, but down on margin related, to I would say, hearing aids, some extent, diagnostic, but I'll get back to that. EBIT down 10% before special items and free cash flow down 11%. Key events in 2025, we acquired the KIND Group in Germany, closed the deal in December, so we have 1 month in the books, one of the world's leading retailers and with that a significantly expanding our position globally, but in particularly in Germany, to a #1 in Hearing Care. In October, we introduced Oticon Zeal in selected markets and a launch that so far have created a lot of excitement and a lot of good momentum to carry into '26. During 2025, we signed agreement to divest both EPOS and Oticon Medical in line with our overall strategy to be more focused hearing healthcare company. The hearing aid market in 2025 was softer than normal, and particularly in the U.S. where we saw flat market growth for 2025 in total. Hearing Care delivered very solid performance in -- solid performance, not the least in the view of the global hearing aid market, whereas hearing aids and diagnostic delivered softer growth. All 3 business areas showed an improved and strong performance in Q4. Key financial takeaways for the second half group organic growth of 4% for the second half in total. So a sequential improvement from the first half fueled by all 3 business areas. Gross margin decline versus second half '24 due to ASP headwinds in hearing aid and increasing share of rechargeability, I'm going to get back to it, but the ASP headwind comes from channel and geography mix, so selling [ more ] in countries and channels with a lower ASP and less in higher-priced markets like U.S. Diagnostic was also a minor drag on the gross margin coming from their product mix and some geography. OpEx grew 5% organically, but -- and as already guided for, and expected flat sequentially from H1, so still reflecting a cautious approach to cost expansion when we look at in sequentially the 5% to some extent, originates from a significant holdback at the end of '24. Acquisitions added 5 percentage points growth compared to second half last year. EBIT before special items, DKK 2.1 billion, negatively impacted by exchange rate effects and by lower operating leverage. EBIT margin, therefore, before special items contracted 2.6 percentage points. Special items amounted to minus DKK 128 million. Strong cash flow from operations of DKK 2.3 billion and free cash flow of just around DKK 2 billion. Outlook, Rene's going to elaborate further on it for '26. Organic growth of 3% to 6% and EBIT before special items of DKK 4.1 billion to DKK 4.5 billion and continued pause on our share buyback to bring down the group leverage. Sustainability achievements quickly, we saw a increase as expected of improved lives by overcoming their hearing loss to 12 million and a growing number of tests in our own clinics following the expansion of that. And when we look at our main -- or 3 main sustainability goals under the headline of Respect for the planet, a planet decrease in our scope 1 and 2 greenhouse gas emissions. We have now achieved 16% reduction compared to baseline with a target of 46% by 2030. Gender diversity in top-level management now at 33%, so 1 in 3 and with the aim of getting above 35% by 2030. And the number of people that have read and understood out of the people for whom it's relevant should be 100% by 2030. And you could say, basically already tomorrow, if at all possible, and we are almost there. Business area review, well, hearing aid market in '25 have definitely been special and fourth quarter, which is the new release is no different. We have seen a high unit growth, and this is all units in Europe, but it's all driven or mainly driven by NHS in U.K., the National Health Service that have -- had strong growth partly to expand the inventory levels, et cetera. And then France also showing high growth as expected due to the annualization of the [ reform]. If we allow ourselves to exclude NHS and France, unit growth was 3% in Europe, in Germany, specifically growth declined year-over-year. North America saw a sequential slowdown from two quarters with 2% growth to 0 and leaving the year with 1%. U.S. or Canada saw a good growth. So it was offset by a flat growth in the U.S. commercial and a slightly negative in the VA. Rest of the World delivered growth, Australia, positive growth, while Japan saw minimal growth. China saw a sequential improvement, and we estimate that several emerging markets saw good growth. So again, the ASP, we normally believe in a flat ASP, but no doubt that with the geography mix and channel mix in the year and fourth quarter as much, then we estimate that we should see a negative impact on ASP in -- it's not exact science, but in the area of percentage points at least. So a global hearing aid market that have assumably grown just around 2% in value for the year. Hearing aids fourth quarter organic growth also in fourth quarter improved despite of the U.S. market weakness and the loss of share in U.S. the main area in which we have lost share in U.S. remains to be a large retailer where the number of providers or suppliers have been expanded. We introduced Oticon Zeal in selected European markets, which have created excitement and momentum change in these 4 countries. We have really seen Zeal lift the sales also in general in these markets. However, with limited impact on the total group level in fourth quarter simply by the size of these 4 countries and the potential, even though Germany is a big country, the premium market in Germany is not that big. So again, not something that financially impacts that much, if, of course, does some, but not that much in the fourth quarter. So unit growth was very solid. Representing overall market share gains in units across several key markets, I would say, almost with the main exception being U.S. the ASP was negative, as I said, due to geography and channel mix changes. So France, U.K., Germany, good growth in Europe, all big markets, strong performance in Canada. U.S. growth was negative, as I said, good growth in Japan, South America, and also relatively broad-based growth in Asia, except for China, which, I still would say is market related. And the rollout of Oticon Zeal, just a few more comments to that. We launched it in Europe and in both Germany, Switzerland, U.K. and Denmark, the conclusion is the same. It is undisputed, seen as a new very innovative concept by both hearing care professional and end users. It does help in having end users take the choice to get going and see less obstacles. So very positively seen uptake with first-time users. It does also lift sales of our other portfolio because it opens door to new customers. And if an end user have tried a Zeal and happy with the sound quality and the quality of the instrument, but for some reason, don't continue with a -- or prefer to continue with an in year. There might be some comfort issues. The ear canal doesn't work. It's natural to then fit an intent because you'll have more or less exactly the same sound quality and something you just like. So we do see additional sales to customers that did not work that watch with us. And we have actually also seen limited cannibalization with customers that we already were doing business with and that have taken in Zeal. So this is the conclusion from the 4 markets. We have also I think, been open about that it's only in a premium price point and that we have lifted pricing in some markets significantly compared to intent. And so far, we have seen acceptance of the price and it has not prevented us from creating excitement and driving sales. That being said, it is a premium price point. It is a premium category type of products, but it definitely also makes some people spend more than they might have thought they would. They had to pick a [ receiver ] on ear instruments where there are more options available at different price points. I also think we can say that you cannot really say, okay, what is the potential and what's the share and the in-ear market? Because that's not how people is basically first-time users think about hearing aids. They will look at what's available at the table and pick the one they find most attractive. And there's no doubt that by first-time users, this is seen as much more attractive than carrying a traditional right instrument. So all in all, very good takeaways and we bring this excitement into '26, where we have now launched in U.S., where we will, in the coming weekend launch in Canada and where we -- early March, will launch in France, and then onwards with all remaining significant and major markets. Germany will also expand activity significantly here in first quarter to make sure they get to a full rollout, which was not the case in the initial launch. So we move on. And again, not to open the discussion already, when we then say we still have something ahead of us, it is because it remains to be a sequential launch so we have to take it market by market to make sure we get off on the right foot. And of course, with U.S. market have been the most muted and a big premium potential, then it also, to some extent, depends on how the market develops, but maybe Zeal can be part of creating renewed excitement and also interest from end users. So I would say there's still some uncertainty left around that, which I'm sure Rene will come back to. We continue to expand our portfolio also in Q1, we released devices of our latest technology containing disposal batteries, which in some channels and geographies are still important and then also a new offering in part of the pediatric portfolio and then all these new products offer latest and greatest sound quality and connectivity similar to Zeal, where we also get very good feedback on the latest technology, which is also a connectivity technology, which is also available in Oticon intent. Hearing Care in Q4, solid performance in a weaker than normal hearing aid market, of course, strong tailwind from a month with KIND. So in the quarter, doing 17% in local currencies, 5% organic in -- across the geographies, strong performance in Poland and a number of other midsized European markets continued solid growth in France, driven by the anniversary of the '21 reform. Good organic growth in North America, driven by continued improved performance in U.S. very positively. However, some negative development in Canada. Australia saw a good growth continuing improved momentum and China also delivered good organic growth, driven by ASP tailwind from a continued better product mix. So all in all, well done in hearing care in the fourth quarter. And also diagnostic came in strong in the fourth quarter, delivered organic growth of 8% in local currencies. So clearly best performing quarter this year here and in general, a good uptake. Strong growth in U.K. and Germany, good performance across several midsized markets. U.S. and Canada saw a strong growth, however, driven by service and consumable business again, back to gross margin, which is a little bit lower in these areas. Australia delivered strong growth primarily on instrument sales, and China continued to be impacted by general weak markets and there was some drag on growth in Asia in general. With that, over to you, Rene. René Schneider: Thank you, Soren. So let's push through the financials, a little bit of repetition. So I will be quick on this. So the revenue for second half year, we saw solid organic growth of 4%. Hearing Aids and Diagnostics saw a good organic growth and especially Diagnostics improved in the fourth quarter. Growth from acquisitions contributed 3 percentage points to growth, and we had a FX headwind of 4% predominantly due to the decline of the U.S. dollars. Turning to gross profit. It increased by 3% to DKK 8.8 billion. We saw a slight decline in the gross margin against second half of last year. And this decline was driven primarily by geography and channel mix changes in our hearing aids business. And we also saw some headwind in the Diagnostics business partly affected by tariffs. And last, also a slight headwind on the gross margin from the FX development. On operating expenses and EBIT. So we increased OpEx by 5% organically half year over half year, partly due to very low comparative figures as we pulled back on cost significantly in '24. And we have seen a flat development sequentially from first half year into second half year, which is a reflection of our continued focus on cost management. Acquisitions added an additional 5 percentage point to growth to OpEx in the second half year of '25. And again, also here, we see an offset from a declining U.S. dollar. When it comes to EBIT, we ended second half at DKK 2.1 billion, negatively impacted by exchange rates and by lowering operating leverage in hearing aids. The decline in EBIT was due to weaker than normal growth in the overall hearing aid market as the main contributor and for us, specifically a loss of market share in the U.S., primarily due to lower sales to a large retailer. And this resulted in a contraction of the EBIT margin to 18 percentage points. Special items in the period was related to the acquisition of KIND and a noncash adjustment. All in all, DKK 128 million in H2. Cash flow continued to be very strong. Cash flow from operations in H2 of DKK 2.3 billion and just shy of DKK 2 billion of free cash flow. So again, continued very strong cash flow generation. Our capital expenditure of DKK 409 million is an increase compared to same period last year primarily driven by higher investments in production facilities. Cash out to acquisitions amounted to DKK 5.4 billion. And this, of course, predominantly related to the acquisition of KIND that closed beginning of December. We did not purchase any more shares under the share buyback program in second half year. So we end the year at a total of DKK 582 million as a previously disclosed. When it comes to the balance sheet items, our net debt increased significantly. Again, this is solely due to the acquisition of a KIND and fully in line with our expectation, our gearing multiple at the end of the year, ended at 3.4%, which is above our medium- to long-term gearing target of 2% to 2.5%. We will prioritize deleveraging and expect to return to our medium- to long-term gearing target of 2% to 2.5% within 18 to 24 months after the first of December of '25. And net working capital had a modest increase of 3% and this again, predominantly related to the result of adding acquisitions to the balance sheet. So in good control here. Thus, summing up the financial key takeaways for the full year. As such, we're ending up at 2% organic growth, again, driven by the weak overall hearing aid market. A contraction of the gross margin by 0.6 percentage points, driven by weak market growth, particularly in the U.S. and ASP headwinds in hearing aids due to geography and channel mix changes. The operating expenses for the full year increased by only 3% organically due to our continued focus on cost management. EBIT before special items, DKK 3.96 billion and an EBIT margin of 17.2%. And special items amounting to DKK 128 million. And as just reviewed, strong cash flow of DKK 3.85 billion of cash flow from operations for the full year and free cash flow of above DKK 3 billion for the full year also. And share buyback DKK 582 million. So that was the quick review of the financials, and that brings us into the outlook section and initiatives that we have taken there. So if we start on some of the assumptions that goes into our outlook and assumptions, of course, alluding to that we don't have certainty around these things, but we go in with a starting hypothesis. And of course, the main hypothesis that goes or assumption that goes into our outlook for the year is our projection for the global hearing aid market to grow 2% to 4%, and in 2026 in value, which obviously is a conservative assumption being temporarily below our medium to long-term assumption of 4% to 6% and also, of course, low seen in the light of the last decade of growing exactly in line with these 4% to 6%. So we believe it's prudent and in line with what we have seen in the last quarter to take a cautious stand on the market going into the year, and that is what we do with the 2% to 4% for the market. We will come back to it, but we believe that Demant in all scenarios will grow above the market in '26. Another key assumption on the right-hand side is that as part of our plans for '26, we have launched a company-wide initiative to exactly improve profitability and lower cost growth and specifically in some areas, lead to cost reductions. These initiatives will positively impact EBIT before special items of around DKK 250 million in '26. Since this is an initiative that is starting now, we foresee that the majority of this impact will be materialized in second half year, which is why, we, for '26 see an EBIT's good more than usual towards the second half year. Also, product launches impact the phasing of EBIT for '26. So this is an important note. We have seen a significant decline in the U.S. dollar in particular, but also other currencies. And we expect a negative impact on EBIT from FX of DKK 200 million compared to '25, with the impact evenly split between H1 and H2. We expect the KIND Group to contribute with DKK 300 million on EBIT before special items in '26. This is in line with our previous communication. And we expect a limited impact on tariffs on the group -- from tarrifs on the group, DKK 25 million in our Diagnostics business, also nothing new in that. So summing up on the special items where we see particular things to take into the account for '26 is now totaling DKK 325 million, of which DKK 125 million related to the previously announced integration cost related to the KIND acquisition. And then we do add to that an additional DKK 200 million related to the foreseen restructuring and also adjustment to the organization and size as part of this cost reduction initiative. Here, we see DKK 200 million of one-off costs. So all in all, DKK 325 million. So these are some of the core assumptions. And if we -- based on that build up and say some of the components in a more [indiscernible] visual schematic way on the graph on the right. The starting point is our EBIT for the full year '25 or DKK 3.96 billion. From that, we need to subtract the DKK 200 million that is the FX headwind in '26. That brings us to an FX adjusted EBIT for '25 of DKK 3.76 [ billion]. To that, we would -- in line with the guidance we give here at a contribution from KIND incremental contribution from KIND which means 11 months of EBIT. As a reminder, we did have 1 month in '25. So this is a 11 months of the DKK 300 million, DKK 275 million. And then we need to add the organic part of our business, which includes the before mentioned cost savings initiatives that we are confident will bring DKK 250 million of savings to the OpEx line. And then adding to that, whatever else we will see of organic impact from profitability in the remaining part of the group. And this builds up to an EBIT outlook of DKK 4.1 billion to DKK 4.5 billion. And important to notice here, the backdrop for this outlook is, of course, the starting point of a market assumption of 2% to 4%. And we have in our plans, and we aim to grow above that 3% to 6%. So taking market share essentially in all scenarios. So in this light, you can say, of course, that the DKK 4.1 billion which is the lower end of this guidance reflects a very, very conservative scenario where the market, of course, is in the conservative end of the already contributive outlook here and also that our market share gain is modest, but still there. But this is the starting point for the year, and we feel comfortable with that. Lastly, just a few more comments on the initiatives to improve profitability. I did mention before the effect in '26 of DKK 250 million, but this is a 2-year program that will -- beginning '28 and onwards bring around DKK 500 million of cost savings to the group. We also announced today that we estimate that this will affect approximately 700 people globally in Demant in '26, of which 150 are located in Demant. The associated costs that we recognized under special items is DKK 200 million in '26 and an additional DKK 100 million in '27, both, of course, of a one-off nature, whereas the expected cost savings will be structural and permanent. So summing up, in total, this brings us to our outlook for '26. Organic growth of 3% to 6% EBIT of DKK 4.1 billion to DKK 4.5 billion. Share buyback is foreseen to be paused throughout '26 as we focus on deleveraging. And for modeling purpose, we estimate acquisitive growth of 8%. FX growth of minus 2%, and special items, minus DKK 325 million and an effective tax rate of 23%. With this, we would hand over to Q&A, please. Operator: [Operator Instructions] The first question today comes from Richard Felton with Goldman Sachs. Richard Felton: The first question is on the -- on your guidance and the midpoint of the organic growth guidance does imply growing ahead of the market in 2026. I think you said you expect to do that in all scenarios. So my question is sort of what -- what is giving you that confidence in outperforming the market in 2026 in all scenarios? And then secondly, Rene, I just wanted to follow-up on your comments on EBIT phasing linked to product launches. Is that due to the phasing of the Zeal rollout or anything else to consider as you think about EBIT phasing? Søren Nielsen: Yes. I'll take the first one, Rene can comment on the other. This is in hearing aids market share gains, that is the main driver for that. We, of course, also going to see share gain coming from lifting our share in the German market after the acquisition of KIND. But the predominant is the momentum that I'm sure Zeal will create once we get full rollout in all channels at the end are opened. And also, of course, we continue to have a strong launch program for the remaining of this year and next year. So it's the comfort and all that, that make us be firm on the market share gains in all scenarios. René Schneider: Yes. On the phasing of EBIT, there are 2 factors to be aware of. One is the effect of our cost savings initiative that will obviously have a little effect in Q2 but predominantly in Q3 and Q4. That is the one. And the second one is the gradual launch of Zeal that, of course, will have an effect here in the first half year, but a full half year effect in H2. Operator: The next question comes from Martin Parkhoi with SEB. Martin Parkhoi: Just a couple of questions. Firstly on -- again, back to the 3% to 6% organic growth guidance. Can you elaborate a little bit about the organic growth assumption across divisions. Now we saw a little bit of a dream run for dynastic in the fourth quarter, but what are you assuming [ genostics ] going into being in '26. And then, of course, also, the split on wholesale and Hearing Care on our organic growth. I understand that KIND will add of course, acquisitive growth. And then secondly, just on, Rene on the gross margin expectations, for 2026. It was not a pretty year in '25. What have you assumed of gross margin development in '26 on an underlying basis. And of course, also say how much is the contribution from KIND in that context as well. Søren Nielsen: Yes, Martin, I will do the first one quick. At this stage, I would say it's equal organic growth opportunities for all businesses. So for modeling purposes, I would be relatively equally spread across the 3. René Schneider: Yes. And on gross margin, we have our, let's say, general guidance of being in the range of [ DKK 76 million to DKK 77 million ] on an underlying basis, as you referred to, you are probably in the low end of that range, but with the contribution from KIND, we are likely to see a gross margin in the high end of that range. Martin Parkhoi: Just a follow-up, Soren, on organic growth. I appreciate that it's unknown yet if CEO will be included in VA from 1st of May, but have you included that scenario in the high end of your guidance? Søren Nielsen: It's very specific with the individual channels. We have estimates of -- we entail a growing business in VA during '26, and we do our utmost to ensure Zeal can also become available for veterans. We have not yet achieved that conclusion. Operator: The next question comes from Hassan Al-Wakeel with Barclays. Hassan Al-Wakeel: Firstly, on your comments around intense competition, could you help quantify the impact in the quarter from Costco and how you're factoring this into your guidance for 2026? And how would you characterize share trends in the commercial market in the U.S. And if there are any other adverse share dynamics that you would flag? And then secondly, on margin guidance for the -- I appreciate a weaker market. But can you help us understand some of the building blocks for a margin which is down year-over-year despite a benefit from the restructuring program in the second half? And just your comment around launches and that. Can you talk about how that would impact phasing and whether you're on track for a platform launch in 2026? Søren Nielsen: Yes. Let me start with the first on the very last. We don't comment on any new launches before they're there. I think you all know the tradition for that. I can only repeat, we have a strong program in front of us, we believe, for the coming year, including the second half of this year. Share trends in -- and U.S., you, of course, have visibility to VA where we after recent launches, have seen a minor dip to Oticon but have held, I think, well two things. We year-over-year does see a declining share with a large retailer after expanding the number of suppliers, but relatively stable after that change. And then with the independent, I can only say it's a very intense fight whether some have been holding that a little bit in the way for Zeal. I can't rule out, and therefore, I would say, sequentially a little bit softening towards the end of the year. But I'm sure and hopeful that we will pick up on that now Zeal out in the U.S. market. I think that's what I can speak to for now. René Schneider: Yes. And when it comes to the margin, let's say, development in '26, it is, of course, challenged by our starting assumption of a market growth of 2% to 4%. That is the, you can say, fundamental margin headwind that we sit with. And of course, in this slide, our cost initiative becomes extremely important because this is what brings us, let's say, at the midpoint of our guidance, it leads to a flat EBIT margin in local currency and then, anything above that would be margin expansion. But of course, when we assume a market growth of 2% to 4% margin expands which is not in line with our mid- to long-term then margin expansion per se is a challenge, but at least the midpoint, we are flat. Operator: The next question comes from Julien Ouaddour with Bank of America. Julien Ouaddour: So I have two. The first one is on Zeal, where, I mean, you said the feedback was like pretty good. My understanding is that Zeal is the main moving part for the share gain in '26, as you said. Just could you tell us a little bit what kind of market share assumptions have you embedded in the '26 guide for the ITE category? I'm just asking because we see a complete project working pretty well right now. And I think another of your competitors just announced new ITE project this morning. And also on Zeal, could you confirm if it's already margin accretive to the group and how the volume pickup could impact the profitability? And a very quick second question is on the ASP. It was down 2% in '25. I think it's below your midterm assumption. You're also feeling intense competitive pressure at the moment. So do you feel the need to have some -- maybe some kind of price discounts in the [ REIT ] category until you have a new premium platform as Intent gets old? So just what could it imply on the pricing for H1 '26? Could it be down again? Søren Nielsen: Yes. Let me start with the pricing and then return to Zeal. ASP, when we see it down is a channel and geography mix. We still uphold I think, a strong ability to have significant better pricing than many and most in the independent sector. So no, I don't see the call out for selling Intent because it should be not competitive. I would also like to stress maybe a little bit back to Hassan's question on product launches. We are very, very happy with the performance of Oticon Intent and Zeal. This platform allows us to exactly do these very high-performing products at now unprecedented small sizes. It is with full connectivity, it is with full AI-driven signal processing that we enable Zeal, and that's why Zeal gets such a good reputation. It's not the first product that you can do as an in-ear instant fit type of product. But you have never before seen it with such a feature list that is totally comparable to any RIC. So back to my initial comments as well, when we open new doors with Zeal, the conclusion from the first 4 markets is, we also see growing sales of Intent, because it's equally a very good product. So Zeal is a door opener to a broader sales, and that's also why you cannot measure Zeal's, ASP effect. You cannot measure Zeal comes in with very strong ASP and of course, additional Zeal volume will lift ASP, everything else equal, it's higher price than anything else we sell. So yes, very positive for ASP. If we sell a lot in U.S. and the U.S. market growth, our ASP will go up the ASP effect in '25 is geography and channel related. Zeal IT category, we have no other products that offer same features all new rechargeable with connectivity type of in-ear products are custom made. They are what's called in-canal which are relatively big devices that don't offer the same discreteness and invisibility as Zeal, if they are to be near as smaller Zeal, that connectivity is not there and typically also limited signal processing in order to accommodate for a much smaller battery. The core element of Zeal is that it offers a much larger battery than any competitor, and therefore, in this size. And therefore, we uphold the full functionality we know from RICs. And that's the strength. And therefore, you cannot just measure share in the EMEA category, and I don't see any new releases that challenge the position of Zeal. Julien Ouaddour: And just if I can very quickly follow up on your last point. So should we expect at least market share in line with the global average for Zeal in the IT category, I mean, given everything that you just said? Søren Nielsen: It will naturally go above because Zeal will capture share outside in your category. So you will see compared to -- you, of course, have to look at a certain higher end of that market. There could be markets where there's a lot of relatively cheap in-ear products sold if I allow myself to exclude those, Zeal will take significant share in the premium segment both from existing in-ear solutions, which are typically only the smaller, more cosmetically attractive or primarily and also from RIC products because that's the preference of the first-time user. Operator: Next question from Andjela Bozinovic, from BNP. Andjela Bozinovic: Maybe the first one, again on the guidance. Can you give us your assumptions on the competitive environment and especially the competitor launches that are planned in H2 and more specifically in the ear category? Have you embedded the competitor launch that was announced this morning? And second question on the cost initiatives. Can you please give us more details on the initiatives that you're implementing, which areas, which regions would be affected? Søren Nielsen: Yes. First of all, we, of course, expect competition to continue to try to innovate and bring new products to the market. We don't have anything special in and I would definitely see what I've seen today from a single competitor. Yes, it's an in-ear product, but in -- as I understand, lower price category and nothing special when it comes to functionality. So I don't see anything changing the fundamental competitiveness and uniqueness and an innovative level of Zeal. And I don't expect others to launch products down that Elite there is a very close relation between the production technology and the ability to make this small form factor with all the features and benefits, as I just said. And no, I don't expect competition to be able to close that gap very short and not in this year. Cost initiatives, they are widespread across the group. They come basically in all geographies to various extent, of course, depending on our size and footprint. They -- comes in all areas. It's not just operation, it's not just R&D, it's not just any of it is basically the entire company that we have looked at. But of course, in selected areas, so we can be even more firm in our commitment to invest in R&D in new products in a continued expansion of our hearing clinic footprint, et cetera, all the things that matters to growth. But we will find areas where you could say, inside the box, we can find more cost-effective ways of doing things. Andjela Bozinovic: Perfect. And just a follow-up on the first question on the traditional RIC and behind the ear, do you embed any competitive launches in your guidance? Søren Nielsen: I don't have a specific assumption on exactly who's going to introduce what except that in the last 12 months, we have seen a high number of launches from our competitors. So new premium launches, I would find less likely. Operator: Next question comes from Martin Brenoe with Nordea. Martin Brenoe: I just have 2 relatively simple questions. The first is on the cost program which will affect a lot of people in the organization. So I would just like to hear about the timing of the cost reduction and the reduction in the number of employees. I guess that we should expect this to be relatively quickly announced and the cost program to be more of a Q1 and Q2 program rather than back-end loaded to avoid unnecessary uncertainty. That's the first question, and then I'll take the second one afterwards. Søren Nielsen: I'll do that quickly. Yes, when it comes to staff and organizational changes, of course, as quickly as possible to make sure we can move on with the business. It always takes up time and energy. But on the other hand, there's also part of this program, which is centered around cost of goods sold where we want to work against the more and more expensive types of hearing aids we have to do. That takes some effort from selected groups of R&D, et cetera, before they come in. And before you have used existing parts if it entails a redesign. So there's also elements of the program, which have a longer run but the majority and most of what's related to people will happen here very soon. Martin Brenoe: And then just the second question is on value growth. I think 2025 was growing around 2%. And some of that were driven by France, which has been benefiting from the replacement cycle, also from the VA with a quite significant price increase, which will lap in May. So you can say that the market growth is maybe a little bit inflated by these 2 channels and markets. So I'm wondering in your assumption going from 2% to 2% to 4%. And where do you see the sequential step-up happening if you look at the global market from here? Søren Nielsen: I would say that would be a more equal growth or different split in market growth between U.S. and rest of the world. U.S. was basically down to flat, where the rest of the world grew more. And I would say that's in the assumption of the 2% to 4% that we see a slightly better U.S. market, which will then help on global ASP. Operator: The next question comes from Veronika Dubajova with Citi. Veronika Dubajova: I have 2, and apologies, they're going to be slightly bigger picture. The first one, I just want to push you a little bit on the sort of EBIT guidance. I think if we sort of build the bridge, I think adjusting for FX, adjusting for the cost savings, adjusting for, obviously, the contribution from [indiscernible] I think the guidance implies sort of EBIT that's year-on-year minus 4% to plus 5% against sort of revenue growth of 3% to 6%. So even at the top end really isn't a huge amount of margin expansion. And I guess sort of right big picture question is, is this the new normal? I mean if we end up in a market where growth is continuously challenged, not just in 2026, but let's say, maybe even in 2027, should we assume it's going to be quite difficult, not just for you, but for the industry as a whole to drive earnings growth? I think that's kind of the question that we've been having lots of discussions around. My second question, and I apologize for being forthright and blunt about this, but Intent is now 2 years old. You have normally followed 2-year launch schedules. We are clearly not getting a platform in February this year. Can you reassure us that there is nothing wrong with the R&D process and that the delay is a deliberate tactic on your part as opposed to something going wrong in the background? I think given the experience with Zeal last year, it'd be helpful to understand your thinking around that. Søren Nielsen: Yes. Thank you very much, Veron. And you to some extent, have to see the cost savings in combination with the remaining business. We would still like to continue to invest in R&D. We would still like to invest in further expanding our footprint. And that's why we, in other areas, take cost out. So you have to, in my book, see the 2 together, you can't just take the cost out and then look at the rest. So in all scenarios, when you take the 2 together, there is a growing EBIT and there is also improving margins, the better we are in the range, of course. On the more blunt question, no, I don't think there is anything wrong in the R&D. We have made a priority to bring our Zeal, because Zeal is possible due to the platform we have, and we think it holds a big potential half of all users in the hearing aid industry are first-time users around half. And this is a major opportunity there. And also for some the product, they really want, even if they already have one. It holds a significant innovative element. So our product road map is a conscious choice and not a broken bike. Operator: The next question comes from Susannah Ludwig with Bernstein. Susannah Ludwig: I have 2, please. I guess, first on Viola you talked about it having a higher ASP and then sort of being a positive contribution to ASP. Could you just clarify in terms of the impact on margins, I guess, sort of whether the margin is also sort of higher than the rest of your portfolio, given that higher ASP or given sort of the different manufacturing process, if there's any sort of negative impact on margins? And then second, I guess, on the cost reduction program, are you able to share a little bit more in terms of which business areas you are targeting? Should we expect, for example, in retail, are there any closures of stores that you're expecting to do as part of this program? Søren Nielsen: Yes. Thank you very much. Selling more premium is super positive for profitability. And Zeal is intended and will grow our premium share. And this way, yes, definitely. I think we have said before that the cost of producing Zeal is higher than a RIC. So if it was just a substitution and the price was not significantly higher, it would not be. It's better than classic in-ear instruments and the price is set higher than RIC. So all in all, good profitability, lifting premium sales, which we have seen so far in the markets we have launched definitely good for profitability. On the cost saving program, it is for all business areas to deliver of course, a little bit different in form and shape. And yes, we would like to do the most on cost of goods sold because that helps everybody. we are very cautious on our retail footprint and network, but there are also optimization opportunities within a network where certain regions, geographies, areas down to cities, you could find that you have stores that are not optimally placed and don't deliver the profit you expect. So we will look also at the network, but it's not the majority of things. Operator: The next question comes from Niels Granholm-Leth with DNB. Carnegie. Niels Granholm-Leth: Could you provide a little bit more color on the phasing of your growth for this year? So would you expect the year to begin on a slightly weaker note and then end on a stronger one. And also, could you talk about for how long you would expect to maintain Zeal only available in your premium price version would -- should we expect this to go on for the remainder of this year? Søren Nielsen: Yes. Thank you very much. The phasing of the growth is relatively normally phased and with a little uptake during the year as we see a full rollout of Zeal, of course, but not very different from first half to second half if we keep it at that level. And Zeal only in premium, this is, of course, also a careful choice. We think it holds a very significant potential for value. And as long as it's unique and that potential is, you could say, not fully tapped, then we will be cautious in adding more price points. Will it eventually happen? Yes, it will, but for now it's off the table. Operator: The next question comes from Carsten Lonborg Madsen with Danske Bank. Carsten Madsen: I only have one question left, and that's actually sort of a high-level question. So the question we are being asked a lot about from investors is whether now that you're implementing AI and hearing aids across the sector, you, your competitors and you're seeing other AI players invest massively in CapEx. Are we seeing sort of a step change in R&D cost to develop the next hearing aid with AI capabilities? Or are you seeing more of a continuation of R&D budgets that you have seen historically? That's the question, I guess. Søren Nielsen: Yes. And thank you for the question. I don't -- I wouldn't say we see a step-up. But yes, if you look relatively to years back, this is definitely where you put in more and more effort and the complexity of what we have to develop increases. And that's also why a continued commitment to investment in R&D is key and back to our structural changes. They are part of making sure we can continue to invest in R&D and a lot of that is into AI-driven signal processing and benefiting from AI, you could say, in all aspects of running a modern hearing aid system. Carsten Madsen: And a quick follow-up. So should we expect you longer term to sort of enter into more external collaboration in order to drive the AI agenda? Søren Nielsen: I would say we have an example of that at our research center where the William Demant Foundation have given quite a significant grant to make sure further programs in the research community can be done under the umbrella of our Eriksholm Research Centre. So yes, we do more collaboration also with external parties to build on this agenda. Operator: The last question today comes from Jack Reynolds-Clark with RBC Capital Markets. Jack Reynolds-Clark: Two, please. First on Zeal manufacturing. Could you just remind us whether this is fully scaled? Or is this going to be a limiter for launch globally? And then how long until you're fully ramped and launched across all of your markets for Zeal? And then the second question is, I mean, is the profitability initiative a signal that you're more cautious around the timing of the recovery in market growth kind of over the longer term versus where you were in the past beyond 2026? Søren Nielsen: Okay. I think I got your questions. I'm not really sure. But the first one, no, we have made a sequential launch to make sure we don't create demand we can't fulfill. That's why we take one market at a time, and we feel comfortable about that and have a good production capacity and can also or have plans to ramp up significantly. So all good. We're a little bit ahead of the curve, if anything. So I think that's the answer to that. René Schneider: Just to make sure, Jack, to understand your second question, whether that relates to the fact that we have a different view on if and when the market returns back to the normal growth, that's the reason why we introduced profitability initiatives. Søren Nielsen: Yes, you could say you should -- we always do that. I would say we accelerate it to make sure we remain a strong company that can continue to invest in the things that matters the most to our customers, R&D strong service, et cetera. So is there some link, yes, there is, I would say, the acceleration definitely has happened also as it reacts into a continued weak assumption of a continued weak market. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to the company for any closing remarks. Søren Nielsen: Thank you, operator, and thank you so much to everybody for joining us here today. I see we still have a couple of people in line in the queue, so please do reach out after the call and we'll be happy to follow-up. As always, we expect to be on the road in the coming weeks and do look forward to see all of you when we could get there. Have a good rest of the day.
Operator: [Operator Instructions] I'd now like to introduce CEO, Andre Rogaczewski; and CFO, Thomas Johansen. Speakers, you may now begin. André Rogaczewski: Thank you. Good day, and welcome to this presentation of Netcompany's results for Q4 and full year 2025. My name is Andre Rogaczewski, and I'm the CEO and Co-Founder of Netcompany; and I'm joined today by our CFO, Thomas Johansen. And before we get going, there are some important disclosures that I need you to read through. So could we have Slide #2, please. I will pause for 30 seconds here and let you all have a read-through of these important disclosures. And with that, can we go to Slide #3, please. The topic of today's presentation is our performance for Q4, full year '25 and financial guidance for '26. I'll start by walking you through the business highlights for Q4 and '25 in general. And once I'm done, Thomas will go through the financial performance, including our guidance for 2026 before we can open the call for questions. And can we have the next slide, please? Over the past year, we've navigated a landscape defined by geopolitical uncertainty. In times like these, the call for resilient, secure and digitally sovereign Europe has never been more urgent. At Netcompany, we are not just observing these changes. We are actively building the solutions that Europe needs to thrive. For both governments and private enterprises, the path forward is clear. We must move beyond legacy systems, streamline administration and responsibly embrace the power of AI. Why? Because technology that truly works and deliver tangible benefits is the single most important force that can bring Europe to a competitive edge. It's what will strengthen our position in the global race, a race where we, as a continent, stand for true democratic values. We have clearly differentiated our offerings from our peers, which is also why we continue to grow by using platforms and products and AI will become a force in the industry and someone other vendors strive to become. At the crucial and complex space where we operate developing regulated IT solutions that truly matter, we have a clear and ambitious goal to become a European tech giant. That is the future we are building. We will get there by accelerating growth and profitability by transitioning from a pure IT service model to a hybrid model, driving expansion through a portfolio of scalable products and platforms and related expertise. The future does not belong to traditional IT consultancy companies building solutions from scratch, but rather to European platform companies using components and products and AI to deliver in a fast, reliable and responsible way. And in 2023, we launched a product and platform strategy embracing this development, and we are strongly positioned to take market share from the more traditional players. Our talented employees embrace this development, and we continue to look at how we can become better in everything we do. To us, this is not a threat but an opportunity. And in 2025, we realized an eNPS of 32 compared to 22 in 2024, highlighting that the trajectory we are on is supported by our employees, too. With the combination of our products, platforms, AI and talented employees, I believe that Netcompany is the most modern and future-pointing company in our sector. That is why when I look to 2026 and see the uncertain global geopolitics that the world finds itself in, I'm comforted by knowing that Netcompany will raise the challenge and enable that we digitize Europe responsibly making us stronger, more competitive and resilient. To get there, first, we need to show velocity. Europe's legacy needs to be replaced and new systems designed to embrace and embed AI must be put in place. Our dedication and skills combined with our platforms and products will get us there. Secondly, we need to show determination by consistently delivering on time, at budget and within the required quality. This is how we'll continue to stay competitive by acting intelligently, by reusing as much as possible, adhering to our methodology, we will show the way. We are uniquely combining our own platforms and products with our abilities as a system integrator. This gives us the edge. This is how we will prevail. This is how we're different. We are confident in our direction and immensely proud to be at the forefront, building the digital foundation for a strong, independent and prosperous Europe. And we will continue the momentum we've built to push even further in '26. Europe needs us more than ever. And can we have the next slide, please? And 2025 was also the year we cemented our position in the financial services industry with the merger of SDC into Netcompany Banking Services. The integration has moved swiftly and since the beginning of this year, all employees of Netcompany Banking Services have been integrated at our headquarter office in Copenhagen, fostering closer collaboration with colleagues from across the group. We have launched the first new modules for our Netcompany Banking Services customers, and we will continue with ongoing new releases. During the second half of 2025, we have seen a significant improvement in margins, and we expect more to come as synergies will be realized. The integration is progressing faster than initially anticipated and the synergy targets announced in connection with the Capital Markets Day remain unchanged. And can I have the next slide, please? That our purpose and ambition for a prosperous and digital sovereign Europe have had merits with clients in both the private and public segments in our markets is supported by continued contract wins throughout the quarter. In the U.K. public sector, we have been selected by HMRC to implement and operate the next phase of the Trader Support Service, TSS. The solution will be built on a market-proven ERMIS customs product and our AMPLIO platform. Netcompany Banking Services was selected by OBOS-Banken in Norway for the delivery and maintenance of the new core banking system. The agreement is a testimony to Netcompany Banking Service approach to open architecture, flexible integration and a high degree of automation. In the Danish private sector, we've expanded our agreement with Forca bringing Festina alongside to deliver the pension solution for the future with OpenAdvisor. The implementation of OpenAdvisor platform from Festina will be a part of the complete pension solution delivered to Forca and its customers. And can we have Slide #7, please? In the Danish public sector, Netcompany has been selected as a vendor under a framework agreement with the Danish Agency for IT and Learning. The framework covers development and maintenance of a portfolio of critical education and grant administration systems. And in the private sector in Greece, we have secured a 3-year extension with Cosmote Payments. The extension includes development, maintenance and operational support across the full Cosmote Payment ecosystem. Furthermore, in the private sector in Greece, we have been awarded a contract by the National Bank of Greece covering several key strategic areas, including the development of the bank's AI framework. And with that, I will now pass on the word to Thomas, who will go through the numbers. Please, Thomas, go ahead. Thomas Johansen: Thank you for that, Andre. Like already mentioned, I am the CFO of Netcompany, and I will go through our financial performance for Q4 and for the full year 2025. So if we move past the breaking Slide #8 and straight into Slide #9, please. We ended 2025 with a strong quarter and grew organic revenue in constant currencies by 10% compared to Q4 2024. Currencies impacted revenue growth negatively by 0.5 percentage points in the quarter, resulting in reported organic revenue growth of 9.5%. Organic growth was driven by 20.7% growth in revenue from the private sector and 5.2% growth in revenue from the public sector. Revenue growth was driven by a mix of new wins related to our products and platforms and revenue generated from existing customers with contributions from all segments. Group revenue grew 35.5% in the quarter, of which 25.4 percentage points were nonorganic related to the inclusion of Netcompany Banking Services. Continued the strong performance in Q3, Netcompany Denmark revenue increased 10.2% compared to Q4 2024, mainly driven by 27.9% growth in the private sector with contribution from multiple verticals, most notably in the financial services industry with both new and existing customer engagements. Netcompany SEE & EUI grew revenue 6.9% compared to the same period last year. The growth was driven by both the public sector, including the EU and the private sector, which grew 4.9% and 12.7%, respectively. Netcompany U.K. also continued its strong growth from the previous quarters and grew revenue 28.1% compared to Q4 '24. The growth was driven by both the public and private sector with increased engagements within Tax and Customs and Defense and Resilience. In Netcompany Banking Services, revenue decreased 3.9% compared to pro forma revenue in SDC in Q4 2024. SDC results in Q4 last year were positively impacted by one-off revenues from customer "outconversions" and exit fees. In Netcompany Norway, revenue increased by 7.4% compared to the same quarter last year. And in Netcompany Netherlands, revenue was in line with the same quarter last year. And can we move to the next slide, please? During a year when most of our peers have seen little to no growth, Netcompany grew organic revenue by 7.9% in constant currencies compared to 2024, fully in line with our guidance given at the beginning of the year. Organic growth was driven by both public sector, including EU that grew 7.4% in '25 and the private sector that grew revenue 8.4%. Growth in both segments was supported by our go-to-market strategy, focusing on dedicated industry verticals, combined with our embedded AI product and platform solutions. Group revenue grew 20.8% in 2025, of which 13 percentage points were nonorganic related to Netcompany Banking Services. And can we move to the next slide, please? In Q4 2025, organic adjusted EBITDA, that means excluding NBS, before allocated headquarter cost increased 21.3% to DKK 346.4 million, yielding an organic adjusted EBITDA margin of 18.8%, an increase of 1.7 percentage points compared to the same quarter last year, all in constant currencies. Group adjusted EBITDA before allocated headquarter costs increased 41.2% to DKK 403 million in Q4, yielding an adjusted EBITDA margin for the group of 17.7% compared to 17% in Q4 2024, even with the inclusion of Netcompany Banking Services, which actually impacted margin negatively by 1 percentage point. In Netcompany Denmark, adjusted EBITDA margin increased 4.7 percentage points to 26.2% in Q4. The significant development was a result of improved utilization and our continued focus on scaling revenue without a one-to-one relation in FTE growth, underpinned by a 2.5% increase in client-facing FTEs compared to double-digit revenue growth in the quarter. In Netcompany SEE & EUI, adjusted EBITDA margin was 13.3% in Q4 2025 compared to 15.5% in the same quarter last year. The decrease in margin was a result of lower license revenue income recognized in this quarter compared to the same quarter last year. In Netcompany U.K., adjusted EBITDA margin increased by 4.4 percentage points to 14% in Q4, an improvement reflected by better project execution as well as continuing focus on converting freelancers into own employees and especially public deliveries. In Netcompany Norway, adjusted EBITDA margin was breakeven in Q4. And in Netcompany Netherlands, margin decreased to 18.8% based on timing events. In Netcompany Banking Services, the adjusted EBITDA margin was 13.3% in the quarter compared to pro forma adjusted EBITDA margin of 6.4% in SDC in the same quarter last year. On a sequential basis, margin in Netcompany Banking Services more than doubled compared to Q3 as the integration is progressing faster than anticipated, and we're starting to see the impact from synergies materializing. The performance in Q4 2025 fully supports and validates our expectations for synergies. And with the recent win of OBOS in Norway, we are confident that Netcompany Banking Services will be able to take market shares going forward. Can we have the next slide, please? For the full year 2025, organic adjusted EBITDA margin before allocated headquarter cost was 17.8% compared to 17.6% last year despite increased time spent on product and business development during the first half of the year as well as time spent on preparation for the SDC integration. Group adjusted EBITDA margin before allocated cost from headquarter was 16.9% compared to 17.6% in the same period last year. The lower margin was fully attributed to the inclusion of Netcompany Banking Services into the group. Can we have the next slide, please? In Q4 2025, we employed an average of 9,752 FTEs, equal to an increase of 1,500 FTEs or 18.2% compared to Q4 2024. Of this, 7.8 percentage points were organic and 10.4 percentage points were nonorganic as a result of including Netcompany Banking Services into the total number. Attrition rate for the last 12 months was 18.1% for the organic part of the group, which was in line with Q4 2024. Netcompany Banking Services is right now in the initial phase of a significant structural reorganization. Stand-alone attrition rate for Netcompany Banking Services was 27.5% for the last 6 months. And can we go to the next slide, please? Along with previous years, a continued focus within our group is that of working capital management. And while our cash conversion ratio was lower at 98% compared to 147% in 2024, we are still satisfied with our result. First of all, we are comparing against an extraordinarily high cash conversion ratio in 2024. Secondly, two of the most important metrics indicating whether we are on the right track in our focus on working capital management, both improved in 2025. The relative share of net work in progress and accounts receivables combined relative to revenue decreased compared to last year as did days of sales outstanding. We ended the year with DKK 287 million of cash at hand, up slightly from last year. Our leverage was 1.6x, naturally impacted by the acquisition of SDC, but still at a level giving us strong balance sheet momentum into 2026. During the year, we have executed share buybacks of DKK 500 million, bringing our accumulated share buyback to DKK 1.3 billion in the period 2024 to '25. We canceled 2.5 million shares in March 2025, and we plan to cancel another 1.5 million shares in connection with the upcoming AGM, reducing our outstanding capital by more than 8% over the last years. To complete our 3-year committed share buyback program of DKK 2 billion, we have today initiated another share buyback program of DKK 750 million, of which DKK 700 million are to be executed in the calendar year 2026. And can we have the next slide, please? Revenue visibility for the group, excluding Netcompany Banking Services for 2026 amounts to DKK 5.3 billion, an improvement of 8.1% compared to 2025. Revenue visibility for Netcompany Banking Services for 2026 amounts to DKK 1.4 billion and solely relates to the private sector. And can we go to the next slide. Taking the current macro and geopolitical uncertainty into perspective and observing pipeline and revenue stability at the beginning of the year, we expect our group revenue to grow between 15% and 20% measured in constant currencies in 2026, including Netcompany Banking Services. Excluding Netcompany Banking Services, we expect revenue to grow between 5% and 10%. From a margin perspective, we expect to deliver adjusted EBITDA margin between 15% and 18%, also in constant currencies and also including Netcompany Banking Services. Excluding Netcompany Banking Services, we expect adjusted EBITDA margin between 16% and 19%. Based on our market position, our superior product and platform offerings, we remain committed to our long-term targets, and we expect to keep winning market shares in existing and new markets in the years to come. And with that, we've concluded the presentation of Q4 and the annual report. And if we move to the Q&A slide and open the call for questions. Thank you. Operator: [Operator Instructions] The first question will be from the line of Daniel Djurberg from Handelsbanken. Daniel Djurberg: Congrats to a solid year-end. I have two questions, if I may. And I could start off with a little bit on how to think of the license revenue. I think it was roughly 1% of group's organic revenue in '25, in line with '24. But now we also have the banking services and the OBOS deal, et cetera. But should we still expect the license revenue to account for roughly 1% of the group also for '26, '27? That's my question. Thomas Johansen: Yes, I can start with that, Daniel, and thanks for the question. We don't give specific guidance on the different revenue lines in our group. But it's clear that with the focus we have on our products and platforms and with the maturing and commercialization of these, we would expect license revenue to be a larger and larger percentage of our total group. So without giving you any number, which you know what you asked for, but without giving you any specific number, we would expect that relative share to increase in the years to come. Daniel Djurberg: That's fair enough. And if I may ask you on -- you have increased the organic growth in client-facing FTEs, while you have had a reduction in non-client facing, partly due to internal work made in early '25. But my question is, is the mix now between the non-client and the client-facing FTEs now is at the optimal level or if you could ask for more improvements or have to think? Thomas Johansen: I'm quite sure that both Andre and I agree on this answer. So I'm going to give it because otherwise, Andre is going to give it for me. We would expect the level of non-client-facing FTEs that is the administrative part. We will expect that to continue to come down as it should. André Rogaczewski: Yes. Daniel Djurberg: Perfect. And may I also ask you a little bit on the geopolitical opportunity, if you call it. Recently, EU took a little bit more clear view on the need for the growing digital sovereignty and push towards tech funds and infrastructure funds, et cetera. But have you seen anything more taking place so far from this? André Rogaczewski: Yes. I think you can say that our dialogues with both governments and large enterprises are obviously affected by the whole movement towards more resilient and a much more strategically independent solutions in the EU space. That goes for both public and private solutions. Now all the new platforms we have been launching in the last 3 or 4 years, they've been launched in a way where they can be moved and they're very flexible and containerized. So in that sense, many of the customers are truly interested in using our technology. Operator: The next question will be from the line of Claus Almer from Nordea. Claus Almer: Also from my side, congratulations with a strong Q4. The first question goes to Denmark and the private sector. You had a very solid growth in Q4. To what degree does this come from, let's call it, AI-based projects? That would be the first one. André Rogaczewski: Yes. Thank you, Claus. That's a great question. Now what we see is that we don't sell AI like an independent offering. We sell AI as embedded offering. And that's something that's happened over the last 1 to 2 years. So customers are really interested in our experience and knowledge about specific industrial processes, for instance, in the financial industry. If you know something about life and pension or insurance or you know something about banking, that's the entrance ticket. But then at the same time, you have to show AI capabilities and treating that data with high levels of confidentiality and track where you use AI and why. If you're able to do that, you have a very compelling offering, and that's what we've been doing in Denmark. And that's what we see happening in the private sector. I hope that was answering your question. Yes. Claus Almer: Yes, it definitely did. Then coming to the MPS division. It seems like your synergies is coming in a bit faster than initially communicated at least. Should we also expect that compared to the split you did at the CMD that you might be a little more front-end loaded? And then secondly, what about the commercial opportunities? I think, Thomas, you said you expect to take market shares. Have you been more confirmed about your potential or it's more following the business plan? That will be the second question. Thomas Johansen: I'll start with the first part of the question, Claus, and Andre will take the second part of the question. When it comes to realization of synergies, what we can say at this point in time is that we reconfirm the plan that was laid out in connection with the Capital Markets Day, which is DKK 300 million to DKK 350 million, more or less evenly split over the years to come. And then with that said, we'll see how fast it goes. But as of now, there's nothing in our performance in Q4 that leads us to be worried about our ability to execute on that promise given earlier. So that's as far as I will go. And then I'll leave the other part to Andre. André Rogaczewski: Yes. I think that when it comes to commercial possibilities here, I mean, the market is definitely in Denmark is much more dynamic now than it was just 1, 2 years ago for certain. But what is maybe even more interesting is that you don't really need to be the core system vendor in order to be relevant, delivering all other types of modules. And if you measure on the frequency and the quality of the meetings we have with the overall sector in Denmark, but actually also in Scandinavia, that frequency is going up. We have a lot of meetings. We have some really qualified discussions of how to use separate modules, not necessarily engaging with the entire banking platform. And I see that as very promising. Claus Almer: Sounds great. And then just a small last question. VERA, is there any opportunity or possibility for you to share some thoughts about the progress you're doing with that solution? André Rogaczewski: VERA is -- well, there's a huge interest in VERA. And technologically, I think we have one of the best solutions in the market space. We have a lot of qualified dialogues, and we also have prototypes running with several customers. But unfortunately, I can't go into further details at this moment, but it looks promising. Operator: The next question will be from Balajee Tirupati from Citi. Balajee Tirupati: Two from my side, if I may. Firstly, you have cited focus on efficiency gains from AI to be supportive for the group's growth. Are you seeing clients also looking at Netcompany for cost-out projects expecting your ability to better leverage AI for productivity gains? And secondly, I appreciate Netcompany doesn't have time and material-based pricing. But even for fixed price contracts, do you believe the industry would be able to retain productivity gains and not required to pass that on to clients? André Rogaczewski: Yes, that's two very good questions. I mean your first question is, yes, we actually see that occurring now more and more. Not that it's a big part of what we do. Normally, we are hired to bring in an IT solution that will come up with the necessary effects. But yes, we also see some customers asking us to engage with them to realize the benefits. And when it comes to fixed price, I think the most important thing at the moment is to be relevant and price is important, absolutely. But the business case is even more important. So if you can show a time to deliver within, say, 1 year or even less, benefits that can be realized within 2 or 3 years and with a compelling business case, I don't find the fixed price and trying to bring that down somehow as an obstacle for our business model at all. So I think we are ahead of the curve. I mean, obviously, some services will become cheaper over time when AI inflects the businesses. But you have to be ahead of the curve and you have to be the one with the most compelling business model. And in that way, you can actually have a very, very good business. Balajee Tirupati: If I may have one follow-up question on margins. So Thomas, could you share building blocks within 2026 margin outlook? It would appear that most of the margin improvement is coming from the banking services business, while outlook for the organic business suggests margin being broadly stable over 2024 level. Are you still factoring sourcing of Danish talents across the group as well as our efforts in product and business development in your 2026 outlook? Thomas Johansen: So without giving you what you asked for, by the way, and that would also be the first time I'm doing that then, right? But without talking in details on the margin buildup, when you decompose the 16% to 19% on organic and 15% to 18% on group and then you can calculate backwards what that implied would be on Netcompany Bank Services. You're right in your math. Now we will do everything we can to continue to improve our efficiency within Netcompany call within Netcompany Banking Services and within the group. So at this point in time, early on in the year, we are comfortable with the guidance that we have laid out, both for the group and for the organic part and the implied part that has to do with Netcompany Banking Services. And then rest assured that we will do everything we can to be as effective and as good to deliver the services that will continue to make Netcompany the standout name in the industry. Operator: The next question will be from Yiwei Zhou from SEB. Yiwei Zhou: Yiwei Zhou from SEB. Also a couple of questions from my side. Firstly, I just want to follow up on the cost synergy. Thomas, if you can elaborate a bit here. So the cost synergy here materialized in Q4, is it a part of the 2026 target or it will be addition to it? Thomas Johansen: What we realized in 2025 has nothing to do with 2026. So what we're realizing now, you can say, will be on top of what we're realizing. So it's not that we have taken something that was planned for '26 and done it in '25 or anything. So we're following the plan for '26 to '28 of the DKK 300 million to DKK 350 million. And then we've just had the opportunity to accelerate certain things that we've done in Q4, but we'll continue with the same pledge in '26 and forward. Yiwei Zhou: Okay. And could you also comment a bit on the phasing of the materialization of those cost synergies during 2026. I previously got the impression that it will be back-end loaded. Is it still the expectation? Thomas Johansen: Yes. Without giving any specific guidance on the quarters of when the synergies are going to be realized because that would then imply that we would give input as to what the margins are going to be in the different quarters. But we don't necessarily expect all the synergies for '26 to be back-end loaded. Yiwei Zhou: I see. Okay. And then lastly, I also realized in the provision did increase quite a lot here in '25. And I can understand the provision for restructuring, but I can see you also booked a sizable project provision here. Could you elaborate a bit here? Thomas Johansen: It's related to the merger with SDC into Netcompany Banking services as part of the purchase price allocation. So that has to do with the period before we took over ownership of SDC. Yiwei Zhou: And is there -- is it fair to understand that you see the risk here that it will be a bad project? Thomas Johansen: No. Operator: The next question will be from the line of Aditya Buddhavarapu from Bank of America. Aditya Buddhavarapu: First, on Denmark. Could you comment on how you're thinking about the public sector development this year, given you saw probably slower tender activity last year, how are you thinking about that going into '26? Second, just a follow-up on the question on margins for the core business. Why do you think -- why is sort of the implied margins for the core business flat? Is that because of maybe some more investments or headcount growth? If you could just maybe offer some color on that? And then could you just comment on how to think about the tax rate for 2026, given you have elevated tax rate in H2? André Rogaczewski: Yes. Thank you for those questions, Aditya. Let me just take the first one and leave the other ones to you, Thomas. So the public sector, yes, I mean, we are looking into a very exciting year in Denmark at the moment. I mean we have some large public engagements to be had. We won a recent one that we mentioned in the presentation. But we're also looking into what's going to happen at some of the core major Danish institutions, both tax office and of course, also police force and defense. And at the same time, we see public sector running at a decent pace. However, we will also see an election coming somehow during the year. But we are very confident that many of the deals that we need to have in '26, we will be able to get signed and executed upon before elections, and that plan is running accordingly to what we've scheduled. And overall, I believe we will have a very decent year in '26 in public sector because there's so much digitization happening everywhere. And for the margins and tax things, I better leave that to you, Thomas. Thomas Johansen: Sure. Thanks, Andre. And for the margin, like I said on the previous question that also was on margin. We don't comment per se on the bridge or the buildup on the margin for 2026 for the group or for the organic part. We've given a guidance of 16% to 19% for the organic part, of which we are comfortable at this point in time. And then we will do our utmost to do as good as we can. For the tax rate, we expect that to come down during 2026 to a more normalized level. It is impacted for the first half negatively with the special items that are nontaxable -- nontax deductible, sorry. So that, of course, has a big impact on the tax rate in 2025, which will not have the same impact in 2026. We will see that we can deduct the taxable depreciation on the purchase price for SDC, which will then have a full year effect of 2026 and have a positive impact, meaning a lower tax rate for 2026. So it will normalize in 2026, Aditya. Aditya Buddhavarapu: Understood. Also just a follow-up on the free cash flow. You mentioned that what you're looking at in terms of the DSOs, work in progress, all of that is looking in the right direction. So how should we think about the cash conversion in '26? Thomas Johansen: If you look at 2024, that was really high, right, especially in Q4, more than 400%, underpinning that, that was an abnormal quarter, 147% in 2024 and 98% in 2025. So we're probably looking into a year which is more in line with what we've seen from a cash conversion perspective like 2025. Operator: [Operator Instructions] The next question will be from the line of from ABG Sundal Collier. Unknown Analyst: Just one question on my end here. So it's obviously very encouraging to see the integration of NBS is tracking well, and we all know that you have high ambitions in terms of growth. I'm okay with Denmark and the Nordics, which I also appreciate are sort of the starting point. But I'm just still curious regarding the expansion you're aiming for into the rest of Europe at some point. Can you confirm that you, at this point in time, have all the regulatory approvals you need, i.e., is it theoretically something you could do tomorrow? Or would it take some time to get these? And if so, how extensive would that be able to get? Would it be -- would it require? That would be my question. André Rogaczewski: That's a good question. So that depends definitely on the specific type of solution you want to build in a specific European country. Obviously, if you're in -- within EU, many of the regulatory things you need to build particular solutions are already in place. And when it comes to supporting European banks with particular modules or processes, we can do that without any problems at the moment. Now there are definitely some things that need to be regulated even further in EU. For instance, if you want to put things into the EU wallet and you want payment services in that, that still -- there's still some regulation to be had. But overall, I have to say 80%, 90% of what we can deliver to European banks, we can do without any problems at the moment. So that's not a big obstacle. Having that said, the most important thing right now is obviously Scandinavia. We have -- we see a big market there. And of course, the integration of NBS absolutely important. So we have a very, very strong focus on that. I think that alone can bring us to a very interesting place alone in '26 and '27. Operator: The next question will be from the line of Poul Jessen from Danske Bank. Poul Jessen: I have 3 questions. First question is coming to Yiwei's question about NBS and the guidance. With DKK 56 million in the fourth quarter and a guidance of DKK 180 million to DKK 230 million for full year '26, then you actually guide flat earnings described that you would see slight growth. And I assume also you will have further initiatives coming in '26. So how should we get to that you will have lower earnings on the full year run rate next year in '26 than you had in the fourth quarter? That's number one. Thomas Johansen: What we can say in terms of specific guidance for NBS is that we are comfortable with the guidance set out at this point in time. And clearly, Q4 was good and Q4 was based on realization of synergies. So that's also good. Integration is going fine, and we see some very, very strong interest into the business. So let's see where we end the year with both the group and with NBS. At this point in time, we are comfortable with the guidance. Poul Jessen: Second question, public sector Denmark. Andre, you said that you saw contracts coming up from police tax on defense. We're waiting with consensus moving for an election, do you actually believe that we will see those contracts awarded in before end of April? André Rogaczewski: I think you were falling out a bit there, but I hear your question is the public sector in Denmark and whether some of the contracts with the tax defense and police will fall into place before spring time. Now I'd say -- okay. I'd say that you will see some of it happening definitely before the summer. The good thing about taxes, a lot of these funds have already been allocated. I think so too, when it comes to Defense '26, even in you will see defense and resilience sector acquiring what they need to acquire in '26, that's not going to be influenced by the elections and the same thing goes. So I'm very confident that '26 will be a year with all those 3 government institutions will actually invest more into IT than we've seen for a long time. So I think it looks promising, yes. Poul Jessen: Okay. And then a final question is about Schleswig-Holstein. There has been some local German press writing that you are doing a tax solution, a very small one in Italy for the municipalities there. But they also state that it could be run out across all municipalities in Schleswig-Holstein and also more than just the tourist tax. Can you put a little or elaborate a little about what kind of opportunities you see for this isolated, but also how it can be used in Germany to further expand into tax in Germany in general? André Rogaczewski: Well, it is true that we are delivering minor -- smaller tax solution in Schleswig-Holstein. But we're also in dialogues with other German states about similar solutions based on our AMPLIO platforms. Now the ability to scale those solutions and whether they can be made into larger deals, I think we have to await that. But we are working continuously actually right now in 5 or 6 different areas in Germany, trying to -- trying to use our platforms as an entry point to do new modern case management systems. It's very difficult at this time because it's early days to discuss whether it can be scaled or not. But obviously, that's our intention. Operator: The next question will be from the line of William Richards from Morgan Stanley. William Christian Richards: Just a single one for myself. So for the quarter, we saw SEE & EUI segment growth slow a bit sequentially. I think we are now around 7% for the fourth quarter. I know for a while you've been talking about growth slowing in this region to more normalized levels. So I guess my question is, is 2026 the year where we can expect this normalization to take hold? Or was there something else on the growth front in the fourth quarter for that segment that drove this deceleration? Any more color there would be really helpful. Thomas Johansen: So the deceleration of Q4 stand-alone was driven by lower license revenue in Q4. So that's the main reason for that. We don't necessarily expect the growth to be had in SEE & EUI to come to an end in 2026 on the contrary. I think we lost William. Operator: Yes. As we have no further questions in the queue, I'll hand it back to the speakers for any closing remarks. André Rogaczewski: Well, thank you all for joining in, and have a wonderful day.
Operator: Hello, and welcome to the Q1 2026 TransDigm Group Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce Director of Investor Relations, Jaimie Stemen. Jaimie Stemen: Thank you, and welcome to TransDigm's Fiscal 2026 First Quarter Earnings Conference Call. Presenting on the call this morning are TransDigm's Chief Executive Officer, Mike Lisman; Co-Chief Operating Officer, Patrick Murphy; and Chief Financial Officer, Sarah Wynne. Also present for the call today is our Co-Chief Operating Officer, Joel Reiss. Please visit our website at transdigm.com to obtain a supplemental slide deck and call replay information. Before we begin, the company would like to remind you that statements made during this call which are not historical in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the SEC available through the Investors section of our website, or sec.gov. The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined, adjusted net income and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and applicable reconciliations. I will now turn the call over to Mike. Michael Lisman: Good morning, and thanks for calling in today. First, I'll start off with the usual quick overview of our strategy. Second, make a few comments about the quarter; and third, discuss our fiscal '26 outlook. Then Patrick and Sarah will give some additional color on the quarter. This will be the first time you're hearing from our new co-COO, Patrick Murphy, but he's hardly a new guy around TransDigm, having served as an Executive Vice President for the last 6 years, and as President at our HarcoSemco operating unit in Connecticut prior to that. To reiterate, we believe we are unique in the industry in both the consistency of our strategy, in both good times and bad, as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle. To summarize, here are some of the reasons why we believe this. About 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues, which generally has significantly higher margins and over any extended period have typically provided relative stability in the downturns. We follow a consistent long-term strategy. First, we own and operate proprietary aerospace businesses with significant aftermarket content. Second, we utilize a simple, well-proven, value-based operating methodology. Third, we have a decentralized organizational structure and unique compensation system closely aligned with our shareholders. Fourth, we acquire businesses that fit this strategy and where we see a clear path to private equity-like returns. And lastly, our capital structure and allocation are a key part of our value creation methodology. Our long-standing goal is to give our shareholders private equity-like returns with the liquidity of a public market. To do this, we stay focused on both the details of value creation, as well as careful allocation of our capital. As you saw from our earnings release, we had a good start to our fiscal year. Our Q1 results ran ahead of our expectations, and we raised our sales and EBITDA defined guidance for the year. During the quarter, we saw solid growth in the revenue for our commercial OEM channel, and healthy growth in both our commercial aftermarket and defense market channels. Bookings in the quarter were strong across all of these three market channels. Commercial aerospace trends remained favorable. Air traffic continues to steadily grow, and airline schedules remain fairly stable as well with takeoffs and landings growing in the 4% ballpark year-over-year. Within commercial aftermarket, a quick note on our growth in this market channel over the last 12 months. While our growth rates have hit and continue to hit our own expectations, there is a lag in TransDigm's growth versus the broader market of probably 5 to 6 percentage points. As we have said many times before, it's not odd for us to see this, and we have lived through brief periods like this before. With regard to what is driving it as we run the math, roughly half of the 5 or 6 percentage point growth gap is from our underexposure on engine content versus the rest of market, and the remaining half comes from lumpiness in our distribution channel and at airlines, with this latter piece owing to our earlier and higher recovery versus the broader market as we came out of COVID. The second piece, the lumpiness, can be hard to quantify exactly. Switching to the commercial OEM market, there's still much progress to be made for OEM rates. However, it is good to see both Boeing and Airbus steadily ramping up their production rates. They expect to continue doing so in coming months and quarters. Airline demand for new aircraft remains high and the OEMs have long backlogs. The OEM production rate recovery to date has been bumpy, and we're planning for it to remain so. We remain encouraged by the progress we're currently seeing and have seen over the last several quarters. Our EBITDA as defined margin was 52.4% in the quarter, which includes about 2 full percentage points of dilution from recent acquisitions. Contributing to this solid Q1 margin is the continued growth in our commercial aftermarket, along with diligent focus on our operating strategy, which is allowing margin performance to expand across all segments. Additionally, we had strong operating cash flow generation in Q1 of over $830 million, and we ended the quarter with a cash balance of over $2.5 billion. Next, an update on our capital allocation activities and priorities. In the past 5 weeks, we have signed up the acquisition of 3 new operating units and 2 separate M&A transactions. Stellant Systems, Jet Parts Engineering, and Victor Sierra Aviation. On December 31, we announced that we had agreed to acquire Stellant Systems from Arlington Capital Partners for approximately $960 million in cash. Stellant is a designer and manufacturer of high power electronic components and subsystems serving the aerospace and defense end market. The business generated approximately $300 million in revenue for the 2025 calendar year. And then on January 16, we announced that we had agreed to acquire two businesses, Jet Parts Engineering and Victor Sierra Aviation, from Vance Street Capital for approximately $2.2 billion in cash. Jet Parts Engineering is a designer and manufacturer of aerospace aftermarket solutions, primarily proprietary OEM alternative parts and repairs. Victor Sierra is a designer, manufacturer and distributor of proprietary PMA and other aftermarket parts serving the commercial aerospace end market, primarily the general aviation and business aviation sectors. Collectively, Jet Parts and Victor Sierra generated approximately $280 million in revenue for the 2025 calendar year. As you know, we've been a player in the PMA space for many years through our existing operating units, which often work directly with the airlines on their PMA efforts, most of which are focused on developing better technical solutions for the airline customers. We see PMA as a small but growing subsector within commercial aerospace that serves an important need for the airlines. Jet Parts and Victor Sierra will add to our existing PMA revenue and further enhance our partnership with these airlines. We look forward to owning all three businesses, Stellant, Jet Parts and Victor Sierra. These are good businesses with proprietary products that generate significant aftermarket revenue and align well with TransDigm. Regarding the current M&A activities and pipeline, we continue to actively look for opportunities that fit our model. As usual, the potential targets are mostly in the small and midsize range. And while we are very happy to be adding Jet Parts and Victor Sierra into the fold, the primary M&A focus at this time remains on acquiring proprietary OE component aerospace business. As always, we will remain focused and disciplined around our approach to M&A. Additionally, acquisitions are, by their nature, hard to predict. So consistent with past practice, I will not be saying too much on what is currently active in our funnel. The capital allocation priorities at TransDigm are unchanged. Our first priority is to reinvest in our businesses. Second, do accretive, disciplined M&A. And third, return capital to our shareholders via buybacks or dividends. The fourth option paying down debt seems unlikely at this time, though we do still take this into consideration. We are continually evaluating all of our capital allocation options. We exited the quarter with a sizable cash balance and our recent capital allocation actions still leave us with significant liquidity and financial flexibility to meet any likely range of capital requirements, or other opportunities, in the readily foreseeable future. Pro forma for the announced acquisitions, we have significant M&A firepower and capacity remaining, approaching $10 billion. Moving to our outlook for fiscal 2026. As noted in our earnings release, we are increasing our full year '26 sales and EBITDA as defined guidance to reflect our strong first quarter results, and our current expectations for the remainder of the year. At the midpoint, sales guidance was raised $90 million, and EBITDA defined guidance was raised $60 million. We are still early in our fiscal year, and considerable risk remains. But I am quite encouraged by and optimistic on how things appear to be shaping up these first 4 months. The guidance assumes no additional acquisitions or divestitures. Our current guidance for fiscal 2026 is as follows and can also be found on Slide 6 in today's presentation. Note the pending acquisitions of Stellant, Jet Parts Engineering and Victor Sierra are all excluded from this analysis until each acquisition closes. The midpoint of our fiscal 2026 revenue guidance is now $9.94 billion, or up approximately 13% over the prior year. In regard to the market channel growth rate assumptions that this revenue guidance is based on, we are not updating the full year market channel assumptions for our three primary end markets: commercial OEM, commercial aftermarket and defense. Underlying market fundamentals have not meaningfully changed for any of these markets. The revenue guidance is based on the following market channel growth rate assumptions. We expect commercial OEM revenue growth in the high single digit to mid-teens percentage range, which is highly dependent on the evolution of the production rates in the commercial OEM environment, commercial aftermarket revenue growth to be in the high single-digit percentage range, and defense revenue growth in the mid-single-digit to high single-digit percentage range. The midpoint of fiscal 2026 EBITDA defined guidance is now $5.21 billion, or up approximately 9%, with an expected margin of around 52.4%. We are very pleased with our margin performance in the year-to-date period, and we are running ahead of where we thought we'd be. Adjusting for the two dilutive factors we discussed last quarter, the margins in our base businesses improved nicely in our first fiscal quarter, more than we had expected. And as a reminder, the dilutive factors are approximately 200 basis points of margin dilution from our recent acquisitions, and about 0.5 percentage point to 1 full percentage point of dilution from commercial OEM and defense mix headwind. The midpoint of adjusted EPS is now expected to be $38.38. We believe we are well positioned for the remainder of fiscal 2026. We'll continue to closely watch how the aerospace and capital markets develop and react accordingly. We are pleased with the company's performance this quarter. It is a good start to the fiscal year. Our teams remain focused on our value drivers, cost structure and operational excellence. We look forward to the remainder of fiscal '26 and expect that our disciplined, consistent strategy will continue to deliver the value you have come to expect from us. Now let me hand it over to Patrick Murphy, our TransDigm Group Co-COO, to review our recent performance and a few other items. Patrick Murphy: Good morning, everyone. I'll start with our typical review of results by key market categories. For the remainder of the call, I'll provide commentary on a pro forma basis compared to the prior year period 2025. That is assuming we own the same mix of businesses in both periods. For reference, the market discussion includes the recent acquisition of Simmonds Precision Products, the pending acquisitions of Stellant, Jet Parts Engineering and Victor Sierra are excluded. In the commercial market, we will split our discussion into OEM and aftermarket. Our total commercial OEM revenue increased approximately 17% in Q1, compared with the prior year period. As we anticipated, commercial OEM revenue in the first quarter showed strong growth as we supported higher build rates. Commercial transport OEM revenues, which excludes the biz jet submarket were up 18% over the comparable prior year period. As you will recall, Boeing experienced production issues in late 2024 that resulted in a drop in OEM demand in our first fiscal quarter last year. Our Q1 FY '26 growth is driven by the increase in the Airbus and Boeing OEM build rates, and the bounce back from the Boeing production disruption in the prior year. Commercial OEM bookings in the quarter were up compared to the same prior year period, and ran ahead of our expectations, and significantly outpaced sales. Commercial transport bookings growth was up into the high teens percentage for the first quarter. The bookings levels for commercial transport OEM continued to show that the market is recovering from the various disruptions seen over the past 1.5 years. However, the OEM recovery to this point has been bumpy, and uneven on a quarterly basis, and we expect that to continue as OEMs in our Tier 1 and Tier 2 customers rightsized inventory levels. We remain encouraged by the continued progress of the 737 MAX production line as well as the overall progress we are seeing at both Boeing and Airbus as they ramp their production rates. Our operating units are well positioned to support the higher production rates as they occur. The commercial OEM guidance we are giving today contains what we believe is an appropriate level of risk around the production build rates for the 2026 fiscal year. Our fiscal 2026 commercial OEM revenue guidance range, which as Mike mentioned, is unchanged, is high single digit to mid-teens percentage growth, and contemplates reasonable risks around the Boeing and Airbus rates. Now moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 7% compared with the prior year period. This quarter, all submarkets within commercial aftermarket experienced positive growth. Our commercial transport aftermarket revenue growth, which excludes our biz jet submarket, was up 8% driven by solid growth at all 4 of the transport submarkets, freight, interiors, engine and passenger. Overall, we saw strength in commercial aftermarket transport across a large majority of our operating units. Q2 bookings in commercial aftermarket were also strong, running ahead of our expectations, solidly outpacing sales and supporting the full year growth outlook. Additionally, POS at our distributors grew in the double digits on a percentage basis this quarter. As Mike already mentioned, our commercial aftermarket revenue growth guidance is unchanged, and with positive leading indicators in bookings, book-to-bill ratio, and distribution sales, we fully expect 2026 commercial aftermarket growth in the high single-digit percentage range. Additionally, as we have said before, our operating units continue to vigilantly monitor market share and competitive losses. We see no material loss in this space from either USM or PMAs. Now shifting to our defense market. Defense market revenue which includes both OEM and aftermarket revenues, grew by approximately 7% compared to the prior year period. Over the past year, we have seen strong growth in defense, driven by new business wins and strong performance by our teams in both domestic and international markets, driven by the growth in defense spending around the world. Q1 defense revenue growth was well distributed across our businesses and customer base. We saw similar rates of growth in both OEM and aftermarket components of our total defense market, with OEM running slightly ahead of aftermarket. Defense bookings for the quarter were robust, up year-over-year, higher than our expectations and significantly surpassing sales for the period. Bookings started the year strong and continue to support our unchanged 2026 defense guidance for mid-single digit to high single-digit revenue growth. As we have said many times before, defense sales and bookings can be lumpy. We are confident that the bookings and sales will meet our expectations, but forecasting them with accuracy and precision, especially on a quarterly basis, is difficult. Overall, we are encouraged by the backlog that is building in our defense market segment. Moving on to our value drivers. We continue to see strong success winning new business at our operating units, and I would like to highlight a few new business program wins from last quarter. Our Chelton business was awarded a multimillion dollar contract from Lockheed Martin to supply their latest generation very high-frequency, ultra-high frequency antenna system. These systems are used in line with the upgraded radios that are now standard fit for production on C-130J aircraft. In December, the IrvinGQ business was awarded a $24 million contract from the U.S. Department of Defense for provisioning of floating decoy systems to protect the U.S. Navy Arleigh Burke Destroyers. These systems are used as one of the last lines of defense for ships under missile attack. U.S. DOD have requested these deliveries to start in FY '26, the overall program period of performance over the next 4 years. Just a quick update on our acquisition integration activities. We continue to make good progress integrating our two most recent acquisitions. Servotronics and Simmonds Precision. Both integrations are being led by experienced EVPs, and we have augmented the existing teams with seasoned individuals from other TransDigm operators to accelerate their progress. It's still early, but our experience to date indicates that these are going to be 2 very good additions. I'd like to wrap up by recognizing the concerted efforts of our operating teams during the first quarter of fiscal '26. We are pleased with the solid operational performance our teams delivered for our shareholders this quarter. The teams continue to execute on our value drivers and it was a good start to our fiscal '26. As we progress further into the year, our management teams remain focused on our consistent operating strategy, delivering on new business opportunities, and meeting increased customer demand for our products. With that, I'd like to turn it over to our Chief Financial Officer, Sarah Wynne. Sarah Wynne: Thanks, Patrick. Good morning, everyone. I'll recap the financial highlights for the first quarter and then provide some more information on the guidance. First, on organic growth and liquidity. In the first quarter, our organic growth rate was 7.4% and all market channels contributed to this growth, as previously discussed by Mike and Patrick. On cash and liquidity, free cash flow, as we traditionally define as EBITDA less cash interest payments, CapEx and cash taxes was just under $900 million for the quarter. This is higher than our average free cash flow conversion due to the timing of our interest and tax payments in the quarter. This will normalize throughout the year as these payments pick up next quarter. We expect to steadily generate significant additional cash throughout the remainder of fiscal 2026. Our free cash flow guidance is unchanged, and we continue to expect free cash flow of approximately $2.4 billion for fiscal 2026. As a reminder, this guidance doesn't include the pending acquisitions or interest expense from any potential debt issuance to fund those acquisitions. Below that free cash flow line, an investment of net working capital consumed approximately $30 million for the quarter. For the full year, we expect working capital tool to end roughly in line with historical levels as a percentage of sales. We ended the quarter with approximately $2.5 billion of cash on the balance sheet after paying for the Simmonds acquisition at the beginning of the quarter. Our net debt-to-EBITDA ratio was 5.7x, down from the 5.8 at the end of last quarter. While we don't target a specific amount of cash that we like to have on hand, our current balance, and available debt capacity, provides ample liquidity to fund the recently announced pending acquisitions through a likely combination of cash on hand and new debt issuance, based on our strategy of operating in the 5 to 7x net debt-EBITDA ratio range. Our net debt-to-EBITDA target range also preserves plenty of capacity for additional acquisitions should opportunities arise along with other capital deployment options. Regarding our debt, our capital allocation strategy is to both grow actively, and prudently, manage our debt maturity stacks by keeping near-term maturities well extended. In addition, approximately 75% of our $30 billion gross debt balance is fixed through fiscal 2029. This is achieved through a combination of fixed rate notes, interest rate swaps, caps and collars. This provides us plenty of protection at least in the immediate term. Our EBITDA to interest expense coverage ratio ended the quarter at 3.1x, which provides us with comfortable cushion versus our target range of 2 to 3. Additionally, during Q1, we took advantage of a dip in the share price and opportunistically deployed a little over $100 million of capital for repurchases of our common stock. These share repurchases are anchored in the same targeted return criteria we have consistently applied over the years. We continue to seek the best opportunities for providing value to our shareholders through our capital allocation strategy. We think we remain in good position with adequate flexibility to continue to pursue M&A opportunities, or return cash to our shareholders via share buybacks, and/or additional dividends during the course of fiscal 2026. With that, I'll hand it back to Jaimie, our Director of Investor Relations. Jaimie Stemen: Before we open the line for Q&A, I'd ask everyone in the queue to consider your fellow analysts and ask one question only so we can get to as many people as possible today. Operator, can you please open the line? Operator: [Operator Instructions] And our first question comes from the line of Sheila Kahyaoglu with Jefferies. Ellen Page: It's actually Ellen on for Sheila this morning. Just looking at your profitability in the quarter, it was better than expected given fiscal Q1 is typically seasonally weaker, and it's in line with your guidance for the year. How are you thinking about the puts and takes through the year and the cadence of profitability? And what is -- kind of what's driving that strength in the quarter? Michael Lisman: Sure. We had a stronger start to the year on the margin front than we thought, the 52.4% that we came in at on EBITDA was a little bit better than we expected. In terms of what contributed to that, while commercial OEM did have a strong growth quarter, it was up 17% on a pro forma basis, as Patrick said, that was a little bit light of where we thought it would come in, a couple of points. So we got a bit of tailwind on the margin just from the mix that came with that. And then separate from that, the teams at our op units have done a really good job in terms of getting cost out, productivity projects, driving a higher margin for us in Q1. Hopefully, that continues for the balance of the year. There's probably a bit of conservatism embedded in the guidance, too, from here on out. I think as you guys know, we aim to be conservative on some of the projections. We'll see how the year evolves in terms of the growth rates as commercial OEM bounces back. As you know, that's expected to be the highest growth end market for us. So that could present a bit of a headwind, but overall, a solid start to the year. Operator: And our next question comes from the line of Myles Walton with Wolfe Research. Myles Walton: I was wondering maybe, Mike, could you comment a bit on the distributor POS and that's been running double digits now for the last several years, every quarter, but 3 of the last 5 times aftermarket has [ fallen short of ] that double-digit mark. I think it's more engine sensitive. So maybe you can confirm that, or how much of information value there is? Then within the aftermarket growth, if you can just tell us what is lagging in that plus 8%? Is interiors in the low single digits still? Michael Lisman: Sure. So a couple of things on the POS point. We do, through the POS channel weighed a bit more heavily towards engine there. So that has what has been a little bit of what's contributed, driven it up. In terms of where distributors are generally, as I think we mentioned on last quarter's call. During our fiscal '25 year, we probably saw 1 to 2 percentage points of drag on the overall CAM growth from distributor inventory changes. That was a headwind at the time. Some of that persisted into our Q1 here, probably a little bit more elevated than the 1 or 2 percentage points. That should turn the corner as we head into the year. Again, it's not rare to see these kind of movements in distributor inventory levels. So as that rebounds into the balance of fiscal '26 that continued headwinds should hopefully turn into a bit more of a tailwind. In terms of the end market color, Patrick, do you want to provide a little bit of commentary? Patrick Murphy: Yes. I mean one of the -- we see that's a really solid growth rate on our engine end market for CAM, as well as our airframe and airline being in line with what our expectations are. Biz jet is a little bit lighter here, and that's what's kind of holding us back. But overall, these are well within our expectations, and it was good growth in the first quarter. Michael Lisman: And all of the submarkets were -- when you strip out the business yet, which was obviously at 1% and dug us back a little bit. All the submarkets within commercial transport at 8% for commercial transport were above sort of the 7% overall CAM growth rate for all of them. So good to see uniformly distributed growth. Myles Walton: Just one clarification on the 7.4% overall company organic growth versus the subsectors, 17%, 7% and 7%? I know there's pro forma versus organic. But is the takeaway that Simmonds' significant growth underlying year-on-year, and that's what's driving most of that differential? Sarah Wynne: Yes. Myles, this is Sarah. I'll take that one. Yes, if you look at the market growth segments, which are obviously pro forma for Simmonds, we do see a little bit of upside in the market segments coming from Simmonds on that piece. The other bit that's playing into that delta difference, the 7.4% of organic, that includes our non-aero market segment. It's a smaller piece but it's lower than the average 7.4%. So that's the other bit of the delta that you see going on there. Operator: Our next question comes from the line of Gavin Parsons with UBS. Gavin Parsons: I just wanted to follow up on Myles' question on the lumpiness to make sure I'm just clear on the time frame we're talking about, and I appreciate that color. The 7% aftermarket growth rate in the quarter, so if half of 5% to 6% below peer growth was lumpiness, does that suggest that your core growth is more like 9% or 10% for aftermarket? Michael Lisman: I guess it depends how you define core growth. We've taken a bit of a headwind just because of the distributor lumpiness and some of the inventory in the channel, potentially the airlines. And it's -- as I tried to address in the prepared remarks, it's hard to quantify that exactly in what it might be because you don't get great inventory data from the airlines. You do from distributors, but not always from the airlines in terms of great detail on exactly what they have. As we rack up the math over the last 4, 5 quarters or so, if we're 5 or 6 percentage points [ light ] versus where the rest of the market is, about half of that is this kind of lumpiness, both at airlines and at the distributors. And that's what -- the point we were trying to raise in the prepared comments. Gavin Parsons: Was the destocking last year more specific to the first half or second half? Michael Lisman: No, I think it was pretty uniformly distributed throughout the year. It bounces around a little bit quarter-by-quarter as you would guess, with as many distributors and op units as we have, but generally fairly uniformly distributed. Operator: Our next question comes from the line of Noah Poponak with Goldman Sachs. Noah Poponak: You mentioned aftermarket -- aerospace aftermarket bookings grew faster than revenue. I was hoping maybe you could quantify how much faster the bookings growth was compared to revenue, or a book-to-bill? And I don't know if you also had that for full year '25 just so we can understand if things are accelerating, decelerating, staying the same? And then as we go through the rest of the year, how much should we be taking into consideration that compares from last year in aerospace aftermarket just because 2Q is a much different comp than 3Q? Or do you expect the remainder of the year's growth to be pretty even? Michael Lisman: Yes. No, it's Mike. I'll take that one. I think you know how we look at the quarterly CAM bookings trends. We don't focus on it too much. We look at a rolling 12-month average. So I don't want to go down the path of saying too much on the quarterly bookings targets that I think everybody expects to get it every single quarter. That said, as Patrick said in his comments, prepared comments, it ran nicely ahead of what the sales growth was this quarter into the double digits. But we're not going to go and give a specific number, but good growth that we think sets us up nicely for the rest of the year. When we look at CAM growth, we look at a rolling 12-month average stat. And as you look at the 2025 level, and where we sort of tracked out all the calendar last year, it was nice signals growth, was above 1.0. But again, we don't disclose the exact amount. That's what set us up well as we looked in and forecasted out FY '26 and what the growth could be, it made us somewhat confident that we'll have at least a little bit of backlog there to hit the shipments target. On the quarterly comps and where things go from here, we don't want to say too much. This sort of sounds like we're giving quarterly guidance. We'll see how the year progresses. As we give the guidance, we guide for a full year because we know how lumpy commercial aftermarket can be. We feel really good about the high single-digit guidance for the full year, but I'm hesitant to give anything that sounds like we know exactly what it's going to look like on a quarter-by-quarter basis as we get there. Noah Poponak: Okay. I appreciate that. And just one clarification, the lumpiness in distribution being a headwind, and then the statement of POS at distribution grew double digits. What's the difference between those two comments on one being a headwind, one being a tailwind from distribution? Michael Lisman: Well, I think the point is distributor inventory is contracted. So we're getting headwinds of selling into distributors and then their on sale rate into the market from the distributor is higher. So the net inventory position is contracting a bit. Noah Poponak: Do you have visibility into how much inventory of yours is left in the channel? Michael Lisman: We track it quite a bit at the op unit level of distributors, and we think as the rest of the year shapes up, this should be something that instead of a headwind should hopefully become more of a tailwind for us as we head out through Q2 through Q4. We did take a bit of a headwind in Q1, a couple of percentage points. Operator: And our next question comes from the line of Scott Mikus with Melius Research. Scott Mikus: Mike, quick question on the Jet Parts Engineering and Victor Sierra acquisition. That should accelerate your commercial aftermarket growth, but was part of the rationale also to deter other companies from PMA-ing your OEM parts, because you could then retaliate in PMA or DER their parts as well? Michael Lisman: No. No. We bought these businesses because we think they're fundamentally good businesses on which we can make a 20% IRR. The same TransDigm logic we've always applied to M&A, the businesses will run and operate themselves. And that's why we bought these two companies. Scott Mikus: Okay. And then thinking about the deal model, normally, you let your operating units run autonomously. But is there upside to your deal model if Jet Parts Engineering and Victor Sierra start distributing the PMAs from your other operating units? Michael Lisman: Potentially, but our business run themselves. So anything of that sort would have to be an arm's length agreement between the op units and those businesses. That certainly wasn't in our acquisition case and not what we banked on. I think, as you guys know, our 53 businesses and going on 56 will run themselves independently. Operator: And our next question comes from the line of Robert Stallard with Vertical Research. Robert Stallard: Just a couple for me. First of all, on the acquisitions. they looked a bit pricey. And I was wondering if that was reflective of broader M&A market trends in aerospace and defense at the moment. And then secondly, do you expect to see similar opportunities for value-based pricing readjustments going forward? Michael Lisman: I guess on the valuation multiples, you're always -- theoretically, you'd love to buy things for lower than you actually have to pay for them. But at a certain point, the market is what it is, and we have to pay up, especially in the current environment to own these businesses. What we did pay is not anything that we view as too high. Again, it foots to math that basically results in the same 20% sort of IRR we always targeted. So we're happy to own the businesses. We think we paid fair prices, but nothing that was too high given the valuation environment we're in today. Robert Stallard: And on the pricing? Michael Lisman: And on the pricing, I think it's going to be similar playbook as we've deployed our acquisitions over time at TransDigm. Basically, no change there. Operator: And our next question comes from the line of Scott Deuschle with Deutsche Bank. Scott Deuschle: Patrick, I think in your prepared remarks, you mentioned that you've seen no material share loss from PMAs. I guess within that, what would you define as material? Is it less than 1% share loss per year? Patrick Murphy: We just think that, that's something small and it's not something that we're seeing. Our operating units is where they're sort of fighting this, or looking for that potential risk to pop up. And those are the ones, those are the teams that are really considering what they should be doing. Right now, our teams are delivering very well to the market. They're satisfying the demand for our -- for all of our customer needs. Our on-time delivery has improved significantly over the last few quarters over the last year, and I think we're well positioned to defend ourselves there and it's just not something that we see as an issue. Scott Deuschle: Okay. And then just to clarify, does Jet Parts currently have many PMAs on existing TransDigm products? And is there any kind of conflict of interest that needs to be managed through there? Or can it all just be done by the typical TransDigm playbook of running them as their own entities? Michael Lisman: Yes. I think the playbook is they'll run themselves as their own entities. That's the game plan for all of our businesses. Consistent with how we do it here, and there's no significant or sizable overlap to your other question. Operator: Your next question comes from the line of Ronald Epstein with Bank of America. Jordan Lyonnais: This is Jordan Lyonnais on for Ron. On Jet and Victor, if we look out 3 years and you start to realize revenue synergies, do you guys have a target or an idea of how much you would like to see your PMA business grow? Or what percentage of the portfolio you'd be comfortable with? Michael Lisman: That's not necessarily how we looked at it in terms of overall TransDigm. Again, we footed as we bought these businesses, we modeled it up and we built a 5-year LBO model, same approach we've always taken and ask ourselves, can we hit 20% IRR at the price we have to pay. And we think that's the case with both of these businesses, but we're not footing necessarily to a total percentage growth target for TransDigm's overall CAM in year 5. We think these are great businesses. That's why we bought them. We think there's a good growth trend here in PMA. It's something that's not going to see explosive growth, but it's probably going to grow a little bit above the market. This gives us position in that space and a way to benefit from that growth. And again, we look forward to getting both deals closed and owning these businesses and then watching them continue to grow. Operator: And our next question comes from the line of Gautam. Khanna with TD Cowen. Gautam Khanna: Just to follow up on the PMA acquisitions. I'm curious if the margin structure in that type of business mirrors that of TransDigm's core business. Because when we look at companies like HEICO, their segment margins in the related business are like half that. Admittedly, that's -- I'm sure there's differences in accounting, or what have you, but I'm just curious, is there any structural limitation to moving the margins of the acquired businesses up towards the company average? Michael Lisman: We think these are great businesses. We're excited to own them both. In terms of margin targets, we did not model these as getting where -- anywhere close to the TransDigm margin level. There's good volume growth here. That's part of what drives and helps you get to the 20% IRR. But in terms of how we model these businesses up, we did not model the margins getting to the TransDigm level. Gautam Khanna: Okay. And do you know if the -- those businesses have an engine, if you will, internally to constantly develop new PMA parts? And if so, kind of at what rate they've been introducing new PMA parts per year? Michael Lisman: Yes. And they both do. They've got engines in both businesses that do this. That's what drives the growth, and they've got a solid track record of having done it. In terms of the exact numbers they've done, we know it, obviously through our diligence. It's good sizable growth they drive every year through those efforts. And we're not going to disclose the exact numbers, but it's pretty sizable introductions that drive good revenue growth. Gautam Khanna: Okay. And last one, just quickly on M&A beyond that what you've announced, how would you characterize the pipeline? Michael Lisman: Just as I said in the comments, active in the small to midsize range. We're working away at it. M&A is impossible to predict. We're working hard. Operator: And our next question comes from the line of Ken Herbert with RBC Capital Markets. Kenneth Herbert: Mike, and Patrick and Sarah, thanks for the time. Maybe Mike, just to maybe pivot over to the commercial OE side. Can you just talk about some of the puts and takes as we think about the range of high single to mid-teens on the guide? And just to clarify, you feel like you're basically through the destock you've seen on the MAX and some of the other major programs at Boeing? Patrick Murphy: Yes, Ken, I'll take this one. This is Patrick. Yes. We do think we're through that destocking. So as the both -- as Boeing had their strike issues last year, what we saw from our Tier 2 and Tier 3 customers that we're supplying, they continue to order at kind of mixed rates. And so what that meant was there was some bleed out over the past, let's say, quarter to 2 quarters as they're kind of getting back to the normal pattern. That, we think, is done at this point in time. So we're encouraged that we're all in lockstep supporting the Boeing and Airbus build rates. As far as what we expect to see going forward, right now, there are positive indicators from Boeing and Airbus about what they can do. And that should create some tailwind for us as we continue to support that. We're encouraged by what we see, but there's still risk, right. There's still -- there are still things that could go wrong in supply chain, as you heard about from some of the other companies that support this growth rate in this business segment. Kenneth Herbert: Thanks, Patrick. So as we just think about the range, I guess, I don't want to put words in your mouth, but if things go according to plan, that's probably mid-teens, but the high single just reflects maybe some conservatism rightly so just sort of based on recent track record? Or how would I interpret that? Patrick Murphy: I think that's fair to say as well as there are some. Other -- it's not all just commercial transport, Boeing and Airbus that factors into our number here. Michael Lisman: And I would add too, Ken. I mean this is a segment, as you know, the last 2 years, the ramp-up has been more challenged than we thought. So hopefully, our range and as broad as we made the brackets ends up being conservative at the low end, but time will tell. Past 2 years, you probably would have liked to have some of that cushion and we'll see whether or not this year we need it again. Operator: And our next question comes from the line of Seth Seifman with JPMorgan. Seth Seifman: I wanted to start off. I think you said a little bit earlier, you hope the margin forecast for the year would be conservative. I think it's probably around what you did in the first quarter and had Simmonds in there for more or less the entire quarter and margin usually moved up through the year. Is there -- other than conservatism? Is there anything to be aware of regarding why that margin wouldn't ascend through the year? Michael Lisman: I think it's a bit of conservatism and then also just we'll see where commercial OEM goes and how that ramp up and the growth comes from there. As you guys know, that's a lower margin segment for us. So as that outgrows other things presents a bit of a headwind. We're early in the acquisitions. So we're probably conservative in the margins we forecasted for both those businesses as well. So time will tell. But I think it's fair to say there's a healthy dose of conservatism here on the margins included too. And we'll aim to be there. Seth Seifman: Right. Okay. And then just following up. I know you're not guiding for the acquisitions, but in the past, I think maybe you've given -- you foreshadowed a little bit what impact acquisitions could have on margin. When we bring in these three pending deals, how do we think about where the margin resets to from where it is now? Michael Lisman: Yes. We don't want to give guidance until things actually close. So we'll cross that bridge when we come to it. I think you guys know the way past acquisitions go, usually dilute you down a little bit on the margin. And it'd be safe to assume that you can expect something like that with these 3 new op units as well. Operator: And our final question comes from the line of Kristine Liwag with Morgan Stanley. Kristine Liwag: Maybe pivoting away from commercial aerospace and PMAs. Your defense business is now more than 40% of the portfolio. And if you look at the ecosystem, a lot of the primes have called out some of the sole source providers in the supply chain as creating bottlenecks for the ability to convert the $540 billion record defense backlog into revenue. Your pricing model has gotten a lot of attention, but you're operating excellence also is a significant variable for the company. Is this an opportunity for you to roll up some of more of these mom-and-pops shortages. How do you see that opportunity set there? Because some of the companies we're seeing that are providing these solutions, you're seeing 20% plus growth in those kinds of ecosystems. It would be great to get your perspective here. Michael Lisman: Kristine, I think you know what we -- from an M&A standpoint, we go out and we look at commercial and defense businesses. We're looking for highly engineered aerospace and defense components, and that's how we size it up, regardless of whether they're doing commercial or defense work. We think we're a great supplier to Department of Defense directly, as well as to the primes in terms of on-time delivery and high-quality products. A lot of the businesses we acquire that do defense work, it's usually a bit of their revenue. We get the on-time delivery, the performance up, the quality up, and that's why I think folks generally like and enjoy working with TransDigm op units because they're fast, nimble and they do what they say they're going to do, and hit the delivery dates. We think that's definitely value add to the folks who are in the supply chain up to the prime level, because it gets them the parts they need to satisfy their end customer, which is the U.S. or international governments. In terms of mom and pop shops and M&A and supporting them is, we're not actively out targeting from an M&A standpoint, mom-and-pops in the defense world. It is more larger acquisition focused and again, not focused on any one end market. It's commercial and defense. And if we had our pick, we aim to buy more commercial rather than defense. We're primarily a commercial supplier. Kristine Liwag: Super helpful. And then on the growth question on the revenue side. When you look at the backlog, we've seen the backlog for big defense primes up double-digit CAGR in the past 3 years. How conservative is your defense outlook? And what are the variables that could potentially get you through a higher revenue growth for the year versus your guidance? Michael Lisman: Yes. I think that what you're saying is true. We're seeing some good demand. Our bookings are strong. They're ahead of expectations outpacing our sales. And so if that were to continue, we could see some upside here. But these lead times are a bit longer as well, Kristine. And it's hard to anticipate exactly how that will play out over the next, say, 6 to 9 months. But over the long term, we are seeing good positive indicators in this market segment, and we're well positioned to support that. Operator: I'll now hand the call back over to Director of Investor Relations, Jaimie Stemen, for any closing remarks. Jaimie Stemen: Thank you all for joining us today. This concludes the call for today. We appreciate your time, and have a good rest of your day. Operator: Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.
Operator: [Operator Instructions] I'd now like to introduce CEO, Andre Rogaczewski; and CFO, Thomas Johansen. Speakers, you may now begin. André Rogaczewski: Thank you. Good day, and welcome to this presentation of Netcompany's results for Q4 and full year 2025. My name is Andre Rogaczewski, and I'm the CEO and Co-Founder of Netcompany; and I'm joined today by our CFO, Thomas Johansen. And before we get going, there are some important disclosures that I need you to read through. So could we have Slide #2, please. I will pause for 30 seconds here and let you all have a read-through of these important disclosures. And with that, can we go to Slide #3, please. The topic of today's presentation is our performance for Q4, full year '25 and financial guidance for '26. I'll start by walking you through the business highlights for Q4 and '25 in general. And once I'm done, Thomas will go through the financial performance, including our guidance for 2026 before we can open the call for questions. And can we have the next slide, please? Over the past year, we've navigated a landscape defined by geopolitical uncertainty. In times like these, the call for resilient, secure and digitally sovereign Europe has never been more urgent. At Netcompany, we are not just observing these changes. We are actively building the solutions that Europe needs to thrive. For both governments and private enterprises, the path forward is clear. We must move beyond legacy systems, streamline administration and responsibly embrace the power of AI. Why? Because technology that truly works and deliver tangible benefits is the single most important force that can bring Europe to a competitive edge. It's what will strengthen our position in the global race, a race where we, as a continent, stand for true democratic values. We have clearly differentiated our offerings from our peers, which is also why we continue to grow by using platforms and products and AI will become a force in the industry and someone other vendors strive to become. At the crucial and complex space where we operate developing regulated IT solutions that truly matter, we have a clear and ambitious goal to become a European tech giant. That is the future we are building. We will get there by accelerating growth and profitability by transitioning from a pure IT service model to a hybrid model, driving expansion through a portfolio of scalable products and platforms and related expertise. The future does not belong to traditional IT consultancy companies building solutions from scratch, but rather to European platform companies using components and products and AI to deliver in a fast, reliable and responsible way. And in 2023, we launched a product and platform strategy embracing this development, and we are strongly positioned to take market share from the more traditional players. Our talented employees embrace this development, and we continue to look at how we can become better in everything we do. To us, this is not a threat but an opportunity. And in 2025, we realized an eNPS of 32 compared to 22 in 2024, highlighting that the trajectory we are on is supported by our employees, too. With the combination of our products, platforms, AI and talented employees, I believe that Netcompany is the most modern and future-pointing company in our sector. That is why when I look to 2026 and see the uncertain global geopolitics that the world finds itself in, I'm comforted by knowing that Netcompany will raise the challenge and enable that we digitize Europe responsibly making us stronger, more competitive and resilient. To get there, first, we need to show velocity. Europe's legacy needs to be replaced and new systems designed to embrace and embed AI must be put in place. Our dedication and skills combined with our platforms and products will get us there. Secondly, we need to show determination by consistently delivering on time, at budget and within the required quality. This is how we'll continue to stay competitive by acting intelligently, by reusing as much as possible, adhering to our methodology, we will show the way. We are uniquely combining our own platforms and products with our abilities as a system integrator. This gives us the edge. This is how we will prevail. This is how we're different. We are confident in our direction and immensely proud to be at the forefront, building the digital foundation for a strong, independent and prosperous Europe. And we will continue the momentum we've built to push even further in '26. Europe needs us more than ever. And can we have the next slide, please? And 2025 was also the year we cemented our position in the financial services industry with the merger of SDC into Netcompany Banking Services. The integration has moved swiftly and since the beginning of this year, all employees of Netcompany Banking Services have been integrated at our headquarter office in Copenhagen, fostering closer collaboration with colleagues from across the group. We have launched the first new modules for our Netcompany Banking Services customers, and we will continue with ongoing new releases. During the second half of 2025, we have seen a significant improvement in margins, and we expect more to come as synergies will be realized. The integration is progressing faster than initially anticipated and the synergy targets announced in connection with the Capital Markets Day remain unchanged. And can I have the next slide, please? That our purpose and ambition for a prosperous and digital sovereign Europe have had merits with clients in both the private and public segments in our markets is supported by continued contract wins throughout the quarter. In the U.K. public sector, we have been selected by HMRC to implement and operate the next phase of the Trader Support Service, TSS. The solution will be built on a market-proven ERMIS customs product and our AMPLIO platform. Netcompany Banking Services was selected by OBOS-Banken in Norway for the delivery and maintenance of the new core banking system. The agreement is a testimony to Netcompany Banking Service approach to open architecture, flexible integration and a high degree of automation. In the Danish private sector, we've expanded our agreement with Forca bringing Festina alongside to deliver the pension solution for the future with OpenAdvisor. The implementation of OpenAdvisor platform from Festina will be a part of the complete pension solution delivered to Forca and its customers. And can we have Slide #7, please? In the Danish public sector, Netcompany has been selected as a vendor under a framework agreement with the Danish Agency for IT and Learning. The framework covers development and maintenance of a portfolio of critical education and grant administration systems. And in the private sector in Greece, we have secured a 3-year extension with Cosmote Payments. The extension includes development, maintenance and operational support across the full Cosmote Payment ecosystem. Furthermore, in the private sector in Greece, we have been awarded a contract by the National Bank of Greece covering several key strategic areas, including the development of the bank's AI framework. And with that, I will now pass on the word to Thomas, who will go through the numbers. Please, Thomas, go ahead. Thomas Johansen: Thank you for that, Andre. Like already mentioned, I am the CFO of Netcompany, and I will go through our financial performance for Q4 and for the full year 2025. So if we move past the breaking Slide #8 and straight into Slide #9, please. We ended 2025 with a strong quarter and grew organic revenue in constant currencies by 10% compared to Q4 2024. Currencies impacted revenue growth negatively by 0.5 percentage points in the quarter, resulting in reported organic revenue growth of 9.5%. Organic growth was driven by 20.7% growth in revenue from the private sector and 5.2% growth in revenue from the public sector. Revenue growth was driven by a mix of new wins related to our products and platforms and revenue generated from existing customers with contributions from all segments. Group revenue grew 35.5% in the quarter, of which 25.4 percentage points were nonorganic related to the inclusion of Netcompany Banking Services. Continued the strong performance in Q3, Netcompany Denmark revenue increased 10.2% compared to Q4 2024, mainly driven by 27.9% growth in the private sector with contribution from multiple verticals, most notably in the financial services industry with both new and existing customer engagements. Netcompany SEE & EUI grew revenue 6.9% compared to the same period last year. The growth was driven by both the public sector, including the EU and the private sector, which grew 4.9% and 12.7%, respectively. Netcompany U.K. also continued its strong growth from the previous quarters and grew revenue 28.1% compared to Q4 '24. The growth was driven by both the public and private sector with increased engagements within Tax and Customs and Defense and Resilience. In Netcompany Banking Services, revenue decreased 3.9% compared to pro forma revenue in SDC in Q4 2024. SDC results in Q4 last year were positively impacted by one-off revenues from customer "outconversions" and exit fees. In Netcompany Norway, revenue increased by 7.4% compared to the same quarter last year. And in Netcompany Netherlands, revenue was in line with the same quarter last year. And can we move to the next slide, please? During a year when most of our peers have seen little to no growth, Netcompany grew organic revenue by 7.9% in constant currencies compared to 2024, fully in line with our guidance given at the beginning of the year. Organic growth was driven by both public sector, including EU that grew 7.4% in '25 and the private sector that grew revenue 8.4%. Growth in both segments was supported by our go-to-market strategy, focusing on dedicated industry verticals, combined with our embedded AI product and platform solutions. Group revenue grew 20.8% in 2025, of which 13 percentage points were nonorganic related to Netcompany Banking Services. And can we move to the next slide, please? In Q4 2025, organic adjusted EBITDA, that means excluding NBS, before allocated headquarter cost increased 21.3% to DKK 346.4 million, yielding an organic adjusted EBITDA margin of 18.8%, an increase of 1.7 percentage points compared to the same quarter last year, all in constant currencies. Group adjusted EBITDA before allocated headquarter costs increased 41.2% to DKK 403 million in Q4, yielding an adjusted EBITDA margin for the group of 17.7% compared to 17% in Q4 2024, even with the inclusion of Netcompany Banking Services, which actually impacted margin negatively by 1 percentage point. In Netcompany Denmark, adjusted EBITDA margin increased 4.7 percentage points to 26.2% in Q4. The significant development was a result of improved utilization and our continued focus on scaling revenue without a one-to-one relation in FTE growth, underpinned by a 2.5% increase in client-facing FTEs compared to double-digit revenue growth in the quarter. In Netcompany SEE & EUI, adjusted EBITDA margin was 13.3% in Q4 2025 compared to 15.5% in the same quarter last year. The decrease in margin was a result of lower license revenue income recognized in this quarter compared to the same quarter last year. In Netcompany U.K., adjusted EBITDA margin increased by 4.4 percentage points to 14% in Q4, an improvement reflected by better project execution as well as continuing focus on converting freelancers into own employees and especially public deliveries. In Netcompany Norway, adjusted EBITDA margin was breakeven in Q4. And in Netcompany Netherlands, margin decreased to 18.8% based on timing events. In Netcompany Banking Services, the adjusted EBITDA margin was 13.3% in the quarter compared to pro forma adjusted EBITDA margin of 6.4% in SDC in the same quarter last year. On a sequential basis, margin in Netcompany Banking Services more than doubled compared to Q3 as the integration is progressing faster than anticipated, and we're starting to see the impact from synergies materializing. The performance in Q4 2025 fully supports and validates our expectations for synergies. And with the recent win of OBOS in Norway, we are confident that Netcompany Banking Services will be able to take market shares going forward. Can we have the next slide, please? For the full year 2025, organic adjusted EBITDA margin before allocated headquarter cost was 17.8% compared to 17.6% last year despite increased time spent on product and business development during the first half of the year as well as time spent on preparation for the SDC integration. Group adjusted EBITDA margin before allocated cost from headquarter was 16.9% compared to 17.6% in the same period last year. The lower margin was fully attributed to the inclusion of Netcompany Banking Services into the group. Can we have the next slide, please? In Q4 2025, we employed an average of 9,752 FTEs, equal to an increase of 1,500 FTEs or 18.2% compared to Q4 2024. Of this, 7.8 percentage points were organic and 10.4 percentage points were nonorganic as a result of including Netcompany Banking Services into the total number. Attrition rate for the last 12 months was 18.1% for the organic part of the group, which was in line with Q4 2024. Netcompany Banking Services is right now in the initial phase of a significant structural reorganization. Stand-alone attrition rate for Netcompany Banking Services was 27.5% for the last 6 months. And can we go to the next slide, please? Along with previous years, a continued focus within our group is that of working capital management. And while our cash conversion ratio was lower at 98% compared to 147% in 2024, we are still satisfied with our result. First of all, we are comparing against an extraordinarily high cash conversion ratio in 2024. Secondly, two of the most important metrics indicating whether we are on the right track in our focus on working capital management, both improved in 2025. The relative share of net work in progress and accounts receivables combined relative to revenue decreased compared to last year as did days of sales outstanding. We ended the year with DKK 287 million of cash at hand, up slightly from last year. Our leverage was 1.6x, naturally impacted by the acquisition of SDC, but still at a level giving us strong balance sheet momentum into 2026. During the year, we have executed share buybacks of DKK 500 million, bringing our accumulated share buyback to DKK 1.3 billion in the period 2024 to '25. We canceled 2.5 million shares in March 2025, and we plan to cancel another 1.5 million shares in connection with the upcoming AGM, reducing our outstanding capital by more than 8% over the last years. To complete our 3-year committed share buyback program of DKK 2 billion, we have today initiated another share buyback program of DKK 750 million, of which DKK 700 million are to be executed in the calendar year 2026. And can we have the next slide, please? Revenue visibility for the group, excluding Netcompany Banking Services for 2026 amounts to DKK 5.3 billion, an improvement of 8.1% compared to 2025. Revenue visibility for Netcompany Banking Services for 2026 amounts to DKK 1.4 billion and solely relates to the private sector. And can we go to the next slide. Taking the current macro and geopolitical uncertainty into perspective and observing pipeline and revenue stability at the beginning of the year, we expect our group revenue to grow between 15% and 20% measured in constant currencies in 2026, including Netcompany Banking Services. Excluding Netcompany Banking Services, we expect revenue to grow between 5% and 10%. From a margin perspective, we expect to deliver adjusted EBITDA margin between 15% and 18%, also in constant currencies and also including Netcompany Banking Services. Excluding Netcompany Banking Services, we expect adjusted EBITDA margin between 16% and 19%. Based on our market position, our superior product and platform offerings, we remain committed to our long-term targets, and we expect to keep winning market shares in existing and new markets in the years to come. And with that, we've concluded the presentation of Q4 and the annual report. And if we move to the Q&A slide and open the call for questions. Thank you. Operator: [Operator Instructions] The first question will be from the line of Daniel Djurberg from Handelsbanken. Daniel Djurberg: Congrats to a solid year-end. I have two questions, if I may. And I could start off with a little bit on how to think of the license revenue. I think it was roughly 1% of group's organic revenue in '25, in line with '24. But now we also have the banking services and the OBOS deal, et cetera. But should we still expect the license revenue to account for roughly 1% of the group also for '26, '27? That's my question. Thomas Johansen: Yes, I can start with that, Daniel, and thanks for the question. We don't give specific guidance on the different revenue lines in our group. But it's clear that with the focus we have on our products and platforms and with the maturing and commercialization of these, we would expect license revenue to be a larger and larger percentage of our total group. So without giving you any number, which you know what you asked for, but without giving you any specific number, we would expect that relative share to increase in the years to come. Daniel Djurberg: That's fair enough. And if I may ask you on -- you have increased the organic growth in client-facing FTEs, while you have had a reduction in non-client facing, partly due to internal work made in early '25. But my question is, is the mix now between the non-client and the client-facing FTEs now is at the optimal level or if you could ask for more improvements or have to think? Thomas Johansen: I'm quite sure that both Andre and I agree on this answer. So I'm going to give it because otherwise, Andre is going to give it for me. We would expect the level of non-client-facing FTEs that is the administrative part. We will expect that to continue to come down as it should. André Rogaczewski: Yes. Daniel Djurberg: Perfect. And may I also ask you a little bit on the geopolitical opportunity, if you call it. Recently, EU took a little bit more clear view on the need for the growing digital sovereignty and push towards tech funds and infrastructure funds, et cetera. But have you seen anything more taking place so far from this? André Rogaczewski: Yes. I think you can say that our dialogues with both governments and large enterprises are obviously affected by the whole movement towards more resilient and a much more strategically independent solutions in the EU space. That goes for both public and private solutions. Now all the new platforms we have been launching in the last 3 or 4 years, they've been launched in a way where they can be moved and they're very flexible and containerized. So in that sense, many of the customers are truly interested in using our technology. Operator: The next question will be from the line of Claus Almer from Nordea. Claus Almer: Also from my side, congratulations with a strong Q4. The first question goes to Denmark and the private sector. You had a very solid growth in Q4. To what degree does this come from, let's call it, AI-based projects? That would be the first one. André Rogaczewski: Yes. Thank you, Claus. That's a great question. Now what we see is that we don't sell AI like an independent offering. We sell AI as embedded offering. And that's something that's happened over the last 1 to 2 years. So customers are really interested in our experience and knowledge about specific industrial processes, for instance, in the financial industry. If you know something about life and pension or insurance or you know something about banking, that's the entrance ticket. But then at the same time, you have to show AI capabilities and treating that data with high levels of confidentiality and track where you use AI and why. If you're able to do that, you have a very compelling offering, and that's what we've been doing in Denmark. And that's what we see happening in the private sector. I hope that was answering your question. Yes. Claus Almer: Yes, it definitely did. Then coming to the MPS division. It seems like your synergies is coming in a bit faster than initially communicated at least. Should we also expect that compared to the split you did at the CMD that you might be a little more front-end loaded? And then secondly, what about the commercial opportunities? I think, Thomas, you said you expect to take market shares. Have you been more confirmed about your potential or it's more following the business plan? That will be the second question. Thomas Johansen: I'll start with the first part of the question, Claus, and Andre will take the second part of the question. When it comes to realization of synergies, what we can say at this point in time is that we reconfirm the plan that was laid out in connection with the Capital Markets Day, which is DKK 300 million to DKK 350 million, more or less evenly split over the years to come. And then with that said, we'll see how fast it goes. But as of now, there's nothing in our performance in Q4 that leads us to be worried about our ability to execute on that promise given earlier. So that's as far as I will go. And then I'll leave the other part to Andre. André Rogaczewski: Yes. I think that when it comes to commercial possibilities here, I mean, the market is definitely in Denmark is much more dynamic now than it was just 1, 2 years ago for certain. But what is maybe even more interesting is that you don't really need to be the core system vendor in order to be relevant, delivering all other types of modules. And if you measure on the frequency and the quality of the meetings we have with the overall sector in Denmark, but actually also in Scandinavia, that frequency is going up. We have a lot of meetings. We have some really qualified discussions of how to use separate modules, not necessarily engaging with the entire banking platform. And I see that as very promising. Claus Almer: Sounds great. And then just a small last question. VERA, is there any opportunity or possibility for you to share some thoughts about the progress you're doing with that solution? André Rogaczewski: VERA is -- well, there's a huge interest in VERA. And technologically, I think we have one of the best solutions in the market space. We have a lot of qualified dialogues, and we also have prototypes running with several customers. But unfortunately, I can't go into further details at this moment, but it looks promising. Operator: The next question will be from Balajee Tirupati from Citi. Balajee Tirupati: Two from my side, if I may. Firstly, you have cited focus on efficiency gains from AI to be supportive for the group's growth. Are you seeing clients also looking at Netcompany for cost-out projects expecting your ability to better leverage AI for productivity gains? And secondly, I appreciate Netcompany doesn't have time and material-based pricing. But even for fixed price contracts, do you believe the industry would be able to retain productivity gains and not required to pass that on to clients? André Rogaczewski: Yes, that's two very good questions. I mean your first question is, yes, we actually see that occurring now more and more. Not that it's a big part of what we do. Normally, we are hired to bring in an IT solution that will come up with the necessary effects. But yes, we also see some customers asking us to engage with them to realize the benefits. And when it comes to fixed price, I think the most important thing at the moment is to be relevant and price is important, absolutely. But the business case is even more important. So if you can show a time to deliver within, say, 1 year or even less, benefits that can be realized within 2 or 3 years and with a compelling business case, I don't find the fixed price and trying to bring that down somehow as an obstacle for our business model at all. So I think we are ahead of the curve. I mean, obviously, some services will become cheaper over time when AI inflects the businesses. But you have to be ahead of the curve and you have to be the one with the most compelling business model. And in that way, you can actually have a very, very good business. Balajee Tirupati: If I may have one follow-up question on margins. So Thomas, could you share building blocks within 2026 margin outlook? It would appear that most of the margin improvement is coming from the banking services business, while outlook for the organic business suggests margin being broadly stable over 2024 level. Are you still factoring sourcing of Danish talents across the group as well as our efforts in product and business development in your 2026 outlook? Thomas Johansen: So without giving you what you asked for, by the way, and that would also be the first time I'm doing that then, right? But without talking in details on the margin buildup, when you decompose the 16% to 19% on organic and 15% to 18% on group and then you can calculate backwards what that implied would be on Netcompany Bank Services. You're right in your math. Now we will do everything we can to continue to improve our efficiency within Netcompany call within Netcompany Banking Services and within the group. So at this point in time, early on in the year, we are comfortable with the guidance that we have laid out, both for the group and for the organic part and the implied part that has to do with Netcompany Banking Services. And then rest assured that we will do everything we can to be as effective and as good to deliver the services that will continue to make Netcompany the standout name in the industry. Operator: The next question will be from Yiwei Zhou from SEB. Yiwei Zhou: Yiwei Zhou from SEB. Also a couple of questions from my side. Firstly, I just want to follow up on the cost synergy. Thomas, if you can elaborate a bit here. So the cost synergy here materialized in Q4, is it a part of the 2026 target or it will be addition to it? Thomas Johansen: What we realized in 2025 has nothing to do with 2026. So what we're realizing now, you can say, will be on top of what we're realizing. So it's not that we have taken something that was planned for '26 and done it in '25 or anything. So we're following the plan for '26 to '28 of the DKK 300 million to DKK 350 million. And then we've just had the opportunity to accelerate certain things that we've done in Q4, but we'll continue with the same pledge in '26 and forward. Yiwei Zhou: Okay. And could you also comment a bit on the phasing of the materialization of those cost synergies during 2026. I previously got the impression that it will be back-end loaded. Is it still the expectation? Thomas Johansen: Yes. Without giving any specific guidance on the quarters of when the synergies are going to be realized because that would then imply that we would give input as to what the margins are going to be in the different quarters. But we don't necessarily expect all the synergies for '26 to be back-end loaded. Yiwei Zhou: I see. Okay. And then lastly, I also realized in the provision did increase quite a lot here in '25. And I can understand the provision for restructuring, but I can see you also booked a sizable project provision here. Could you elaborate a bit here? Thomas Johansen: It's related to the merger with SDC into Netcompany Banking services as part of the purchase price allocation. So that has to do with the period before we took over ownership of SDC. Yiwei Zhou: And is there -- is it fair to understand that you see the risk here that it will be a bad project? Thomas Johansen: No. Operator: The next question will be from the line of Aditya Buddhavarapu from Bank of America. Aditya Buddhavarapu: First, on Denmark. Could you comment on how you're thinking about the public sector development this year, given you saw probably slower tender activity last year, how are you thinking about that going into '26? Second, just a follow-up on the question on margins for the core business. Why do you think -- why is sort of the implied margins for the core business flat? Is that because of maybe some more investments or headcount growth? If you could just maybe offer some color on that? And then could you just comment on how to think about the tax rate for 2026, given you have elevated tax rate in H2? André Rogaczewski: Yes. Thank you for those questions, Aditya. Let me just take the first one and leave the other ones to you, Thomas. So the public sector, yes, I mean, we are looking into a very exciting year in Denmark at the moment. I mean we have some large public engagements to be had. We won a recent one that we mentioned in the presentation. But we're also looking into what's going to happen at some of the core major Danish institutions, both tax office and of course, also police force and defense. And at the same time, we see public sector running at a decent pace. However, we will also see an election coming somehow during the year. But we are very confident that many of the deals that we need to have in '26, we will be able to get signed and executed upon before elections, and that plan is running accordingly to what we've scheduled. And overall, I believe we will have a very decent year in '26 in public sector because there's so much digitization happening everywhere. And for the margins and tax things, I better leave that to you, Thomas. Thomas Johansen: Sure. Thanks, Andre. And for the margin, like I said on the previous question that also was on margin. We don't comment per se on the bridge or the buildup on the margin for 2026 for the group or for the organic part. We've given a guidance of 16% to 19% for the organic part, of which we are comfortable at this point in time. And then we will do our utmost to do as good as we can. For the tax rate, we expect that to come down during 2026 to a more normalized level. It is impacted for the first half negatively with the special items that are nontaxable -- nontax deductible, sorry. So that, of course, has a big impact on the tax rate in 2025, which will not have the same impact in 2026. We will see that we can deduct the taxable depreciation on the purchase price for SDC, which will then have a full year effect of 2026 and have a positive impact, meaning a lower tax rate for 2026. So it will normalize in 2026, Aditya. Aditya Buddhavarapu: Understood. Also just a follow-up on the free cash flow. You mentioned that what you're looking at in terms of the DSOs, work in progress, all of that is looking in the right direction. So how should we think about the cash conversion in '26? Thomas Johansen: If you look at 2024, that was really high, right, especially in Q4, more than 400%, underpinning that, that was an abnormal quarter, 147% in 2024 and 98% in 2025. So we're probably looking into a year which is more in line with what we've seen from a cash conversion perspective like 2025. Operator: [Operator Instructions] The next question will be from the line of from ABG Sundal Collier. Unknown Analyst: Just one question on my end here. So it's obviously very encouraging to see the integration of NBS is tracking well, and we all know that you have high ambitions in terms of growth. I'm okay with Denmark and the Nordics, which I also appreciate are sort of the starting point. But I'm just still curious regarding the expansion you're aiming for into the rest of Europe at some point. Can you confirm that you, at this point in time, have all the regulatory approvals you need, i.e., is it theoretically something you could do tomorrow? Or would it take some time to get these? And if so, how extensive would that be able to get? Would it be -- would it require? That would be my question. André Rogaczewski: That's a good question. So that depends definitely on the specific type of solution you want to build in a specific European country. Obviously, if you're in -- within EU, many of the regulatory things you need to build particular solutions are already in place. And when it comes to supporting European banks with particular modules or processes, we can do that without any problems at the moment. Now there are definitely some things that need to be regulated even further in EU. For instance, if you want to put things into the EU wallet and you want payment services in that, that still -- there's still some regulation to be had. But overall, I have to say 80%, 90% of what we can deliver to European banks, we can do without any problems at the moment. So that's not a big obstacle. Having that said, the most important thing right now is obviously Scandinavia. We have -- we see a big market there. And of course, the integration of NBS absolutely important. So we have a very, very strong focus on that. I think that alone can bring us to a very interesting place alone in '26 and '27. Operator: The next question will be from the line of Poul Jessen from Danske Bank. Poul Jessen: I have 3 questions. First question is coming to Yiwei's question about NBS and the guidance. With DKK 56 million in the fourth quarter and a guidance of DKK 180 million to DKK 230 million for full year '26, then you actually guide flat earnings described that you would see slight growth. And I assume also you will have further initiatives coming in '26. So how should we get to that you will have lower earnings on the full year run rate next year in '26 than you had in the fourth quarter? That's number one. Thomas Johansen: What we can say in terms of specific guidance for NBS is that we are comfortable with the guidance set out at this point in time. And clearly, Q4 was good and Q4 was based on realization of synergies. So that's also good. Integration is going fine, and we see some very, very strong interest into the business. So let's see where we end the year with both the group and with NBS. At this point in time, we are comfortable with the guidance. Poul Jessen: Second question, public sector Denmark. Andre, you said that you saw contracts coming up from police tax on defense. We're waiting with consensus moving for an election, do you actually believe that we will see those contracts awarded in before end of April? André Rogaczewski: I think you were falling out a bit there, but I hear your question is the public sector in Denmark and whether some of the contracts with the tax defense and police will fall into place before spring time. Now I'd say -- okay. I'd say that you will see some of it happening definitely before the summer. The good thing about taxes, a lot of these funds have already been allocated. I think so too, when it comes to Defense '26, even in you will see defense and resilience sector acquiring what they need to acquire in '26, that's not going to be influenced by the elections and the same thing goes. So I'm very confident that '26 will be a year with all those 3 government institutions will actually invest more into IT than we've seen for a long time. So I think it looks promising, yes. Poul Jessen: Okay. And then a final question is about Schleswig-Holstein. There has been some local German press writing that you are doing a tax solution, a very small one in Italy for the municipalities there. But they also state that it could be run out across all municipalities in Schleswig-Holstein and also more than just the tourist tax. Can you put a little or elaborate a little about what kind of opportunities you see for this isolated, but also how it can be used in Germany to further expand into tax in Germany in general? André Rogaczewski: Well, it is true that we are delivering minor -- smaller tax solution in Schleswig-Holstein. But we're also in dialogues with other German states about similar solutions based on our AMPLIO platforms. Now the ability to scale those solutions and whether they can be made into larger deals, I think we have to await that. But we are working continuously actually right now in 5 or 6 different areas in Germany, trying to -- trying to use our platforms as an entry point to do new modern case management systems. It's very difficult at this time because it's early days to discuss whether it can be scaled or not. But obviously, that's our intention. Operator: The next question will be from the line of William Richards from Morgan Stanley. William Christian Richards: Just a single one for myself. So for the quarter, we saw SEE & EUI segment growth slow a bit sequentially. I think we are now around 7% for the fourth quarter. I know for a while you've been talking about growth slowing in this region to more normalized levels. So I guess my question is, is 2026 the year where we can expect this normalization to take hold? Or was there something else on the growth front in the fourth quarter for that segment that drove this deceleration? Any more color there would be really helpful. Thomas Johansen: So the deceleration of Q4 stand-alone was driven by lower license revenue in Q4. So that's the main reason for that. We don't necessarily expect the growth to be had in SEE & EUI to come to an end in 2026 on the contrary. I think we lost William. Operator: Yes. As we have no further questions in the queue, I'll hand it back to the speakers for any closing remarks. André Rogaczewski: Well, thank you all for joining in, and have a wonderful day.
Peter Pudselykke: Good afternoon, everyone, and welcome to the Conference Call for Demant's 2025 Annual Results. My name is Peter Pudselykke, and I'm heading up the Investor Relations activities here in Demant. With me here today, I have the usual team, our President and CEO, Soren Nielsen; our CFO, Rene Schneider; as well as Gustav Hoegh from the IR team. For the call, we will do a presentation, which will be followed by a Q&A. We expect the session to last no more than 1 hour in total. [Operator Instructions] before we dig into the presentation, please do pay notice to the disclaimer on Slide #2. And with that, I will go to Slide #3, we'll pass the baton to Soren, to kick-off the presentation. Søren Nielsen: Thank you very much, Peter, and welcome, everybody. The agenda for today is key events for 2025 financial takeaways, and then comment on sustainability advancement. More details on business area reviews, not the least the fourth quarter. Then Rene he will do group financial and also take us through outlook and initiatives to improve profitability. And if we take a 2025 in total, at group level, we delivered 2% organic growth, 5% in local currencies. Of course, a significant element from acquisitions, headwind from currencies leaves us with 2% reported growth and biggest, you say, expansion is in Hearing Care, which now is the biggest business area, as you can see in the business mix split. Gross profit, up 2%, but down on margin related, to I would say, hearing aids, some extent, diagnostic, but I'll get back to that. EBIT down 10% before special items and free cash flow down 11%. Key events in 2025, we acquired the KIND Group in Germany, closed the deal in December, so we have 1 month in the books, one of the world's leading retailers and with that a significantly expanding our position globally, but in particularly in Germany, to a #1 in Hearing Care. In October, we introduced Oticon Zeal in selected markets and a launch that so far have created a lot of excitement and a lot of good momentum to carry into '26. During 2025, we signed agreement to divest both EPOS and Oticon Medical in line with our overall strategy to be more focused hearing healthcare company. The hearing aid market in 2025 was softer than normal, and particularly in the U.S. where we saw flat market growth for 2025 in total. Hearing Care delivered very solid performance in -- solid performance, not the least in the view of the global hearing aid market, whereas hearing aids and diagnostic delivered softer growth. All 3 business areas showed an improved and strong performance in Q4. Key financial takeaways for the second half group organic growth of 4% for the second half in total. So a sequential improvement from the first half fueled by all 3 business areas. Gross margin decline versus second half '24 due to ASP headwinds in hearing aid and increasing share of rechargeability, I'm going to get back to it, but the ASP headwind comes from channel and geography mix, so selling [ more ] in countries and channels with a lower ASP and less in higher-priced markets like U.S. Diagnostic was also a minor drag on the gross margin coming from their product mix and some geography. OpEx grew 5% organically, but -- and as already guided for, and expected flat sequentially from H1, so still reflecting a cautious approach to cost expansion when we look at in sequentially the 5% to some extent, originates from a significant holdback at the end of '24. Acquisitions added 5 percentage points growth compared to second half last year. EBIT before special items, DKK 2.1 billion, negatively impacted by exchange rate effects and by lower operating leverage. EBIT margin, therefore, before special items contracted 2.6 percentage points. Special items amounted to minus DKK 128 million. Strong cash flow from operations of DKK 2.3 billion and free cash flow of just around DKK 2 billion. Outlook, Rene's going to elaborate further on it for '26. Organic growth of 3% to 6% and EBIT before special items of DKK 4.1 billion to DKK 4.5 billion and continued pause on our share buyback to bring down the group leverage. Sustainability achievements quickly, we saw a increase as expected of improved lives by overcoming their hearing loss to 12 million and a growing number of tests in our own clinics following the expansion of that. And when we look at our main -- or 3 main sustainability goals under the headline of Respect for the planet, a planet decrease in our scope 1 and 2 greenhouse gas emissions. We have now achieved 16% reduction compared to baseline with a target of 46% by 2030. Gender diversity in top-level management now at 33%, so 1 in 3 and with the aim of getting above 35% by 2030. And the number of people that have read and understood out of the people for whom it's relevant should be 100% by 2030. And you could say, basically already tomorrow, if at all possible, and we are almost there. Business area review, well, hearing aid market in '25 have definitely been special and fourth quarter, which is the new release is no different. We have seen a high unit growth, and this is all units in Europe, but it's all driven or mainly driven by NHS in U.K., the National Health Service that have -- had strong growth partly to expand the inventory levels, et cetera. And then France also showing high growth as expected due to the annualization of the [ reform]. If we allow ourselves to exclude NHS and France, unit growth was 3% in Europe, in Germany, specifically growth declined year-over-year. North America saw a sequential slowdown from two quarters with 2% growth to 0 and leaving the year with 1%. U.S. or Canada saw a good growth. So it was offset by a flat growth in the U.S. commercial and a slightly negative in the VA. Rest of the World delivered growth, Australia, positive growth, while Japan saw minimal growth. China saw a sequential improvement, and we estimate that several emerging markets saw good growth. So again, the ASP, we normally believe in a flat ASP, but no doubt that with the geography mix and channel mix in the year and fourth quarter as much, then we estimate that we should see a negative impact on ASP in -- it's not exact science, but in the area of percentage points at least. So a global hearing aid market that have assumably grown just around 2% in value for the year. Hearing aids fourth quarter organic growth also in fourth quarter improved despite of the U.S. market weakness and the loss of share in U.S. the main area in which we have lost share in U.S. remains to be a large retailer where the number of providers or suppliers have been expanded. We introduced Oticon Zeal in selected European markets, which have created excitement and momentum change in these 4 countries. We have really seen Zeal lift the sales also in general in these markets. However, with limited impact on the total group level in fourth quarter simply by the size of these 4 countries and the potential, even though Germany is a big country, the premium market in Germany is not that big. So again, not something that financially impacts that much, if, of course, does some, but not that much in the fourth quarter. So unit growth was very solid. Representing overall market share gains in units across several key markets, I would say, almost with the main exception being U.S. the ASP was negative, as I said, due to geography and channel mix changes. So France, U.K., Germany, good growth in Europe, all big markets, strong performance in Canada. U.S. growth was negative, as I said, good growth in Japan, South America, and also relatively broad-based growth in Asia, except for China, which, I still would say is market related. And the rollout of Oticon Zeal, just a few more comments to that. We launched it in Europe and in both Germany, Switzerland, U.K. and Denmark, the conclusion is the same. It is undisputed, seen as a new very innovative concept by both hearing care professional and end users. It does help in having end users take the choice to get going and see less obstacles. So very positively seen uptake with first-time users. It does also lift sales of our other portfolio because it opens door to new customers. And if an end user have tried a Zeal and happy with the sound quality and the quality of the instrument, but for some reason, don't continue with a -- or prefer to continue with an in year. There might be some comfort issues. The ear canal doesn't work. It's natural to then fit an intent because you'll have more or less exactly the same sound quality and something you just like. So we do see additional sales to customers that did not work that watch with us. And we have actually also seen limited cannibalization with customers that we already were doing business with and that have taken in Zeal. So this is the conclusion from the 4 markets. We have also I think, been open about that it's only in a premium price point and that we have lifted pricing in some markets significantly compared to intent. And so far, we have seen acceptance of the price and it has not prevented us from creating excitement and driving sales. That being said, it is a premium price point. It is a premium category type of products, but it definitely also makes some people spend more than they might have thought they would. They had to pick a [ receiver ] on ear instruments where there are more options available at different price points. I also think we can say that you cannot really say, okay, what is the potential and what's the share and the in-ear market? Because that's not how people is basically first-time users think about hearing aids. They will look at what's available at the table and pick the one they find most attractive. And there's no doubt that by first-time users, this is seen as much more attractive than carrying a traditional right instrument. So all in all, very good takeaways and we bring this excitement into '26, where we have now launched in U.S., where we will, in the coming weekend launch in Canada and where we -- early March, will launch in France, and then onwards with all remaining significant and major markets. Germany will also expand activity significantly here in first quarter to make sure they get to a full rollout, which was not the case in the initial launch. So we move on. And again, not to open the discussion already, when we then say we still have something ahead of us, it is because it remains to be a sequential launch so we have to take it market by market to make sure we get off on the right foot. And of course, with U.S. market have been the most muted and a big premium potential, then it also, to some extent, depends on how the market develops, but maybe Zeal can be part of creating renewed excitement and also interest from end users. So I would say there's still some uncertainty left around that, which I'm sure Rene will come back to. We continue to expand our portfolio also in Q1, we released devices of our latest technology containing disposal batteries, which in some channels and geographies are still important and then also a new offering in part of the pediatric portfolio and then all these new products offer latest and greatest sound quality and connectivity similar to Zeal, where we also get very good feedback on the latest technology, which is also a connectivity technology, which is also available in Oticon intent. Hearing Care in Q4, solid performance in a weaker than normal hearing aid market, of course, strong tailwind from a month with KIND. So in the quarter, doing 17% in local currencies, 5% organic in -- across the geographies, strong performance in Poland and a number of other midsized European markets continued solid growth in France, driven by the anniversary of the '21 reform. Good organic growth in North America, driven by continued improved performance in U.S. very positively. However, some negative development in Canada. Australia saw a good growth continuing improved momentum and China also delivered good organic growth, driven by ASP tailwind from a continued better product mix. So all in all, well done in hearing care in the fourth quarter. And also diagnostic came in strong in the fourth quarter, delivered organic growth of 8% in local currencies. So clearly best performing quarter this year here and in general, a good uptake. Strong growth in U.K. and Germany, good performance across several midsized markets. U.S. and Canada saw a strong growth, however, driven by service and consumable business again, back to gross margin, which is a little bit lower in these areas. Australia delivered strong growth primarily on instrument sales, and China continued to be impacted by general weak markets and there was some drag on growth in Asia in general. With that, over to you, Rene. René Schneider: Thank you, Soren. So let's push through the financials, a little bit of repetition. So I will be quick on this. So the revenue for second half year, we saw solid organic growth of 4%. Hearing Aids and Diagnostics saw a good organic growth and especially Diagnostics improved in the fourth quarter. Growth from acquisitions contributed 3 percentage points to growth, and we had a FX headwind of 4% predominantly due to the decline of the U.S. dollars. Turning to gross profit. It increased by 3% to DKK 8.8 billion. We saw a slight decline in the gross margin against second half of last year. And this decline was driven primarily by geography and channel mix changes in our hearing aids business. And we also saw some headwind in the Diagnostics business partly affected by tariffs. And last, also a slight headwind on the gross margin from the FX development. On operating expenses and EBIT. So we increased OpEx by 5% organically half year over half year, partly due to very low comparative figures as we pulled back on cost significantly in '24. And we have seen a flat development sequentially from first half year into second half year, which is a reflection of our continued focus on cost management. Acquisitions added an additional 5 percentage point to growth to OpEx in the second half year of '25. And again, also here, we see an offset from a declining U.S. dollar. When it comes to EBIT, we ended second half at DKK 2.1 billion, negatively impacted by exchange rates and by lowering operating leverage in hearing aids. The decline in EBIT was due to weaker than normal growth in the overall hearing aid market as the main contributor and for us, specifically a loss of market share in the U.S., primarily due to lower sales to a large retailer. And this resulted in a contraction of the EBIT margin to 18 percentage points. Special items in the period was related to the acquisition of KIND and a noncash adjustment. All in all, DKK 128 million in H2. Cash flow continued to be very strong. Cash flow from operations in H2 of DKK 2.3 billion and just shy of DKK 2 billion of free cash flow. So again, continued very strong cash flow generation. Our capital expenditure of DKK 409 million is an increase compared to same period last year primarily driven by higher investments in production facilities. Cash out to acquisitions amounted to DKK 5.4 billion. And this, of course, predominantly related to the acquisition of KIND that closed beginning of December. We did not purchase any more shares under the share buyback program in second half year. So we end the year at a total of DKK 582 million as a previously disclosed. When it comes to the balance sheet items, our net debt increased significantly. Again, this is solely due to the acquisition of a KIND and fully in line with our expectation, our gearing multiple at the end of the year, ended at 3.4%, which is above our medium- to long-term gearing target of 2% to 2.5%. We will prioritize deleveraging and expect to return to our medium- to long-term gearing target of 2% to 2.5% within 18 to 24 months after the first of December of '25. And net working capital had a modest increase of 3% and this again, predominantly related to the result of adding acquisitions to the balance sheet. So in good control here. Thus, summing up the financial key takeaways for the full year. As such, we're ending up at 2% organic growth, again, driven by the weak overall hearing aid market. A contraction of the gross margin by 0.6 percentage points, driven by weak market growth, particularly in the U.S. and ASP headwinds in hearing aids due to geography and channel mix changes. The operating expenses for the full year increased by only 3% organically due to our continued focus on cost management. EBIT before special items, DKK 3.96 billion and an EBIT margin of 17.2%. And special items amounting to DKK 128 million. And as just reviewed, strong cash flow of DKK 3.85 billion of cash flow from operations for the full year and free cash flow of above DKK 3 billion for the full year also. And share buyback DKK 582 million. So that was the quick review of the financials, and that brings us into the outlook section and initiatives that we have taken there. So if we start on some of the assumptions that goes into our outlook and assumptions, of course, alluding to that we don't have certainty around these things, but we go in with a starting hypothesis. And of course, the main hypothesis that goes or assumption that goes into our outlook for the year is our projection for the global hearing aid market to grow 2% to 4%, and in 2026 in value, which obviously is a conservative assumption being temporarily below our medium to long-term assumption of 4% to 6% and also, of course, low seen in the light of the last decade of growing exactly in line with these 4% to 6%. So we believe it's prudent and in line with what we have seen in the last quarter to take a cautious stand on the market going into the year, and that is what we do with the 2% to 4% for the market. We will come back to it, but we believe that Demant in all scenarios will grow above the market in '26. Another key assumption on the right-hand side is that as part of our plans for '26, we have launched a company-wide initiative to exactly improve profitability and lower cost growth and specifically in some areas, lead to cost reductions. These initiatives will positively impact EBIT before special items of around DKK 250 million in '26. Since this is an initiative that is starting now, we foresee that the majority of this impact will be materialized in second half year, which is why, we, for '26 see an EBIT's good more than usual towards the second half year. Also, product launches impact the phasing of EBIT for '26. So this is an important note. We have seen a significant decline in the U.S. dollar in particular, but also other currencies. And we expect a negative impact on EBIT from FX of DKK 200 million compared to '25, with the impact evenly split between H1 and H2. We expect the KIND Group to contribute with DKK 300 million on EBIT before special items in '26. This is in line with our previous communication. And we expect a limited impact on tariffs on the group -- from tarrifs on the group, DKK 25 million in our Diagnostics business, also nothing new in that. So summing up on the special items where we see particular things to take into the account for '26 is now totaling DKK 325 million, of which DKK 125 million related to the previously announced integration cost related to the KIND acquisition. And then we do add to that an additional DKK 200 million related to the foreseen restructuring and also adjustment to the organization and size as part of this cost reduction initiative. Here, we see DKK 200 million of one-off costs. So all in all, DKK 325 million. So these are some of the core assumptions. And if we -- based on that build up and say some of the components in a more [indiscernible] visual schematic way on the graph on the right. The starting point is our EBIT for the full year '25 or DKK 3.96 billion. From that, we need to subtract the DKK 200 million that is the FX headwind in '26. That brings us to an FX adjusted EBIT for '25 of DKK 3.76 [ billion]. To that, we would -- in line with the guidance we give here at a contribution from KIND incremental contribution from KIND which means 11 months of EBIT. As a reminder, we did have 1 month in '25. So this is a 11 months of the DKK 300 million, DKK 275 million. And then we need to add the organic part of our business, which includes the before mentioned cost savings initiatives that we are confident will bring DKK 250 million of savings to the OpEx line. And then adding to that, whatever else we will see of organic impact from profitability in the remaining part of the group. And this builds up to an EBIT outlook of DKK 4.1 billion to DKK 4.5 billion. And important to notice here, the backdrop for this outlook is, of course, the starting point of a market assumption of 2% to 4%. And we have in our plans, and we aim to grow above that 3% to 6%. So taking market share essentially in all scenarios. So in this light, you can say, of course, that the DKK 4.1 billion which is the lower end of this guidance reflects a very, very conservative scenario where the market, of course, is in the conservative end of the already contributive outlook here and also that our market share gain is modest, but still there. But this is the starting point for the year, and we feel comfortable with that. Lastly, just a few more comments on the initiatives to improve profitability. I did mention before the effect in '26 of DKK 250 million, but this is a 2-year program that will -- beginning '28 and onwards bring around DKK 500 million of cost savings to the group. We also announced today that we estimate that this will affect approximately 700 people globally in Demant in '26, of which 150 are located in Demant. The associated costs that we recognized under special items is DKK 200 million in '26 and an additional DKK 100 million in '27, both, of course, of a one-off nature, whereas the expected cost savings will be structural and permanent. So summing up, in total, this brings us to our outlook for '26. Organic growth of 3% to 6% EBIT of DKK 4.1 billion to DKK 4.5 billion. Share buyback is foreseen to be paused throughout '26 as we focus on deleveraging. And for modeling purpose, we estimate acquisitive growth of 8%. FX growth of minus 2%, and special items, minus DKK 325 million and an effective tax rate of 23%. With this, we would hand over to Q&A, please. Operator: [Operator Instructions] The first question today comes from Richard Felton with Goldman Sachs. Richard Felton: The first question is on the -- on your guidance and the midpoint of the organic growth guidance does imply growing ahead of the market in 2026. I think you said you expect to do that in all scenarios. So my question is sort of what -- what is giving you that confidence in outperforming the market in 2026 in all scenarios? And then secondly, Rene, I just wanted to follow-up on your comments on EBIT phasing linked to product launches. Is that due to the phasing of the Zeal rollout or anything else to consider as you think about EBIT phasing? Søren Nielsen: Yes. I'll take the first one, Rene can comment on the other. This is in hearing aids market share gains, that is the main driver for that. We, of course, also going to see share gain coming from lifting our share in the German market after the acquisition of KIND. But the predominant is the momentum that I'm sure Zeal will create once we get full rollout in all channels at the end are opened. And also, of course, we continue to have a strong launch program for the remaining of this year and next year. So it's the comfort and all that, that make us be firm on the market share gains in all scenarios. René Schneider: Yes. On the phasing of EBIT, there are 2 factors to be aware of. One is the effect of our cost savings initiative that will obviously have a little effect in Q2 but predominantly in Q3 and Q4. That is the one. And the second one is the gradual launch of Zeal that, of course, will have an effect here in the first half year, but a full half year effect in H2. Operator: The next question comes from Martin Parkhoi with SEB. Martin Parkhoi: Just a couple of questions. Firstly on -- again, back to the 3% to 6% organic growth guidance. Can you elaborate a little bit about the organic growth assumption across divisions. Now we saw a little bit of a dream run for dynastic in the fourth quarter, but what are you assuming [ genostics ] going into being in '26. And then, of course, also, the split on wholesale and Hearing Care on our organic growth. I understand that KIND will add of course, acquisitive growth. And then secondly, just on, Rene on the gross margin expectations, for 2026. It was not a pretty year in '25. What have you assumed of gross margin development in '26 on an underlying basis. And of course, also say how much is the contribution from KIND in that context as well. Søren Nielsen: Yes, Martin, I will do the first one quick. At this stage, I would say it's equal organic growth opportunities for all businesses. So for modeling purposes, I would be relatively equally spread across the 3. René Schneider: Yes. And on gross margin, we have our, let's say, general guidance of being in the range of [ DKK 76 million to DKK 77 million ] on an underlying basis, as you referred to, you are probably in the low end of that range, but with the contribution from KIND, we are likely to see a gross margin in the high end of that range. Martin Parkhoi: Just a follow-up, Soren, on organic growth. I appreciate that it's unknown yet if CEO will be included in VA from 1st of May, but have you included that scenario in the high end of your guidance? Søren Nielsen: It's very specific with the individual channels. We have estimates of -- we entail a growing business in VA during '26, and we do our utmost to ensure Zeal can also become available for veterans. We have not yet achieved that conclusion. Operator: The next question comes from Hassan Al-Wakeel with Barclays. Hassan Al-Wakeel: Firstly, on your comments around intense competition, could you help quantify the impact in the quarter from Costco and how you're factoring this into your guidance for 2026? And how would you characterize share trends in the commercial market in the U.S. And if there are any other adverse share dynamics that you would flag? And then secondly, on margin guidance for the -- I appreciate a weaker market. But can you help us understand some of the building blocks for a margin which is down year-over-year despite a benefit from the restructuring program in the second half? And just your comment around launches and that. Can you talk about how that would impact phasing and whether you're on track for a platform launch in 2026? Søren Nielsen: Yes. Let me start with the first on the very last. We don't comment on any new launches before they're there. I think you all know the tradition for that. I can only repeat, we have a strong program in front of us, we believe, for the coming year, including the second half of this year. Share trends in -- and U.S., you, of course, have visibility to VA where we after recent launches, have seen a minor dip to Oticon but have held, I think, well two things. We year-over-year does see a declining share with a large retailer after expanding the number of suppliers, but relatively stable after that change. And then with the independent, I can only say it's a very intense fight whether some have been holding that a little bit in the way for Zeal. I can't rule out, and therefore, I would say, sequentially a little bit softening towards the end of the year. But I'm sure and hopeful that we will pick up on that now Zeal out in the U.S. market. I think that's what I can speak to for now. René Schneider: Yes. And when it comes to the margin, let's say, development in '26, it is, of course, challenged by our starting assumption of a market growth of 2% to 4%. That is the, you can say, fundamental margin headwind that we sit with. And of course, in this slide, our cost initiative becomes extremely important because this is what brings us, let's say, at the midpoint of our guidance, it leads to a flat EBIT margin in local currency and then, anything above that would be margin expansion. But of course, when we assume a market growth of 2% to 4% margin expands which is not in line with our mid- to long-term then margin expansion per se is a challenge, but at least the midpoint, we are flat. Operator: The next question comes from Julien Ouaddour with Bank of America. Julien Ouaddour: So I have two. The first one is on Zeal, where, I mean, you said the feedback was like pretty good. My understanding is that Zeal is the main moving part for the share gain in '26, as you said. Just could you tell us a little bit what kind of market share assumptions have you embedded in the '26 guide for the ITE category? I'm just asking because we see a complete project working pretty well right now. And I think another of your competitors just announced new ITE project this morning. And also on Zeal, could you confirm if it's already margin accretive to the group and how the volume pickup could impact the profitability? And a very quick second question is on the ASP. It was down 2% in '25. I think it's below your midterm assumption. You're also feeling intense competitive pressure at the moment. So do you feel the need to have some -- maybe some kind of price discounts in the [ REIT ] category until you have a new premium platform as Intent gets old? So just what could it imply on the pricing for H1 '26? Could it be down again? Søren Nielsen: Yes. Let me start with the pricing and then return to Zeal. ASP, when we see it down is a channel and geography mix. We still uphold I think, a strong ability to have significant better pricing than many and most in the independent sector. So no, I don't see the call out for selling Intent because it should be not competitive. I would also like to stress maybe a little bit back to Hassan's question on product launches. We are very, very happy with the performance of Oticon Intent and Zeal. This platform allows us to exactly do these very high-performing products at now unprecedented small sizes. It is with full connectivity, it is with full AI-driven signal processing that we enable Zeal, and that's why Zeal gets such a good reputation. It's not the first product that you can do as an in-ear instant fit type of product. But you have never before seen it with such a feature list that is totally comparable to any RIC. So back to my initial comments as well, when we open new doors with Zeal, the conclusion from the first 4 markets is, we also see growing sales of Intent, because it's equally a very good product. So Zeal is a door opener to a broader sales, and that's also why you cannot measure Zeal's, ASP effect. You cannot measure Zeal comes in with very strong ASP and of course, additional Zeal volume will lift ASP, everything else equal, it's higher price than anything else we sell. So yes, very positive for ASP. If we sell a lot in U.S. and the U.S. market growth, our ASP will go up the ASP effect in '25 is geography and channel related. Zeal IT category, we have no other products that offer same features all new rechargeable with connectivity type of in-ear products are custom made. They are what's called in-canal which are relatively big devices that don't offer the same discreteness and invisibility as Zeal, if they are to be near as smaller Zeal, that connectivity is not there and typically also limited signal processing in order to accommodate for a much smaller battery. The core element of Zeal is that it offers a much larger battery than any competitor, and therefore, in this size. And therefore, we uphold the full functionality we know from RICs. And that's the strength. And therefore, you cannot just measure share in the EMEA category, and I don't see any new releases that challenge the position of Zeal. Julien Ouaddour: And just if I can very quickly follow up on your last point. So should we expect at least market share in line with the global average for Zeal in the IT category, I mean, given everything that you just said? Søren Nielsen: It will naturally go above because Zeal will capture share outside in your category. So you will see compared to -- you, of course, have to look at a certain higher end of that market. There could be markets where there's a lot of relatively cheap in-ear products sold if I allow myself to exclude those, Zeal will take significant share in the premium segment both from existing in-ear solutions, which are typically only the smaller, more cosmetically attractive or primarily and also from RIC products because that's the preference of the first-time user. Operator: Next question from Andjela Bozinovic, from BNP. Andjela Bozinovic: Maybe the first one, again on the guidance. Can you give us your assumptions on the competitive environment and especially the competitor launches that are planned in H2 and more specifically in the ear category? Have you embedded the competitor launch that was announced this morning? And second question on the cost initiatives. Can you please give us more details on the initiatives that you're implementing, which areas, which regions would be affected? Søren Nielsen: Yes. First of all, we, of course, expect competition to continue to try to innovate and bring new products to the market. We don't have anything special in and I would definitely see what I've seen today from a single competitor. Yes, it's an in-ear product, but in -- as I understand, lower price category and nothing special when it comes to functionality. So I don't see anything changing the fundamental competitiveness and uniqueness and an innovative level of Zeal. And I don't expect others to launch products down that Elite there is a very close relation between the production technology and the ability to make this small form factor with all the features and benefits, as I just said. And no, I don't expect competition to be able to close that gap very short and not in this year. Cost initiatives, they are widespread across the group. They come basically in all geographies to various extent, of course, depending on our size and footprint. They -- comes in all areas. It's not just operation, it's not just R&D, it's not just any of it is basically the entire company that we have looked at. But of course, in selected areas, so we can be even more firm in our commitment to invest in R&D in new products in a continued expansion of our hearing clinic footprint, et cetera, all the things that matters to growth. But we will find areas where you could say, inside the box, we can find more cost-effective ways of doing things. Andjela Bozinovic: Perfect. And just a follow-up on the first question on the traditional RIC and behind the ear, do you embed any competitive launches in your guidance? Søren Nielsen: I don't have a specific assumption on exactly who's going to introduce what except that in the last 12 months, we have seen a high number of launches from our competitors. So new premium launches, I would find less likely. Operator: Next question comes from Martin Brenoe with Nordea. Martin Brenoe: I just have 2 relatively simple questions. The first is on the cost program which will affect a lot of people in the organization. So I would just like to hear about the timing of the cost reduction and the reduction in the number of employees. I guess that we should expect this to be relatively quickly announced and the cost program to be more of a Q1 and Q2 program rather than back-end loaded to avoid unnecessary uncertainty. That's the first question, and then I'll take the second one afterwards. Søren Nielsen: I'll do that quickly. Yes, when it comes to staff and organizational changes, of course, as quickly as possible to make sure we can move on with the business. It always takes up time and energy. But on the other hand, there's also part of this program, which is centered around cost of goods sold where we want to work against the more and more expensive types of hearing aids we have to do. That takes some effort from selected groups of R&D, et cetera, before they come in. And before you have used existing parts if it entails a redesign. So there's also elements of the program, which have a longer run but the majority and most of what's related to people will happen here very soon. Martin Brenoe: And then just the second question is on value growth. I think 2025 was growing around 2%. And some of that were driven by France, which has been benefiting from the replacement cycle, also from the VA with a quite significant price increase, which will lap in May. So you can say that the market growth is maybe a little bit inflated by these 2 channels and markets. So I'm wondering in your assumption going from 2% to 2% to 4%. And where do you see the sequential step-up happening if you look at the global market from here? Søren Nielsen: I would say that would be a more equal growth or different split in market growth between U.S. and rest of the world. U.S. was basically down to flat, where the rest of the world grew more. And I would say that's in the assumption of the 2% to 4% that we see a slightly better U.S. market, which will then help on global ASP. Operator: The next question comes from Veronika Dubajova with Citi. Veronika Dubajova: I have 2, and apologies, they're going to be slightly bigger picture. The first one, I just want to push you a little bit on the sort of EBIT guidance. I think if we sort of build the bridge, I think adjusting for FX, adjusting for the cost savings, adjusting for, obviously, the contribution from [indiscernible] I think the guidance implies sort of EBIT that's year-on-year minus 4% to plus 5% against sort of revenue growth of 3% to 6%. So even at the top end really isn't a huge amount of margin expansion. And I guess sort of right big picture question is, is this the new normal? I mean if we end up in a market where growth is continuously challenged, not just in 2026, but let's say, maybe even in 2027, should we assume it's going to be quite difficult, not just for you, but for the industry as a whole to drive earnings growth? I think that's kind of the question that we've been having lots of discussions around. My second question, and I apologize for being forthright and blunt about this, but Intent is now 2 years old. You have normally followed 2-year launch schedules. We are clearly not getting a platform in February this year. Can you reassure us that there is nothing wrong with the R&D process and that the delay is a deliberate tactic on your part as opposed to something going wrong in the background? I think given the experience with Zeal last year, it'd be helpful to understand your thinking around that. Søren Nielsen: Yes. Thank you very much, Veron. And you to some extent, have to see the cost savings in combination with the remaining business. We would still like to continue to invest in R&D. We would still like to invest in further expanding our footprint. And that's why we, in other areas, take cost out. So you have to, in my book, see the 2 together, you can't just take the cost out and then look at the rest. So in all scenarios, when you take the 2 together, there is a growing EBIT and there is also improving margins, the better we are in the range, of course. On the more blunt question, no, I don't think there is anything wrong in the R&D. We have made a priority to bring our Zeal, because Zeal is possible due to the platform we have, and we think it holds a big potential half of all users in the hearing aid industry are first-time users around half. And this is a major opportunity there. And also for some the product, they really want, even if they already have one. It holds a significant innovative element. So our product road map is a conscious choice and not a broken bike. Operator: The next question comes from Susannah Ludwig with Bernstein. Susannah Ludwig: I have 2, please. I guess, first on Viola you talked about it having a higher ASP and then sort of being a positive contribution to ASP. Could you just clarify in terms of the impact on margins, I guess, sort of whether the margin is also sort of higher than the rest of your portfolio, given that higher ASP or given sort of the different manufacturing process, if there's any sort of negative impact on margins? And then second, I guess, on the cost reduction program, are you able to share a little bit more in terms of which business areas you are targeting? Should we expect, for example, in retail, are there any closures of stores that you're expecting to do as part of this program? Søren Nielsen: Yes. Thank you very much. Selling more premium is super positive for profitability. And Zeal is intended and will grow our premium share. And this way, yes, definitely. I think we have said before that the cost of producing Zeal is higher than a RIC. So if it was just a substitution and the price was not significantly higher, it would not be. It's better than classic in-ear instruments and the price is set higher than RIC. So all in all, good profitability, lifting premium sales, which we have seen so far in the markets we have launched definitely good for profitability. On the cost saving program, it is for all business areas to deliver of course, a little bit different in form and shape. And yes, we would like to do the most on cost of goods sold because that helps everybody. we are very cautious on our retail footprint and network, but there are also optimization opportunities within a network where certain regions, geographies, areas down to cities, you could find that you have stores that are not optimally placed and don't deliver the profit you expect. So we will look also at the network, but it's not the majority of things. Operator: The next question comes from Niels Granholm-Leth with DNB. Carnegie. Niels Granholm-Leth: Could you provide a little bit more color on the phasing of your growth for this year? So would you expect the year to begin on a slightly weaker note and then end on a stronger one. And also, could you talk about for how long you would expect to maintain Zeal only available in your premium price version would -- should we expect this to go on for the remainder of this year? Søren Nielsen: Yes. Thank you very much. The phasing of the growth is relatively normally phased and with a little uptake during the year as we see a full rollout of Zeal, of course, but not very different from first half to second half if we keep it at that level. And Zeal only in premium, this is, of course, also a careful choice. We think it holds a very significant potential for value. And as long as it's unique and that potential is, you could say, not fully tapped, then we will be cautious in adding more price points. Will it eventually happen? Yes, it will, but for now it's off the table. Operator: The next question comes from Carsten Lonborg Madsen with Danske Bank. Carsten Madsen: I only have one question left, and that's actually sort of a high-level question. So the question we are being asked a lot about from investors is whether now that you're implementing AI and hearing aids across the sector, you, your competitors and you're seeing other AI players invest massively in CapEx. Are we seeing sort of a step change in R&D cost to develop the next hearing aid with AI capabilities? Or are you seeing more of a continuation of R&D budgets that you have seen historically? That's the question, I guess. Søren Nielsen: Yes. And thank you for the question. I don't -- I wouldn't say we see a step-up. But yes, if you look relatively to years back, this is definitely where you put in more and more effort and the complexity of what we have to develop increases. And that's also why a continued commitment to investment in R&D is key and back to our structural changes. They are part of making sure we can continue to invest in R&D and a lot of that is into AI-driven signal processing and benefiting from AI, you could say, in all aspects of running a modern hearing aid system. Carsten Madsen: And a quick follow-up. So should we expect you longer term to sort of enter into more external collaboration in order to drive the AI agenda? Søren Nielsen: I would say we have an example of that at our research center where the William Demant Foundation have given quite a significant grant to make sure further programs in the research community can be done under the umbrella of our Eriksholm Research Centre. So yes, we do more collaboration also with external parties to build on this agenda. Operator: The last question today comes from Jack Reynolds-Clark with RBC Capital Markets. Jack Reynolds-Clark: Two, please. First on Zeal manufacturing. Could you just remind us whether this is fully scaled? Or is this going to be a limiter for launch globally? And then how long until you're fully ramped and launched across all of your markets for Zeal? And then the second question is, I mean, is the profitability initiative a signal that you're more cautious around the timing of the recovery in market growth kind of over the longer term versus where you were in the past beyond 2026? Søren Nielsen: Okay. I think I got your questions. I'm not really sure. But the first one, no, we have made a sequential launch to make sure we don't create demand we can't fulfill. That's why we take one market at a time, and we feel comfortable about that and have a good production capacity and can also or have plans to ramp up significantly. So all good. We're a little bit ahead of the curve, if anything. So I think that's the answer to that. René Schneider: Just to make sure, Jack, to understand your second question, whether that relates to the fact that we have a different view on if and when the market returns back to the normal growth, that's the reason why we introduced profitability initiatives. Søren Nielsen: Yes, you could say you should -- we always do that. I would say we accelerate it to make sure we remain a strong company that can continue to invest in the things that matters the most to our customers, R&D strong service, et cetera. So is there some link, yes, there is, I would say, the acceleration definitely has happened also as it reacts into a continued weak assumption of a continued weak market. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to the company for any closing remarks. Søren Nielsen: Thank you, operator, and thank you so much to everybody for joining us here today. I see we still have a couple of people in line in the queue, so please do reach out after the call and we'll be happy to follow-up. As always, we expect to be on the road in the coming weeks and do look forward to see all of you when we could get there. Have a good rest of the day.
Operator: Good afternoon, everyone, and welcome to the Digital Turbine, Inc. Fiscal 2026 Third Quarter Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your touch-tone telephones. To withdraw your questions, you may press star and two. Please also note this event is being recorded. I would now like to turn the conference call over to Brian Bartholomew, Senior Vice President of Capital Markets. Please go ahead. Brian Bartholomew: Thanks, Jamie. Afternoon, and welcome to the Digital Turbine, Inc. Fiscal 2026 Third Quarter Earnings Conference Call. Joining me today on the call to discuss our results are CEO, William Gordon Stone, and CFO, Stephen Andrew Lasher. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. These forward-looking statements are based on our current assumptions, expectations, and beliefs, including projected operating metrics, future products and services, anticipated market demand, and other forward-looking topics. Although we believe that our assumptions are reasonable, they are not guarantees of future performance, and some will inevitably prove to be incorrect. Except as required by law, we undertake no obligation to update any forward-looking statements. For a discussion of the risk factors that could cause our actual results to differ materially from those contemplated by our forward-looking statements, please refer to the documents we file with the Securities and Exchange Commission. Also, during this call, we will discuss certain non-GAAP measures of our performance. Non-GAAP measures are not substitutes for GAAP measures. Please refer to today's press release for important information about the limitations of using non-GAAP measures, as well as reconciliations of these non-GAAP financial results to the most comparable GAAP measures. Now I'd like to turn the call over to our CEO, William Gordon Stone. William Gordon Stone: Thanks, Brian, and thanks, everyone, for joining our call tonight. Our December quarter showcased accelerating business momentum across both our on-device solutions and app growth platform segments. Strong demand for our platform combined with our disciplined operational execution drove top and bottom-line results that exceeded our expectations. Revenue for the quarter came in at $151.4 million, representing 12% year-over-year growth. We also achieved $39 million in quarterly EBITDA, that was 76% year-over-year growth with EBITDA margins of 26%. All of these results are proof points demonstrating the inherent operating leverage in our model. In particular, there are three things at a corporate level I wanted to call out before getting into my detailed segment remarks. First is the diversification of our revenues, the double-digit growth across so many of our products and geographies. We are seeing many drivers of our growth versus being tied to a single thing. Second is our improving use of AI and machine learning tools not only in our data and targeting that power revenue, but also for our operations that's driving improved efficiency in our coding, quality assurance, regression timelines, and a variety of other administrative and back-office tasks. As an example of this, in December, our gross profit dollars increased by more than 25% while our operating expenses declined. And finally is the strong progress we've made in strengthening our balance sheet. Our debt leverage ratio now stands at roughly three turns down from more than five turns just a year ago. This disciplined deleveraging is positioning us exceptionally well to pursue the $5 trillion market opportunity in front of us. Now turning to breaking our results out by segment, our On Device Solutions business generated nearly $100 million in revenue, which was up approximately 9% from December. In particular, our international business continues to be the driver of this growth, with a greater than 20% increase in both devices and revenue per device, or RPD, that drove more than 60% year-over-year international growth. And for the first time in our history, more than 30% of our revenues on our Ignite platform were from outside the United States. Our application growth platform or AGP business was another bright spot for the quarter and continued its momentum from September with December year-over-year growth of 19% posting $53 million in revenue. In particular, I was pleased with the strong results in our Brand business and also growth in our DTX or SSP business of over 30%. The hard work we did over the past few years to stay the course and integrate our legacy tech stacks into a common platform is now paying dividends. And we expect the momentum to continue into the future. For our growth drivers, improving supply and demand trends power the improved performance. First, on increased supply. While we continue to see softness for U.S. Devices, our overall devices grew 20% year-over-year driven by strong volumes from our international partners. In addition, our AGP supply volumes increased impressions by over 20% year-over-year, driven by strong performance internationally and strong increases in nongaming inventory. We also had higher advertiser demand, which translated into improving pricing and fill rates. Particularly for premium placements on our platform. The strong advertiser demand resulted in year-over-year growth in revenue per device in both the U.S. and international markets. For our on-device business. For our brand business, we reorganized our sales teams last year around verticals and I'm pleased to see those changes bearing fruit in our results. As our focus on vertical sales areas, consumer packaged goods, retail, telecom, and technology, all demonstrated increased spend. In particular, our retail vertical had 5x growth compared to last holiday season, as our retail media efforts are bearing fruit with large retailers wanting to extend their audiences. As we now enter 2026, we have five strategic priorities that we believe will continue to build on our profitable growth trajectory of both our ODS and AGP segments into the future. The first strategic priority is unlocking the value in our first-party data. This effort is centered on leveraging data signals across all of our DT products to create and enhance the IGNITE graph and apply the DT iQ AI machine learning models to drive better outcomes across your end consumer experiences. Our second priority is building the flywheel effect between our supply and demand. We have over 80,000 applications that have integrated our ad monetization technology. Leveraging that position in our demand-side technology to acquire more users for these apps creates a flywheel effect of increased monetization and higher investment into our platform. Our third priority is scaling our brand business. Over the last couple of years, we've established a brand and agency-facing business that diversifies and differentiates our monetization activities. This business has been showing positive growth and scaling it is the key to the next phase of our growth. Fourth is expanding the services offered through our IGNITE. Ignite's been the backbone of our highly scalable app distribution business, we're looking to leverage its footprint across more than 500 million devices to unlock better monetization and a superior user experience for our carrier and OEM partners. And finally is the alternative app opportunity. We believe the app economy is entering an era of democratization beyond the traditional duopoly. And that the ecosystem will benefit from solutions that are agnostic to the format or path developers use to distribute apps or how users choose to discover and use them. Made some recent progress with three of the largest global mobile game developers signed in December now using single tap capabilities in their alternative distribution efforts. Combined, these five things have a half trillion-dollar market opportunity in front of them, and our assets are uniquely positioned to go after this growth. You'll hear more about our progress on these areas on future calls. To wrap up, our business momentum is accelerating, our priority is to continue our growth are focused and clear. We showed solid year-over-year double-digit growth in both revenue and EBITDA driven by a healthy mix of disciplined execution innovation, and favorable industry dynamics. We're building the right foundation through operational discipline and strategic investment to drive sustained profitable growth. We're excited by the traction we're seeing across our business and confident in our ability to continue delivering value to partners, advertisers, users, and shareholders. With that, I'll turn it over to Stephen Andrew Lasher to take you through the financials in more detail. Stephen Andrew Lasher: Thank you, Bill, and good afternoon, everyone. The fiscal third-quarter results were reflective of sustained business momentum. We delivered another quarter of double-digit revenue growth, further expanded profit margin, and delivered top and bottom-line results that surpassed expectations. We also made significant progress in strengthening our balance sheet in the process. Now let's get into the numbers. Total revenue for the fiscal third quarter was $151.4 million, representing 12% growth year-over-year. Both segments of our businesses, ODS and AGP, contributed positively to the overall growth and upside versus expectations. Our ODS business delivered $99.6 million in revenue, up 9% year-over-year. This growth was primarily driven by higher device volumes and RPDs primarily with our international partners. Our AGP segment delivered $52.6 million in revenue, up 19% from the prior year. These results reflect positive outcomes of our strategic focus to better utilize first-party data and showcase our AI-driven capabilities. The combination of strong top-line growth and efficient operational execution yielded 76% year-over-year growth in adjusted EBITDA in the quarter. Adjusted EBITDA for the fiscal third quarter totaled $38.8 million, representing a 76% increase year-over-year. EBITDA margin reached 26%, marking the seventh consecutive quarter of expansion and improvement of more than 900 basis points versus the prior year. This comparison includes approximately $3.5 million of one-time benefits in the period primarily related to a sublease settlement and improved working capital. Free cash flow for our third quarter totaled $6.4 million. Our non-GAAP gross margin in the fiscal third quarter was 49%, well above the prior year figure of 44%. This expansion was primarily the result of a more positive product and segment mix during the quarter. Cash operating expenses were $36 million, down 4% year-over-year. We're pleased with the progress we've made on our cost controls and operational discipline, which allowed us to achieve double-digit year-over-year revenue growth with lower cash operating expenses. We will continue to do that to identify areas of additional efficiency while maintaining targeted, disciplined investments to support future growth. Turning to the bottom line. We reported a GAAP net income of $5.1 million or $0.03 per share in the fiscal third quarter. On a non-GAAP basis, we generated net income of $21.7 million or $0.18 per share on 120 million shares outstanding. Looking at the balance sheet. We ended December with a cash balance of $40 million, up approximately $1 million from the end of September. Meanwhile, our total debt net of debt issuance cost declined during the quarter by more than $41 million and ended the quarter at $355 million. This decline was a result of tax-positive cash flow generation supplemented by proceeds from our at-the-market offering. The company sold a total of 6.8 million shares at an average price of $6.54 during December, yielding $44.6 million in gross proceeds. We are pleased with the progress we have made to our balance sheet in recent months. To that end, we made the decision to terminate our existing at-the-market equity program. Given our performance and improved leverage profile, we believe our current liquidity and balance sheet strength eliminate the need for this funding source as a component of our long-term capital management strategy. Now let me turn to the updated outlook for fiscal 2026. Following the stronger-than-expected December performance, and with improved visibility into the current March, we are once again raising our full-year revenue and adjusted EBITDA guide. We now expect revenue to be in the range of $553 million to $558 million and adjusted EBITDA to be in the range of $114 million to $117 million for fiscal year 2026. At the midpoint, this represents an increase of $10 million in revenue guidance and over $13 million in EBITDA guidance compared to our prior outlook. In closing, I want to reiterate Bill's earlier comments. That momentum across our core business remains strong and we're increasingly confident in our ability to build on this performance as we move forward. With that, let me hand the call back to the operator to open up the line for questions. Operator: Jamie? Ladies and gentlemen, at this time, if you would like to ask a question, you may press star and then one. To withdraw your questions, you may press star and 2. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Once again, that is star and then 1. Join the question queue. We'll pause momentarily to assemble the roster. And our first question today comes from Anthony Joseph Stoss from Craig Hallum. Please go ahead with your question. Anthony Joseph Stoss: Great. Thanks. I have a couple, so I'll just go one at a time. Bill, I love to hear, you know, you used the word flywheel. What are you seeing in terms of maybe the app install business? If those same customers are now giving you advertising within the app, any thoughts just on how things are starting to come in faster and faster? Love to hear it. William Gordon Stone: Yeah. Sure, Tony. Yeah. This is, as I mentioned, this is one of our five strategic priorities in the business. And there's enormous opportunity given that we have over 80,000 different applications with our technology, and those applications are all out trying to acquire users. So the ability for us to integrate their budgets that we're paying them back into acquiring users both with our own DSP as well as our own device business then feeds back into the monetization and becomes a flywheel feeding on itself to generate incremental growth in revenue and better margins. So this is a big area to integrate those. Now that we have the tech stacks integrated that we had not had over the few years, we can put a lot more energy behind this. So, you know, we're really excited about this being a driver for growth for us as we look into the future. Anthony Joseph Stoss: Got it. And then, Bill, I've fielded a couple of calls in the last few days regarding the Google Gemini announcement. You can help us understand how you think that'll impact you. William Gordon Stone: Yeah. So, you know, first, you know, for us, we made a concentrated effort I mentioned in my remarks, to diversify away from just strictly gaming inventory and increase nongaming inventory. And so that's been a growth driver for us. As it relates to Google's announcement specifically, I think it's a great thing for our company. And what I mean by that is we don't not in the game business. We don't we don't we don't make games. You know, we distribute them. And so as more games come into the market, they're all gonna need distribution. So our ability to leverage our extensive distribution footprint both on device and with our DSP, I think it's going to bring more games to market, and those they're gonna need more distribution to acquire the users regardless of how they're generating the technology to make the game. So I view it as positive, you know, for our business. And as I mentioned in our remarks more broadly around AI, it's driving revenue growth for us and it's driving efficiencies in the back office. So I look at it as a net positive. I can't speak for other companies. But for us, we're excited about it. Anthony Joseph Stoss: Got it. And, yeah, I just wanna call out your mentioning of the three largest global gaming companies have signed in December for Single Tap. How do they plan on using it? What's kind of the timing? And how quickly do you think it'll ramp? William Gordon Stone: Yeah. So I'm excited to say they're live today. And so they're using it today to distribute all alternative applications of their own versions that can be their own house billing, if you will, versus using, you know, one of the duopolies billing for that. They're also using it for a thing called dual downloads. And what that is is the ability to download an application with Single Tap, but also download the store that goes with that. So in other words, if a large gaming studio, you want you, Tony, want wanted wants a game, download it. Well, you also get the store that can be delivered in the background once you enter in your credentials and pay through that app or game you've downloaded, now it's prewired for anything that that publisher wants to do. So it reduces the friction in the future. It lowers the cost structure for the app publishers. So Single Tap's a key enabler to make that happen. So yeah, we're excited about that, and it's already generating revenue today. Anthony Joseph Stoss: Thanks, Bill, for everything, and great job, guys. Nice results. William Gordon Stone: Thanks, Tony. Operator: Once again, if you would like to ask a question, please press star and then one. To withdraw your questions, you may press star and 2. Our next question comes from Arthur Chu from Bank of America. Please go ahead with your question. Arthur Chu: Hey, guys. This is Arthur on for Omar. Thanks for taking my question. Bill, there's been some recent chatter about Meta back on iOS bidding for non-IDFA traffic. I think after a couple of years of only bidding on the IDFA traffic, any sort of observations you have around maybe just, you know, any changes in the competitive landscape as a result of Meta being carrying a little bit more active on iOS? William Gordon Stone: Yeah. So nothing to comment specifically on them and iOS here. I would just say from a competitive perspective, I'm excited to see that the overall market grew kind of mid to high single digits, you know, in December. And our growth, you know, on the AGP side was 20%. So in other words, you know, our growth is 2x the market. From a competitive perspective, we're out taking share. Obviously, we're focused we have iOS and Android. We're focused more on Android, you know, given our unique on-device position there. So nothing specific on Meta to comment on this call. But in terms of what we're doing, you know, we're outgrowing the market right now. Arthur Chu: Got it. That's really helpful color. Thanks a lot, guys. Operator: And ladies and gentlemen, I'm showing no additional questions at this time. I'd like to turn the floor back over to William Gordon Stone for any closing remarks. William Gordon Stone: Thanks, everyone, for joining our call tonight. We'll talk to you again on our fiscal '26 fourth-quarter call in a few months. Thanks, and have a great night. Operator: Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.
Operator: Greetings, and welcome to the Varonis Systems, Inc. Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Tim Perz, Investor Relations. Please go ahead. Tim Perz: Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis Systems, Inc.'s fourth quarter and full year 2025 financial results. With me on the call today are Yakov Faitelson, Chief Executive Officer, and Guy Melamed, Chief Financial Officer and Chief Operating Officer of Varonis Systems, Inc. After preliminary remarks, we will open the call to a question and answer session. During this call, we may make statements related to our business that would be considered forward-looking statements under federal securities laws, including projections of future operating results for our first quarter and full year ending December 31, 2026. Due to a number of factors, actual results may differ materially from those set forth in such statements. These factors are set forth in the earnings press release that we issued today under the section captioned Forward-Looking Statements, and these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission. We encourage all investors to read our SEC filings. These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date. Varonis Systems, Inc. expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements made herein. Additionally, non-GAAP financial measures will be discussed on this conference call. The reconciliation for the most directly comparable GAAP financial measures is also available in our fourth quarter 2025 earnings press release and our investor presentation, which can be found at varonis.com in the Investor Relations section. Lastly, please note that a webcast of today's call is available on our website in the Investor Relations section. With that, I'd like to turn the call over to our Chief Executive Officer, Yakov Faitelson. Yakov? Yakov Faitelson: Thanks, Tim, and good afternoon, everyone. We appreciate you joining us to discuss our fourth quarter and full year 2025 results. Over the past year, we have talked about Varonis Systems, Inc. as a story of two companies. The first is our strong SaaS business, which reflects the present and future of our company, and the second is a legacy on-prem business, which is serving as a headwind to our total company ARR growth. In Q3, the headwind was especially pronounced. As a result, we are now disclosing additional metrics. The purpose of this is to allow investors to understand all the drivers of our business. Guy will expand upon this later. In the fourth quarter, our SaaS business continued its momentum, and our decision to end-of-life our self-hosted platform, combined with the lessons we learned in Q3, led to a record number of conversions. In Q4, SaaS ARR was $638.5 million or 86% of total ARR. Q4 SaaS ARR increased 32% year over year, excluding the impact of conversion, and total ARR increased 16% year over year to $745.4 million. Now I would like to give you some additional color on last quarter's decision to announce the end-of-life for our self-hosted deployment model and the decision to transition our business to be 100% SaaS by the end of 2026. Prior to the introduction of Varonis SaaS, we believed self-hosted software was the best way to secure data, but the downside of this software was that it required significantly more resources to do so. Our SaaS product is fully automated. It is different from our self-hosted solution, like a self-driving car to a bicycle. You can get to the same destination in either method, but with one, you do the majority of the work yourself, and with the other, it gets you there automatically and with minimal effort. We can do this because we built our SaaS platform using world-class architecture, the newest technologies, and the lessons we learned with securing data in large, complex, dynamic environments for thousands of customers. This allows us to protect our SaaS customers in ways that were not possible with our self-hosted solution. For instance, we can only provide MDDR to our SaaS customers because of the automation and centralized visibility within our platform. It is important to understand that for most other companies that underwent SaaS transition, the technological gap between their self-hosted and SaaS products was not as large as it is with our platform. This provides our SaaS customers with much higher satisfaction, which leads to higher renewal rates when compared to our remaining self-hosted customers, many of which are what we call single-threaded customers. This means they only use Varonis Systems, Inc.'s self-hosted platform for a single use case on one data store, and because they do not use the full data security platform, they began to show a greater resistance toward paying a premium to move to Varonis SaaS in Q3. In order to move quickly and maximize customer retention, we are focusing less on uplift or conversions of our remaining on-prem customers. We believe we can show even more value to SaaS to these customers and then have opportunities to upsell them in the future. In the fourth quarter, our decision to end-of-life our self-hosted platform was a catalyst that caused many of our remaining self-hosted customers to convert to SaaS. We converted approximately $65 million or one-third of our remaining non-SaaS ARR in the quarter and believe that between $50 to $75 million of the remaining self-hosted customers will convert by the end of the year. At the same time, we continue to see strong demand from both new and existing customers because they can secure data with minimal effort because of our automation. Other DSPM tools may be able to identify a portion of sensitive data, but no other tool can find sensitive data in the complete way, fix misconfigurations at scale automatically, and alert and respond to threats, delivering automated outcomes like Varonis Systems, Inc. does. Within our SaaS portfolio, MDDR and CoPilot continue to show strong adoption trends, and Varonis for cloud environments continued its momentum, which was driven by the investment we have made in our platform to expand our use cases and protect many more data platforms. We are seeing this demand because customers are realizing that visibility alone is not enough and classification without protection is a liability. Automation is necessary to achieve real outcomes. Early conversations with customers on our database activity monitoring and email security products underscore our belief that these are a strong fit for our portfolio in 2026. We expect our reps to put significantly more focus on new business and SaaS customers. Over time, we believe this focus will help us unlock the potential of this market. Now, I would like to step back from our near-term results and discuss why we believe we are best positioned to help companies safely adapt AI and prevent data breaches. Varonis Systems, Inc. was founded on the belief that managing and protecting data would be impossible without automation. Over time, our goals have been fueled by the constant balance between productivity and security. Today, the emergence of AI is accelerating both the volume and complexity of data at an unprecedented rate. The scale of data growth is matched only by the AI's ability to increase the sophistication of modern cyber threats. Cybercriminals are leveraging AI agents to infiltrate organizations with minimal human involvement. Recent incidents, such as Chinese state actors using cloud code to breach major corporations, highlight the sensitivity and ease of these attacks. Most of these AI-powered attacks start with social engineering. Attackers are not hacking computers; they are hacking trust, and users cannot tell what is real or fake anymore. Cybercriminals are using AI without Companies want to adapt AI as quickly but struggle to due to concerns over data security. The deployment of AI agents raises critical compliance questions: What data does the agent have access to? Is that data sensitive? Is the agent behaving as expected? Most organizations struggle to answer these questions for human users, and the challenge is amplified as they must now secure exponentially more AI agents. Agents are nothing without data. The more data agents can access, the more useful and more risky they become. They operate faster than humans, collaborate autonomously, and maximize their privilege by design. AI security depends on data security. In addition, companies will need guardrails and controls around their AI agents and toolsets. To accelerate our ability to help companies safely adapt AI, Varonis Systems, Inc. announced today that it has acquired Altu, an AI security company. The acquisition strengthens Varonis Systems, Inc.'s ability to protect enterprises from emerging AI risks by combining Altu's end-to-end visibility and guardrails for AI tools with Varonis Systems, Inc.'s ability to protect the underlying data and identities using my AI agent. Altu adds end-to-end visibility and control across the AI lifecycle. It inventories AI components and infrastructure, locks it down, monitors AI tools, and automates compliance. The acquisition reinforces our data-first strategy and extends our platform to secure all AI systems and the data powering them. Our SaaS platform allows for much faster organic innovation and integration of tuck-in acquisitions, which enhance our customers' ability to stay ahead of bad actors. Since launching SaaS, we have gone wider and deeper with our customers, stopped breaches everywhere, and we can now tap into more budgets than ever, including data and AI security, database activity monitoring, and email security. We have unified unstructured, semi-structured, and structured data security into a single platform, which is essential in an age of AI because AI uses all data types. When you combine Interceptor, which is our image security offering, with our SaaS platform and MDDR, it becomes a force multiplier. It stops threats even faster and keeps threat actors even farther from data. With that, I would like to briefly discuss a couple of key customer wins from Q4. We continue to see strong demand from new customers. One example of this was a healthcare service organization that was performing a risk assessment during a multi-cloud migration and realized that the native tools were insufficient to lock down their data. As a result, they launched a DSPM RFP process and ultimately chose Varonis Systems, Inc. after we immediately uncovered several hundred physical misconfigurations, many of which were automatically fixed. We also identified over 900,000 exposed PII records and executive strategy materials. Varonis Systems, Inc.'s simplicity, advanced threat detection, unified interface, and automatic remediation were decisive against competitors, and they ultimately purchased Varonis SaaS with MDDR for hybrid environments, CoPilot, AWS, Azure, and Google Cloud Platform, as well as Unix and Linux, and the Universal Database Connector. In addition to strong new customer momentum, we continue to see existing customers realizing the benefits of SaaS. One example was a hospital system of 45,000 employees that originally bought Varonis Systems, Inc. to remediate overexposure of on-prem HIPAA data. As they began a cloud migration process, they noticed gaps in the ability of native tools to remediate overexposure and label data at scale. During our cloud risk assessment, we discovered over half a million instances of HIPAA and PII data open to everyone in the organization. Our ability to identify and remediate these exposures led this customer to convert to Varonis SaaS with MDDR for hybrid environments, CoPilot, and data lifecycle automation for Windows SaaS. In summary, we are excited by the performance of our SaaS business, which is being driven by the automated value proposition that we deliver to our customers on top of our scalable architecture. We look forward to continuing our momentum and ending the year as a fully SaaS company, which will unlock many more benefits as we capture our growing market opportunity, and we believe in the path to achieving our 2027 financial targets. With that, let me turn the call over to Guy. Guy? Guy Melamed: Thanks, Yakov. Good afternoon, everyone. Thank you for joining us today. We are excited by the momentum we are seeing in our SaaS business, which now accounts for the vast majority of our ARR. SaaS is both the present and the future of our business, and the new disclosures we are making today are intended to enable investors to evaluate the progress of both our SaaS business and the end-of-life of our self-hosted business. We plan to disclose these additional metrics for the duration of 2026, after which we will be 100% SaaS, and we will revert to more traditional metrics. You can find more on this in our investor deck. In 2026, we will provide guidance for SaaS ARR excluding conversions on a quarterly basis. Specifically, we will report the following on a quarterly basis: one, SaaS ARR; two, SaaS ARR excluding conversion; three, conversions ARR; and four, non-SaaS ARR to help you understand how much conversion opportunity remains available. On an annual basis, we will disclose and also provide guidance for one, SaaS ARR, and two, SaaS ARR excluding conversion. We will also continue to report subscription customer count and SaaS dollar-based net retention on an annual basis. Our intention is to provide you with the tools to understand the various drivers of our business and to illustrate how we believe our SaaS business can continue to grow at very healthy levels in 2026 and beyond. In the fourth quarter, SaaS ARR was $638.5 million or 86% of total ARR, and SaaS ARR increased 32% year over year when excluding the impact of conversion. We are proud of our record number of ARR conversions in Q4, which totaled approximately $65 million, including the uplift. We believe that this result was driven by our lessons learned in Q3 and our decision to end-of-life our self-hosted platform. At the end of Q4, we had approximately $105 million of non-SaaS ARR remaining. In 2025, ARR from new customers was approximately $80 million. We ended the year with approximately 6,400 subscription customers, which grew 14% year over year. Our dollar-based net retention rate for SaaS customers was 110% at the end of 2025. To be clear, this metric only includes customers that were SaaS customers in the prior year and therefore is reflective of the organic expansion of ARR within our SaaS customer base. We believe that this metric can trend higher over time as we put more focus on the upsell motion with our SaaS customers. Our renewal rate for the year ending December 31, 2025, continued to be over 90%. Although our renewal activity from our non-SaaS customers was slightly below our historical level, it was better than what we experienced in the third quarter. Our renewal rate disclosure going forward will be the SaaS renewal rate. This metric aligns with our new business model and how we view the business. Now I'd like to recap our Q4 results in more detail. In the fourth quarter, ARR was $745.4 million, increasing 16% year over year. In 2025, we generated $131.9 million of free cash flow, up from $108.5 million in the same period last year. In the fourth quarter, total revenues were $173.4 million, up 9% year over year. SaaS revenues were $142.3 million. Term license subscription revenues were $21 million, and maintenance and services revenues were $10.1 million. Moving down to the income statement, I'll be discussing non-GAAP results going forward. Gross profit for the fourth quarter was $138.7 million, representing a gross margin of 80%, compared to 84.4% in 2024. Our gross margin continues to be healthy and in line with our long-term target set at our Investor Day. Operating expenses in the fourth quarter totaled $134.1 million. As a result, fourth-quarter operating income was $4.6 million or an operating margin of 2.6%. This compares to an operating income of $15.3 million for an operating margin of 9.7% in the same period last year. Fourth-quarter ARR contribution margin was 15.9%, down from 16.6% last year. If our non-SaaS business would have renewed at historical levels this year, our contribution margin would have shown a significant improvement versus 2024. In 2026, we expect a lower ARR contribution margin and lower free cash flow due to the impact of the end-of-life announcement. While this announcement negatively impacts 2026 ARR contribution margin and free cash flow by $30 to $50 million based on our guidance, we believe it will allow us to show a healthier financial profile beginning in 2027 due to the removal of our lower renewal self-hosted customer base. During the quarter, we had financial income of approximately $9.6 million, driven primarily by interest income on our cash, deposits, and investments in marketable securities. Net income for 2025 was $11.1 million or net income of 8¢ per diluted share, compared to net income of $23.9 million or net income of 18¢ per diluted share for 2024. This is based on 133.3 million diluted shares outstanding and 135.1 million diluted shares outstanding for Q4 2025 and Q4 2024, respectively. As of December 31, 2025, we had $1.1 billion in cash, cash equivalents, short-term deposits, and marketable securities. For the twelve months ended December 31, 2025, we generated $147.4 million of cash from operations, compared to $115.2 million generated in the same period last year. And CapEx was $15.5 million, compared to $6.7 million in the same period last year. During the fourth quarter, we repurchased 448,439 shares at an average purchase price of $33.45 for a total of $15 million. I will now briefly recap our full-year 2025 results. Total revenues increased 13% to $623.5 million. Our full-year operating margin was negative 0.6%, compared to 2.9% for 2024. Turning now to our initial 2026 guidance. Apart from conversions, which we included a wide range to account for a pessimistic and optimistic scenario, our guidance was set using the same philosophy that we have used historically. As a reminder, our new KPI for this year is SaaS ARR growth excluding conversions, which reflects our ability to add new SaaS customers and also expand with existing ones, as this will be the primary growth driver of our business in the years ahead. In 2026, we will provide quarterly SaaS ARR including conversion guidance, for this year only. We are doing this because of the difficulty in modeling the year-over-year growth rates due to the impact of conversions in 2025 and 2026. We will also provide a bridge to quarterly total SaaS ARR in our investor deck, which assumes zero conversions for the upcoming quarter. For the full year 2026, we will provide annual guidance for both SaaS ARR excluding conversions and total SaaS ARR. We have provided a wide range of outcomes for the conversions of our non-SaaS ARR to SaaS ARR within our guidance framework in order to bridge SaaS ARR excluding conversion to SaaS ARR for modeling purposes. We believe this range of conversion captures a pessimistic and optimistic scenario, with a midpoint representing our base case for 2026. From a modeling perspective, we have assumed no uplift for these conversions. The largest cohort of customers that we do not expect to convert to SaaS are federal and state government customers. As a reminder, we expect this to have a $30 million to $50 million headwind on free cash flow and ARR contribution margin in 2026. For more information, please see our earnings deck on our Investor Relations website, which includes a more detailed breakdown of our financial guidance. For 2026, we expect SaaS ARR growth of 27% to 28%, excluding conversions, total revenues of $164 million to $166 million, representing growth of 20% to 22%, non-GAAP operating loss of negative $11 million to negative $10 million, and non-GAAP net loss per basic and diluted share in the range of 6¢ to 5¢. This assumes 118 million basic and diluted shares outstanding. For the full year 2026, we expect total SaaS ARR of $805 million to $840 million, representing growth of 26% to 32%. This represents SaaS ARR growth of 18% to 20% excluding conversion. Free cash flow of $100 million to $105 million, total revenues of $722 million to $730 million, representing growth of 16% to 17%. Non-GAAP operating income of breakeven to $4 million, non-GAAP net income per diluted share in the range of 6¢ to 10¢. This assumes 134.2 million diluted shares outstanding. In summary, we are continuing to see momentum across our SaaS business. This demand is coming from both new customers and existing SaaS customers looking to secure more of their data footprint with Varonis Systems, Inc. We remain focused on executing on the many tailwinds we see ahead. With that, we would be happy to take questions. Operator? Operator: We will now be conducting a question and answer session. If you'd like to ask a question, please press 1 on your telephone keypad. One moment, please, while we poll for questions. The first question is from Matthew Hedberg with RBC Capital Markets. Matthew Hedberg: Guys, thanks for taking my question. Thanks for all the additional disclosures. I think it will be really helpful when we think about the standalone SaaS business on a go-forward basis. I think we're getting some inbound from some investors, and I think some of the confusion is around kind of the growth rate assumptions from this year. You're guiding for 18% to 20% SaaS ARR growth excluding conversions. Yet, you know, if you look at sort of just, like, your exit rate SaaS ARR for '26 relative to kind of like the $745 million that you ended 2025 with, it looks like closer to 10% growth. So I know there's some headwinds to conversions here and some churn, but maybe could you just help sort of like again, sort of like square off like the 10% kind of total ARR guide with, you know, how optimistic you are on the SaaS side of the house. Guy Melamed: Thanks, Matt, for the question. I think we had many conversations with investors throughout the last several months, and they've all asked for the SaaS growth excluding conversion to really understand the true growth of the business. And, really, what we want to try and help everyone understand all of this better. So we're providing today more disclosures around our business to help you understand what drives our business in the present and in the future. Now the SaaS ARR excluding conversions is really the most important KPI, which we're going to focus on the ability to sign new customers and expand existing SaaS customers. And that's what's going to drive the business in 2026, 2027, and beyond. When we sit here today, we feel very good about guiding this growth rate of 18% to 20%, which really calls for $120 million of net new organic SaaS ARR versus the $109.5 million that we had in 2025. And that's our starting point. So we're still keeping the same philosophy of guidance. This is our starting point. And we know what we need to do in order to continue throughout the year and increase that number going forward. So as a starting point, looking at the ARR would be extremely misleading because it takes into account the conversions, which are really the rearview mirror of this company. If you want to focus on the present and the future, the right thing to look at is SaaS ARR, excluding conversion, and as a starting point with this with the same guidance philosophy, we're at $120 million versus $109.5 million in 2025. Matthew Hedberg: And, Matt, you also believe Move to the next one. Thank you. Our next question is from Saket Kalia with Barclays. Saket Kalia: Great. Guys, thanks for taking my questions here. And echo the point earlier just on appreciate the additional disclosure. I think it's really helpful. And to your point, really focuses on kind of what the future of the business will look like. Right? That SaaS part. And so for that reason, I just want to dig into that 18% to 20% growth excluding conversions. Guy, maybe the question is for you. Can we just talk about how much of that you think comes from new customers versus existing? And, again, SaaS is the future, but just to make sure we're all squared away, can you touch on whether there's going to be any remnants of on-prem ARR at the end of '26 as well? Guy Melamed: So I'll start with the last part of your question. Our assumption is that we won't have any non-SaaS ARR at the end of the year. So, basically, 2026 is going to be equal ARR. So for this year, if you want to focus on what is right for the business, what is driving the business, in the present and in the future, the right metric to look at is SaaS ARR excluding conversion. Now when you look at the performance in 2025, we had SaaS NRR of 110%, and we had approximately $18 million of new customers ARR. When you look at our expectation going forward, we believe that with the fact that reps won't have to focus on the conversion the way they focused on conversions in 2025, they can go back to selling to new customers and selling to existing customers. And we have so much more to sell, so our expectation is that the SaaS NRR can increase. And, obviously, with the offering that we have, we can increase our sales to new customers. So as a starting point, I'm going back to that 18% to 20%. It's a good starting point that we feel very confident with where we sit here today. Obviously, we believe that we can increase that throughout the year. Brian Essex: Our next question is from Brian Essex with JPMorgan. Brian Essex: Hi, good afternoon. Thank you for taking the question. Thank you for me as well for all the additional color. I guess, Guy, I wanted to dig in a little bit to current period results. 110% net dollar retention, how does that compare with prior periods? And then maybe you can also help us understand how much has Copilot and, you know, AI driven some of the demand? Do you have maybe an attach or an exposure rate you can provide for the SaaS business attributable to that demand in the quarter? Thank you. Guy Melamed: So I'll take the first part of the question. When we look at the SaaS, you have to remember that this only takes SaaS customers last year and compares what their ARR is a year later. So, obviously, it's on a much larger base, and it's at 110, and we absolutely think that it was impacted with some headwind because reps had to focus their time on the conversions. Keep in mind that we had close to $190 million of conversions in 2025 alone. So that doesn't happen in itself. The reps had to focus on those conversions. And when we think about NRR, when you only take SaaS customers and look at the progression, that is actually an indication of how we can grow within our SaaS customer base going forward. We actually believe that that number can improve. So, again, when you look at kind of the mix between existing and new customers, I think that going forward, as we kind of went through the transition and there's not much of a non-SaaS ARR left, the reps can actually focus on acquiring new customers in a better way and can actually go back to the base and sell them additional products going forward. Yakov Faitelson: My definitely was, you know, just a big driver, but AI in general is a big driver because everything that's related to AI, these agents are as good as as risky as the data they can access. And, definitely, the AI train left the station, and the ability to understand the identity and the data that it can access is everything. So it's not just the conversion and Copilot. The other thing that we saw in the fourth quarter is this a lot of success with everything that related to other cloud repositories in, you know, AWS, and Azure and also the database activity monitoring with pipeline is starting to sell the product and everything that is happening with the acquisition of Fleishnex. Important to understand that AI, just from the agency, is a big problem, but also from bad actors. So everything that's related to a compromise to get compromised from trusted sources is something that the Fleishnex acquisition, the product called Interceptor, is doing extremely well. So definitely in terms of the platform, we hit on all cylinders and also have a very good understanding of the cohort of customers, as we explained before, that will not go to SaaS. And with the 86% SaaS business, it's just the end of it, and the SaaS KPIs are extremely strong. And we are very, very happy with where the platform is and how it will perform. And primarily, we believe that the whole AI revolution is a big tailwind to everything we want. Our next question is from Rob Owens with Piper Sandler. Rob Owens: Great. Good afternoon. Thanks for taking my question. I wanted to focus a little bit on go-to-market. I know there were some changes to the federal team back in Q3. Just curious, as you enter the new fiscal year, any broader changes overall, where you are from a sales capacity perspective, and how you're feeling from a sales maturity perspective relative to the folks you have in those seats? Thank you. Guy Melamed: So there are two elements to that question that I want to address. One is in terms of the federal business, we're still focused on trying to sell. As you remember, our federal business is approximately 5% of total ARR. But we still see an opportunity there. We did make some adjustments in terms of our investments there. I will say that the second component that I want to address is the conversion. The non-SaaS ARR we're actually baking a good portion of that federal business that will not convert. And that's why we gave a range of more of a bare case and an optimistic range, which is a really wide range, that $50 million to $75 million that will convert in 2026. So when you look at the element and what is impacting kind of the conversion number, the assumption that we have had is that many of the federal and state and government customers might not convert, and that was baked in that number. And the expectation is that we can go and sell to new customers in that federal space, but some of them will not move to SaaS with us. But in terms of the coverage and capacity, you believe we, you know, the new product's now building a good pipeline. And that will kick in, and we can have a we believe that we can have strong productivity gain. We have now these sales motions that are attaching to, you know, the budget and everything that's related to social engineering and business email compromise, the in the email space, and we have some other in the API and the browser extension. Very good assets there. Database activity monitoring. You know, most of the install base of the incumbent wants to replace them. This is another one for us. Everything, the expansion of the data security, including the MDR, and now the Altu acquisition that really just finalizing the whole vision to be end-to-end in the AI world. So when the we believe and we're starting to see that we see a lot of budgets that are related to AI from security and AI, and we really believe that we can be the foundation for acceleration and adoption of SecureAI within organizations. So we're really happy with where we are. And the way that the pipeline is developing, and we think that, you know, in the next few quarters, we are going to reverse. Joshua Tilton: Alright. Thank you. Our next question is from Joshua Tilton with Wolfe Research. Joshua Tilton: Thanks for sneaking me in here. I have two. One is a follow-up. One is not. I'll start with the non-follow-up one, and that's when we look at kind of the benefits of SaaS from converting the on-premise base relative to kind of, you know, the dollars that you lost in on-premise business last year. It kind of feels that you the uplift that you were getting was below that 26% to 25% ish blended rate that you've been communicating to us. Is there any way to help us understand, like, what you are actually getting from a conversion at Uplift? Or what you're getting on Uplift at a conversion and, you know, what we should expect that rate to be if you can, you know, sustain that for next year. And then I have a follow-up. Guy Melamed: So I want to focus the analysts and the investors on what's important. And what's important is SaaS growth excluding conversion. We've been asked many times by investors recently to try and break it out and show what would be the growth rate. Because if you think about it, by the end of 2026, the assumption is that there will be no non-SaaS ARR left. So the question that you're asking actually relates to 2026 only. Our assumption for 2026 is that from a modeling perspective, is that the conversions will come in flat. The intention is to break down on a quarterly basis what is the SaaS growth excluding conversion, so every single investor can understand how the business is performing, present, and what is the driver for the business going forward. To us, the conversions are obviously an important factor, but they're not the driver. They are the rearview mirror that every investor obviously, we care about getting as many customers over to SaaS as we can. But that's not the driver of the business. The driver of the business is SaaS ARR excluding conversions. And that's why we spent a lot of time in order to break it out in what we hope is a very simplistic way for investors to be able to understand what is the growth rate of SaaS ARR excluding conversion. We gave a range of what the expectation of the conversion is. And remember, at the end of Q3, we got asked every single investor asked us what is the expectation to get the conversions over? We talked about approximately $180 million of non-SaaS ARR that are up for renewal, and we said that about a third of them. And we were able to get in Q4, including the uplift, were up for renewal in Q4, approximately $65 million. So the non-SaaS ARR left has come down significantly. It's now approximately $105 million going into 2026. We're giving this range of $50 million to $75 million, but our desire and the way management is focused in terms of the forward-looking health of the business is SaaS ARR excluding conversions. Yakov Faitelson: It's also critical to understand that this massive expansion we did in the platform, this is what will grow the business, the new licenses. This is not the uplift. It's selling new licenses and adding more value, covering more data, securing our customers end-to-end from a data breach, making sure that they can use AI in the right way, making sure that they don't have a compliance fine, and doing everything on an architecture with tremendous scale. You need to understand that the amount of data that we need to crunch in order to provide this value is massive. And this is the whole growth is driven by the just the new license. Our next question is from Jason Ader with William Blair. Jason Ader: Yes, thanks. Hi, guys. Guy, can you help us understand the $30 million to $50 million headwind to contribution margin and free cash flow in 2026? I'm not sure I quite get that. Guy Melamed: Yeah. So first of all, I want to say that there's really no change from a philosophy perspective of how we are trying to run the business. We believe the business should grow on the top line at healthy levels, but also generate better margins and more meaningful cash flow over time. I think that's been the way we ran the business for many, many years, and there's really no change in the way we're thinking about that going forward. We're facing that $30 million to $50 million headwind from the end-of-life announcement in 2026, but what's important to note is that, one, the announcement of end-of-life actually generated a sense of urgency for customers to move. The second thing that's important to note is that we would have had a headwind, and we did see that in Q4, from the remaining self-hosted customers having a lower renewal rate that would have really masked the strength of our SaaS business. And you can see that in the H2 2025 results and also in the 2026 guidance. And the third thing to keep in mind is that if we didn't have the end-of-life announcement, the cost of maintaining the same set of customers would have increased exponentially over time. So when we look at this $30 million to $50 million headwind, that's really with a lower expected renewal rate for the non-SaaS business, but I think we've proven over time our ability to show better margins and cash flow, and we believe in our ability to continue to do that going forward. So when we think about the 2027 target, we really completed the transition two years ahead of schedule. But as we sit here today, we see a path to achieving the 2027 targets laid out in the investor day. So we feel confident with that. Shaul Eyal: Our next question is from Shaul Eyal with TD Cowen. Shaul Eyal: Thank you. Good afternoon, Yakov and Guy. Thanks for the new disclosures. Yakov, I know you might have touched on that earlier, but I want to go back to that topic du jour in recent weeks. AI eating software. Maybe not so much in the security category, but definitely we're seeing a guilt by association, you know, cyber-related names in recent days. If I have to look at today's performance, can you offer us and investors your viewpoint as to whether AI is augmenting security or whether there's room for concerns based on potential market disruption? And maybe also just a word about your current relations with Microsoft over the past quarter. Thank you. Yakov Faitelson: Yeah. I think that in terms of the market, it's what we and primarily our market, as I said before, AI is as good as as risky as the data that it can access. And you are going to see velocity that we have never seen before and also for bad actors, the ability just to get in to do, you know, everything that related to the initial port to get identity, session token, and so forth is going to grow. The ability to build very sophisticated advanced persistent threats that don't need to, you know, to call home, can talk with local LLMs and agents talking to agents. And, also, the just the human mistake. I think that definitely AI is tremendous impact on development cycles, but we believe that still complicated architecture and deep tech would need a lot of expertise, and this is what we have. And believe that even in this environment, we have a very strong moat. And we also believe that in order for organizations to adapt AI, they need to make sure that they understand what it the data can access and if it's behaving correctly. This is the core competency of Varonis Systems, Inc., and you need to do it at a tremendous scale. And the second thing, Shaul, that it needs to do, and this is related to the Altu acquisition, is you need to understand the actual agents of stemming from which tool. The intent of what they plan to do, and also the pipelines, what data they are going to access. So in terms of AI, Altu starts from the beginning. To make sure, okay. This is the tool. This is the intent. And the pipeline. Then massive force multiplier with Varonis Systems, Inc. is what is the identity and the data that they can access. And, also, then back from Altu, how agents talk to each other. So, you know, maybe an agent can ask another agent that has the permission to do something on his behalf. And this is a big issue. Regarding Microsoft, you know, we have just a lot of synergy with them, and, you know, we're building a pipeline together and feel comfortable about the partnership. So we feel comfortable about the partnership, but the one thing that we are very excited about is just where the platform is. If you look at the year ago, you know, starting from where ataxo starting with Interceptor with Fleishnex, taking the database activity market with classification, the user behavior analytics, we have a lot of success on the cloud data stores, and these data stores have tremendous scale and, you know, and Varonis Systems, Inc. is doing the Varonis platform extremely well there. And now everything that we are doing today AgenTiKi and we combine it with our cost. Thanks. So we are very excited where the platform is. Where the platform is, and the value that you can provide in the marketplace. Our next question is from Meta Marshall with Morgan Stanley. Meta Marshall: Great, thanks. Maybe building on that last answer that you gave, just as you guys look at products that you can now with more focus on kind of the core SaaS business, whether it's MDR or identity or database activity monitoring, or, you know, the acquisition that you just announced, like, what do you see as the biggest driver of upsells over the next year? Thanks. Yakov Faitelson: I think that all of them. I think that all of them, and it's also, you know, we created this data security market. Now it was very natural expansion to go to other places. So, you know, the database activity monitoring is, you know, big market with just incumbents that we can replace. Everything that's related to social engineering, business email compromise, this is a type of product that every organization needs, and we're attacked are starting today. And we believe that in terms of multimodality, the problem starting with trusted sources, and we have the best solution for that. And every organization in this stage trying to use AI in order to survive and thrive. And we Altu together with what we have is a big force multiplier. So we are really excited about everything, and we're also excited about everything is integrated with everything else. Great. Thank you. Our next question is from Roger Boyd. Roger Boyd: Great. Thanks for the question. Guy, I know this is not the focus point going forward, but I wonder if you could just unpack the rebound you saw in 4Q conversion rates. And as you look forward, you said $105 million of remaining on-premise software with the expectation that $50 to $75 million of that converts with zero uplift. When I back out Fed and SLED, my gut reaction is that's a pretty optimistic view on conversions going forward. So maybe just talk about kind of your confidence over the remaining commercial customer base there and in terms of timing, just any sense of how quickly you could get in front of this or if you expect to be maybe more back-half weighted? Thanks. Guy Melamed: So let's start with the fact that we converted in Q4 approximately $65 million. That's a really large number. You can see that in comparison to any of the other quarters. It's 50% higher than Q2. It's close to 60% higher than Q3. I think part of it was absolutely driven by the fact that we had the end-of-life announcement. That generated a sense of urgency with our customers and actually helped us get customers to convert. In terms of 2026, we put a bare case and an optimistic case, and those are the two ranges. I would say that in terms of guidance, the $50 to $75 million is not expected to our expectation is to be within that range. Our base case is kind of that midpoint. We do expect some of the customers from the federal and state government to convert. So it's not like we're writing off every single customer. But I would say that the focus from a kind of a perspective of a vertical that would convert at lower rates is that federal business. But it's not an expectation that none of them will convert. So we feel very good with that $50 to $75 million range. And as you can see, that range is wide because there are a lot of uncertainties, but we do feel confident with that range itself. So our base case scenario is that midpoint. And I think we can do a really good job of getting those customers over. Keep in mind, we got questions about the $180 million of non-SaaS ARR at the end of Q3. And so many of the investors wanted to get a number and wanted to get a range. And many of the investors that we talked to had an expectation that we won't get any, which we thought was not reasonable either. So I think when you look at the actual performance of Q4, the fact that we were able to convert such a large portion had to do with the end-of-life announcement and the urgency that that generated within our customer base. And the expectation for 2026 is within those ranges of $50 to $75 million. Yakov Faitelson: It's also critical to understand that in most other companies that they are doing the SaaS transition, there is not a big discrepancy in features between the on-prem and the cloud. For us, it's something that is completely different in our cloud moving extremely fast, and we integrate the new acquisitions there. And these customers, as Guy said, these federal customers and some just local government customers and some customers that have hesitation and don't want to go to SaaS, I was just it's a huge, huge difference. And then when you have this growth business that is strong and profitable, and as Guy said, you know, we believe that we can get to the 2027 goals with these customers that will not convert to the 2027 goals that we in the investor day. Very important to understand that it's just it's something that is completely different. And not only that, with the way that we move and release features, the SaaS platform works, the discrepancy is growing and growing. And what will happen is that you will have a small cohort of customers that will take this a lot of operational resources to do something that is just not relevant. So this is what you see from us. We just, you know, we are now 86% there, and we just want to be 100% there and make sure that we, you know, we have this SaaS platform. We have high-quality SaaS metrics, and this is where we invest. This is how we move forward. And we just want to make sure that, you know, the last leg of conversion, anybody that we can convert will convert and fight for it. But folks who will not go to the cloud, we need to end the cloud. And partway with them. Fatima Boolani: Our next question is from Fatima Boolani with Citi. Fatima Boolani: Good afternoon. Thank you for taking my question. Guy, I wanted to just zero in on the OpEx and free cash flow expectations. You've been very clear about a number of different factors that are impacting that trajectory. But I was hoping you could sort of recrystallize some of what you shared with respect to the end-of-life headwind, the ARR contribution compression as it relates to some of the nonrenewal assumptions, as well as maybe some organic investments that you are making in growing your sales capacity and then also in the context of the Altu acquisition. So hoping you can stack rank the level of impact from an operating expense and free cash flow headwind perspective between the organic inputs and inorganic inputs, especially kind of given the number of acquisitions that you're absorbing into the cost base? Thank you. Guy Melamed: Absolutely. I'll start by the fact that when you look at the free cash flow progression, I think we've done a good job of increasing kind of the free cash flow number over the last couple of years. And when you look at the ARR contribution margin, we've actually increased it to levels that are just below the 2027 model that we laid out in our 2023 investor day. So I think from a profitability perspective, we have proven to investors that we have the path, and we know how to improve and increase the top-line growth with bringing some of it to the bottom line. When you look at the 2026 numbers, especially when you look at some of the lower renewal rates for the non-SaaS business, that have been below our historical levels, obviously, when you think about renewals, they go directly to the bottom line. That's your pure profitability component, and they are way more profitable than the acquisition of new customers that have a higher cost. So when you think about kind of the non-SaaS ARR that is not going to renew, that obviously has that headwind, and we talked about the $30 to $50 million of headwind from that end-of-life announcement. But I think what's important to note is that if we didn't call that end-of-life, the impact would have been much higher. So if I have to break down kind of that headwind, I would say that for the most part, it relates to the lower renewal rate for that non-SaaS business. Obviously, the acquisitions have a cost. And when you think about the guidance, we didn't bake in any upside from those acquisitions. We saw very good momentum in Q4 with Interceptor. But we need to see how that progresses from 2026. So I think there's upside there for us. And the acquisition that we announced today, we feel good about our ability to capitalize on that as well. So from an expense perspective, we baked in those expenses as part of that guidance, obviously. We didn't fully bake in any real upside for 2026. And we do believe that we can get there. So if you had to break down that headwind, I would say that for the most part, it comes from the renewals, but, obviously, some of it is from the acquisitions themselves. Mike Cikos: Our next question is from Mike Cikos with Needham. Mike Cikos: Great. Thanks for taking the questions here, guys. And just, Guy, to be perfectly clear on the M&A assumptions. So you're not assuming any revenue or ARR contribution from Cyril or Slashneck even though both those products launched last year? And then I guess the follow-up, given some of the changes that were announced following Q3 with the 5% headcount reduction, and the downsized federal team, can you just help us think about your go-to-market organization today? What is the typical tenure of your sales rep? Have there been any changes to incentives as we enter the new year? Thank you. Guy Melamed: Absolutely. So, yeah, when you think about kind of the assumptions that we had for guidance for 2026, we didn't bake in any real top-line contribution from any of the acquisitions. That doesn't mean that we don't think we can generate activity and top-line growth from them. But our starting point assumed a real modest contribution from them and nothing major, but we do feel that there's a path there, and we're seeing good momentum in conversation with customers. Keep in mind, the INTERCEPT acquisition only closed in September. So it's a really short runway when we sit here today for a company that didn't have any material ARR, but we definitely see significant opportunity going forward. In terms of kind of the rep profile, I think that one of the things that is interesting going into 2026 is that with those acquisitions, we actually do have a near-marked budget that we can go and replace. Which does change and simplify some of the go-to-market for the sale of those Interceptor and the viral acquisition. And it's definitely something that we need to see how that progresses, but we feel very good with that path. And when you think about the comp plan for 2026, and I want to touch on the 2025 comp plan. I know many of the investors asked us a lot about it throughout the year. But in 2025, reps had a lot of ways to make money. They could sell to new customers. They sell to existing customers. And they could make money from the conversion. In 2026, they cannot retire quota on the conversions themselves. So their way to make money is by selling to new customers and by selling to existing customers. And I want to put another caveat in. They can make money by selling to both. But they have absolutely no way of making big money if they don't sell to new customers. So there is a threshold from a new customer perspective for them to sell. And we believe that as we have gone through the non-SaaS ARR and got to 86% and can go back to focusing on new customers and existing customer sales and don't need to have the reps cannibalize their time by focusing on the conversion, that actually opens up their ability to increase their productivity levels. And that's the way the comp plan was structured. With no ability for them to make money towards their quarter retirement on the conversion side. Rudy Kessinger: Our next question is from Rudy Kessinger with D. A. Davidson. Rudy Kessinger: Hey. Great. Thanks for sneaking in here. So, Guy, actually, I again, as everybody on this call said, appreciate the new disclosure here. I actually want to dig into the SaaS net new ARR guidance, excluding the conversions midpoint of about $121.5 million. I certainly hear your comments about, you know, reps were really bogged down and tied up with conversions last year, and yet you still did about $110 million of net new SaaS ARR excluding those conversions. And so if I consider the reps being much more freed up to really focus on SaaS expansion, new logos this year, $121.5 million actually to me seems, you know, pretty conservative and or lower than it should be if I assume you maintain at least a 110% SaaS net retention rate. So could you just maybe take it a step further? Like, what are the assumptions in that $121 million figure around new logo contribution, net retention rate, etcetera? And just how conservative are those assumptions? Guy Melamed: So you're absolutely right. We are guiding in a conservative way as a starting point for the year. And you're absolutely right that if you look at the net new SaaS ARR excluding conversions being at $109.5 million, but also accounting for approximately $190 million of conversion ARR, when you don't have that component, the conversion side, then you can go and sell to new customers and existing customers in a better way. So I agree with your statements, and I think that we fully understand what we need to do in order to execute and grow this business in the way that we believe we can grow the business. Sitting here today, we feel very comfortable with the guidance that we provided. And know what we need to do in order to execute and improve it throughout the year. But the assumptions from an NRR perspective is that we actually can do better. There's a lot for us to sell. Going back to the base. And we think that we're selling to new customers, freeing that time that was cannibalized by our reps, they can actually go to many more new customers and sell to them as well. So I agree with your statement. And that is our starting point for 2026. Yakov Faitelson: If you look at the offering today versus just a year ago, we, you know, doubled the platform in terms of value. The focus needs to be not on the conversions to create value and make sure that the data of our customers is protected in an automated way. This is our mission, and this is what we are going to do. Joseph Gallo: Our next question is from Joseph Gallo with Jefferies. Joseph Gallo: Hey, Really appreciate the question and thanks for all the extra disclosures. Guy, can you just help me understand a little bit more the end-of-life headwind to free cash flow? I mean, your billings and ARR were really strong in 4Q. You're still guiding for ARR to grow in calendar '26. So I'd imagine billings and bookings are growing. So just is there something different with the cash collections? And then just any more that you can kind of quantify on, you know, what the benefit for not having to support on-premise can be? Is that a few points to margin? And is that a '26 story or '27? Thank you. Guy Melamed: So, Joe, I actually think that the free cash flow headwind is a much simpler story than anything else, honestly. When you think if you took the renewal rate, the historical renewal rate of the business, and baked it into the non-SaaS ARR, that is the delta. That is the headwind. And we're obviously not getting the same oh, at least the assumption is that we won't be getting the non-SaaS ARR at the same renewal rate historical level, a, because we didn't see that in Q3, and, b, although Q4 renewal rates they were still below historical levels for the non-SaaS business were better than Q3. And I think the end-of-life actually helped us get a lot of the customers converted, and the expectation is that the end-of-life announcement will actually help us get a lot of our customers converted in 2026. But as you can see, that $50 to $75 million range from approximately $105 million denominator is not over 90% renewal. And I think it's a much simpler math, and I know we're getting a lot of questions on it. But to me, it's a pretty straightforward calculation in terms of the headwind itself. So when I look at the actual kind of profitability profile for us as an organization, nothing really has changed. We're not changing kind of the philosophy of investment. We're not trying to invest more in order to generate a lower top-line growth rate. If you look at the trajectory from an ARR contribution margin perspective, and you bake in the additional kind of loss on the headwind from the non-SaaS component, you would see that we would continue to grow at the same historical level. But the announcement of the end-of-life and I said this before, and I probably want to reemphasize this. The announcement of the end-of-life actually helped us in three ways. One is generating that sense of urgency for customers to convert. The second one and I think this is actually important to note, if we would have kept the on-prem subscription going forward, and we would have had a renewal rate that is historically lower than or lower than our historical levels, then the growth rate would have been masked. The total growth rate would have been masked by that component versus a really strong SaaS business. And that's why we spent so much time on breaking out the SaaS excluding conversions and putting the conversions as a separate bucket. Because that allows investors and analysts to actually see the two companies that Varonis Systems, Inc. is right now, the forward-looking and the rearview mirror, which is that conversion component. And, yes, we believe that announcing that end-of-life going to 2027 and beyond can actually generate benefits on the bottom line on savings, and that's why we feel confident with our 2027 model. Junaid Siddiqui: Our next question is from Junaid Siddiqui with Truist. Junaid Siddiqui: Great. Thank you for taking my question. You've talked about MDDR having software-like gross margins over time. As it becomes a material contributor to your business, how do you envision gross margins? Do you anticipate any changes from the range that in that high seventies, low eighties? Guy Melamed: No. We don't expect any material change there. The MDDR has been very well received by both our customers and our sales force. And has been adopted very well. Keep in mind, we only introduced it in 2024, and it's been in a very positive way. We still believe that every single customer should have MDDR. It's going to take time, but we're definitely feeling very good about the path that we have taken so far and what is lying ahead with MDDR as well. Yakov Faitelson: But, also, it's very important to understand that the MDDR is really an AI-based offering. It's just a genetic offering in most of the alerts are being reviewed and closed by the AI agents, the robot. And this is the beauty of it. Operator: Thank you. There are no more questions at this time. I'd like to turn the floor back over to Tim Perz for any closing remarks. Tim Perz: Thanks, everybody, for the interest in Varonis Systems, Inc. We look forward to meeting with you all later this quarter. Goodbye. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.
Operator: Ladies and gentlemen, thank you for standing by. My name is Crista, and I will be your conference operator today. At this time, I would like to welcome you to the Jacobs Solutions Inc. Fiscal First Quarter 2026 Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. And if you'd like to withdraw that question, again, press star 1. Thank you. I would now like to turn the call over to Bert Subin, Vice President, Investor Relations. Bert? You may begin. Bert Subin: Thank you, Krista, and welcome, everyone. Following market close, we issued our earnings announcement, filed our Form 10-Q, and we have posted a slide presentation on our website we'll reference during the call. I would like to refer you to slide two of the presentation for information about our forward-looking statements, non-GAAP financial measures, and operating metrics. Now let's turn to the agenda on Slide three. Speaking on today's call will be Jacobs Solutions Inc.'s chair and CEO, Bob Pragada, and CFO, Venkatesh R. Nathamuni. Bob will begin by providing comments on the business, as well as highlights from our first quarter results and a recap of notable awards. Venk will then provide a detailed review of our financial performance, including commentary on end market trends, cash flow, and balance sheet data. Finally, Bob will provide closing remarks, and then we'll open up the call for questions. With that, I'll turn it over to our chair and CEO, Bob Pragada. Bob Pragada: Good afternoon, everyone, and thank you for joining us to discuss our first quarter 2026 business performance. We delivered very strong results for Q1, exceeding our expectations across all key metrics and made incremental progress toward achieving our FY 2029 targets. I'll quickly highlight a few key takeaways. First, adjusted EPS grew 15% to $1.53, supported by robust 8% net revenue growth and solid underlying margin performance. Second, our backlog grew 21% to over $26 billion, setting a new record, with our trailing twelve-month book-to-bill rising to 1.4 times. And third, we announced an agreement with the shareholders of PA Consulting to acquire the remaining stake in the company. We see PA's core competencies in digital consulting, innovation, and AI advisory as a force multiplier for Jacobs Solutions Inc. and a key accelerant in our strategy to redefine the asset life cycle. In summary, we are exiting Q1 with momentum, and the strong start to the year gives us confidence to increase our FY 2026 outlook for net revenue, adjusted EPS, and free cash flow margin, which Venk will go through in detail shortly. Turning to slide four, we provide a detailed overview of our quarterly results. We are very pleased with Q1 results as a strong operating performance paired with our lower share count drove the fourth straight quarter of double-digit growth in adjusted EPS. We also reported a substantial increase in our quarterly book-to-bill during Q1, to 2.0 times, positioning us well for the rest of FY 2026 and beyond. Turning to Slide five, I'd like to highlight a few notable INAF project awards for the first quarter. Q1 included several marquee wins that reflect the breadth of our capabilities and the strength of our demand across our end markets. Starting with water and environmental, we were selected to lead the engineering design for the Bolivar Roads Gate System along the Texas Gulf Coast. Spanning the narrow strait connecting The Gulf to Galveston Bay, this project is expected to be among the largest storm surge barriers in the world. Once completed, it will help protect more than 6 million people while safeguarding businesses and maintaining operations along the Houston Ship Channel, a critical energy corridor. This major program underscores our leadership in delivering complex and high-impact water infrastructure focused on long-term resilience. In life sciences and advanced manufacturing, we were selected to provide engineering, procurement, and program management services for Hut 8 Riverbend data center in Louisiana, a flagship AI high-performance computing project. The facility is poised to be one of the largest of its kind in North America. The region's power-dense utility infrastructure enables the speed, reliability, and flexibility required for next-generation AI workloads. This project demonstrates how we're leveraging our deep domain expertise in data centers, power, water, and digital twin technology to deliver increasingly complex facilities. In critical infrastructure, we continue to secure high-value mission-critical programs that underscore the strength of our combined Jacobs Solutions Inc. and PA Consulting capabilities. Notably, in the UK, the health security agency selected PA, supported by Jacobs Solutions Inc., to act as a delivery partner in its trust program, an initiative focused on strengthening resilience and safeguarding critical health data and infrastructure. Through advisory, technical, and delivery support, we'll help the agency meet data security and cyber requirements, ensuring the systems that underpin public health and emergency response remain resilient and secure. This award reflects the growing demand for our integrated consulting and delivery approach and reinforces our role in supporting some of the UK government's most critical priorities. Also within critical infrastructure, we were selected to lead program and construction management services for the $1.6 billion modernization of Cleveland Hopkins International Airport. The program will modernize aging infrastructure and improve accessibility and passenger flow at Ohio's busiest airport. Jacobs Solutions Inc. is ranked as Engineering News Record's number one firm in aviation, a sector where we continue to see significant growth in demand for terminal upgrades, master planning for new builds, digital implementation, and AI advisory. In summary, we are deepening our relationship with key clients, which is driving multifaceted, multiyear program wins as demonstrated by our significant backlog growth in the quarter. Now I'll turn the call over to Venk to review our financial results in further detail. Venkatesh R. Nathamuni: Thank you, Bob, and good afternoon, everyone. I'd like to echo Bob's earlier comments on our announcement to acquire the remaining stake in PA Consulting. Our partnership over the last five years has truly differentiated our approach to our clients' business, and we look forward to accelerating the integration of our combined offering. A year ago at our Investor Day, we talked about the power of focus, and increasing our ownership in PA Consulting to 100% will support our goal to simplify our structure, execute on our strategy, and produce predictable high-quality earnings over the long term. Now please turn to slide number six where I'll walk through our results for Q1. In the first quarter, gross revenue increased 12% year over year, and adjusted net revenue, which excludes pass-through revenue, grew by more than 8%. Q1 adjusted EBITDA was $303 million, growing more than 7% with our margin coming in about 13.4%. We absorbed less PTO than anticipated last year during Q1, resulting in a margin tailwind that did not recur this year. Overall, adjusted EPS rose 15% year over year, a great start to fiscal year 2026. Consolidated backlog was up 21% year over year to a record $26.3 billion, with our trailing twelve-month book-to-bill rising to 1.4 times. Book-to-bill was particularly strong in Q1, driven in part by several large awards in the life sciences and advanced manufacturing end market. We expect these awards to contribute positively to net revenue growth through fiscal year 2026 and beyond, but do note that they carry higher than normal pass-through revenue. Importantly, gross profit in backlog, which would not be impacted by this pass-through dynamic, highlighting the underlying strength of our sales performance, increased 15% year over year during Q1. Regarding our performance by end market, and infrastructure and advanced facilities, let's now turn to slide number seven. At a high level, all of our end markets performed well during the quarter, with strong revenue growth in life sciences and advanced manufacturing and critical infrastructure within INAF, as well as a forecast for enterprise net revenue growth. Focusing in on life sciences and advanced manufacturing, net revenue grew 10% in Q1, a nice improvement from Q4 as programs in our advanced manufacturing vertical ramp up. As we have noted in past quarters, strong award activity in both the data center and semiconductor sectors is now helping drive higher growth. Additionally, we continue to see favorable trends in life sciences, and this combination positions us well for the remainder of the year. Our current expectation is that growth in this end market will lead INAF in fiscal year 2026 as programs ramp up during the second half of the year. Shifting now to critical infrastructure, net revenue increased 8% over Q1 2025. Critical infrastructure is performing well across the board, with robust growth in transportation, particularly in rail and aviation, driving strong overall growth for the end market. Net revenue growth in our water and environmental end market increased sequentially to 4%, driven by high single-digit growth in water and a modest easing of headwinds in environmental. We forecast year-on-year performance for environmental will improve as we move into the second half of the fiscal year. In summary, we performed well across our end markets during Q1, and we believe we are positioned nicely for the remainder of fiscal year 2026 and beyond. Now moving on to slide number eight, I'll provide a brief overview of our segment financials. In Q1, INAF operating profit increased modestly year on year, with similar constant currency performance. PA Consulting operating profit increased 27% on 16% revenue growth and a strong operating margin of 24%. On a constant currency basis, operating profit grew 22%. PA continues to benefit from rising demand for digital consulting and advisory services in the public, national security, and energy sectors. As we look ahead, expect PA's revenue growth to remain solid with fiscal year 2026 tracking in the high single-digit range year on year. Moving on to slide nine, we provide an overview of cash generation and our balance sheet. For Q1, free cash flow came in at $365 million, supported by solid working capital performance, as well as a favorable cash timing item at the end of the quarter. Excluding this timing item, that will reverse in Q2, underlying free cash flow performance was still very strong and gives us confidence to raise our full-year free cash flow outlook, which I'll discuss shortly. Focusing in on capital returns, we increased our share repurchase quantum during Q1 to take advantage of the dislocation in our shares in the second half of the quarter. As a result, we're starting the year well on our way to returning at least 60% of our free cash flow to shareholders. Bob Pragada: Additionally, Venkatesh R. Nathamuni: we announced last week that we will be raising our quarterly dividend from 32¢ to 36¢ a share, a 12.5% increase. We have now more than doubled our quarterly dividend per share since 2019. Additionally, our net leverage ratio currently stands just below 0.8 times on LTM adjusted EBITDA, which is well below our 1.0 to 1.5 times target range. Our balance sheet strength has enabled us to increase share repurchases, raise our quarterly dividend, and enter into an agreement to purchase the remaining stake in PA Consulting. The acquisition of the remaining stake in PA will raise our net leverage to slightly above the high end of our 1.0 to 1.5 times target range upon closing, but we expect to return to the target range within a year. Finally, please turn to slide number 10 for our updated fiscal year 2026 outlook. Increasing our forecast adjusted net revenue growth, adjusted EPS growth, Bert Subin: and free cash flow margin Venkatesh R. Nathamuni: relative to our guidance from last quarter. We're increasing our fiscal year 2026 net revenue range to 6.5% to 10% year over year, adjusted EPS range to $6.95 to $7.30, and free cash flow margin range to 7% to 8.5%. Our expectation remains unchanged for an adjusted EBITDA margin range of 14.4% to 14.7%. Notably, our outlook for fiscal year 2026 implies over 16% year-on-year growth in adjusted EPS at the midpoint. We provide relevant assumptions on the right side of the page to help with your modeling. Please note that our guidance does not reflect the announced acquisition of the remaining stake in PA Consulting, and we plan to update our outlook once the deal closes, likely with our Q2 results in May. Based on current assumptions, we expect the acquisition to be accretive to adjusted EPS in the first twelve months following closing. We anticipate the $16 million to $20 million projected cost synergies will begin to phase in during fiscal year 2026, with revenue synergies providing incremental upside. As it pertains to Q2, we expect our adjusted EBITDA margin to be in the range of 13.8% to 14% with year-over-year net revenue growth of approximately 6.5%. In summary, we're off to a great start in fiscal year 2026, and remain focused on strong execution, profitable growth, and continued capital returns. With that, I'll turn the call back over to Bob. Bob Pragada: Thank you, Venk. In closing, we're tracking very well to the start of the new fiscal year. We performed ahead of our expectations in Q1, enabling us to increase our full-year outlook across three key metrics after just one quarter. Our strong execution, secular growth tailwinds, and the announced acquisition of the remaining stake in PA Consulting position us extremely well to deliver on our FY 2029 targets. Operator, we will now open the call for questions. Operator: Thank you. We also ask that you limit yourself to one question and one follow-up. For any additional questions, please re-queue. And your first question comes from the line of Sabahat Khan with RBC Capital Markets. Please go ahead. Sabahat Khan: Great. Thanks, and good afternoon. Maybe just the higher-level question on sort of the outlook here. And obviously, this last calendar quarter to end the year had some concerns about a government shutdown. Doesn't seem to have flown into your numbers. Similarly, obviously, some puts and takes on the macro. If you can just walk us through kind of what's reflected in your guidance, what it would take to get to sort of closer to that higher end of the top line guide versus the lower end, and how you have sort of baked in some of the potential green shoots and potential sort of government-related considerations into this updated guidance? Just start off? Thanks. Bob Pragada: Yeah. Sure. Savi, just on your first one with regards to kinda how we position ourselves within that revenue range that we talked about. I'd say it would be the burn profile of the backlog. We had some really nice wins within our life sciences and advanced manufacturing group driven by data centers and chip manufacturing. Those tend to have pretty high velocity to them. And so, you know, if those continue to go at the pace that they are, that would be a driver. And we're also seeing a nice tick up across the international business. An international business that grew over 9% this year, and that was pretty broad-based. In Europe, Middle East, as well as in APAC. And so I think that balance of our business and, you know, not feeling the effects of the government shutdown has given us confidence in the range that we put out there. But, again, it'd be the velocity of that private sector work that would get us to the higher range. Sabahat Khan: Great. And then just for my follow-up, I think I was Venk's comment around the environmental services side of the business doing better in H2. That was a business that investors had some questions about last year just given some of the evolutions and sort of the backdrop. Nice to hear that's trending in the right direction. Can you maybe just talk about is it a specific end market that's driving that? Is it just maybe some, you know, catch up in that? We're just con kind of bigger picture demand drivers of the environmental services business because it's been a bit of a focus for investors. Thanks, and I'll pass the line. Bob Pragada: Yeah. Yep. So I kinda I would segregate it into three buckets of how it affected us over the course of calendar '25, and now we're starting to see a bit of an inflection point in our pipeline. That's why we're pointed to the second half as a recovery. The government component of that for us is very centric towards US Department of Defense. And now we're starting to see some larger programs specifically for the Navy and the Army Corps of Engineers come through with some optimism on where we're positioned, longtime clients of ours. And so that's kinda one piece. The second piece that and that was had some of the indirect effects of dose if you think back to 2025. So now we're seeing that flow through. The second is around this transfer around the disaster relief work from the federal government to state and local. That has taken a longer time to settle down. And so as that continues to play out, we're starting to see some early indications of that in our pipeline. And then the third is, in this we have seen a pickup in this component is the private sector, and this is kind of the diversity of how we apply our environmental practitioners across our private sector in whether it be industrial or in life sciences and advanced manufacturing those jobs have started to pick up. Now they're smaller in scale. So they're not having an effect right now. But as that continues to grow, and we're seeing it again in our pipeline, and that pipeline is up double digits, so that's where we're kinda pointing to the second half. Operator: Your next question comes from the line of Michael Dudas with Vertical Research Partners. Please go ahead. Michael Dudas: Good afternoon, gentlemen. Mike, good afternoon. Very impressive certainly on the book-to-bill. Sure. Seems like the projects are Operator: Pardon the interruption. Michael, we are having a hard time hearing you. Michael Dudas: Can you hear me now? Bert Subin: Yep. Got you now, Mike. Michael Dudas: Okay. Thank you very much. So my bad. Bob, on very impressive on the book-to-bill backlog growth in Q1. Maybe you could share on the it looks like the projects are getting larger, a little longer for gestation, but much more complex. And how that plays towards what your current pipeline looks, maybe that two-year pipeline outlook. And the ability to gain more, I guess, life cycle revenues or business out of the bidding that you're working on with the negotiation with these larger projects, which the clients that are certainly we've been reading about in the press that seem to be accelerating their cap spend in your especially in your important private sector markets. Bob Pragada: Yeah. Thanks, Mike. I'd say maybe one comment on the overall portfolio, and then I'll talk specifically about what we're seeing in the private sector accelerate at a faster pace. Overall, this is always in our strategy. We talked about it. You know, we talked about it at investor day with regards to redefining the asset life cycle and continuing to work across that. That is happening on a broad base. I'd say that gestation period of the work probably is going faster within water. Little longer in transportation and energy and power, but we're moving at pace. Private sector is happening in real time. And a lot of it is for just the demand cycle that's happening in those end markets, whether it be data centers, chip manufacturing, and life sciences. So for us, that business is in growth mode. We are seeing the pipeline grow at some significant rates. I'd say that two-year pipeline that you're referencing one year, it's greater than 50%. If I were to have a composite rate. And as you get past that period, private sector, we don't really get past eighteen months with any kind of high level of a surety and pipeline, but that twelve to eighteen months definitely greater than 50% on a composite rate. Michael Dudas: I appreciate that. Excellent, Bob. And my follow-up for Venk, you know, the very strong Q1 start on cash flow and the dynamics throughout the year, so given the financing that you're participating on PA and such, the 60% free cash off the company is still targeted towards, again, the share repurchase on a more ratable basis. You feel still comfortably to delever and add opportunistically when the market requires on your cap allocation in this year? Venkatesh R. Nathamuni: Yeah, Mike. Thanks for the question. And as you pointed out, you pretty strong start to the year in terms of free cash flow generation. And we feel pretty good about where we end the year, which is why we raised the guidance. So as it relates to our current position is in terms of repurchases, obviously, we to take advantage of the market dislocation as I mentioned in the script. Increased our repurchases in Q1. But we also increased our dividend. So we feel very good about our commitment to returning 60% plus of free cash flow to shareholders. At the same time, with a solid balance sheet and the good cash flow that we're generating, we also wanna quickly delever from the one to 1.5 x range. When we do the PA financing, we'll we have good line of sight to be able to get to that range within the first four quarters. So a solid cash position to start with, really good cash flow, and we have enough firepower to allocate our capital between repurchases as well as debt pay down. Michael Dudas: Thanks, gentlemen. Bob Pragada: Thank you. Operator: Your next question comes from the line of Sangita Jain with KeyBanc Capital Markets. Please go ahead. Thank you. Good afternoon. Thanks for taking my questions. Sangita Jain: If I can follow-up on the cash flow question, Venk, you said cash flow in the quarter was quite high, but some of it may reverse in the second quarter. Could you elaborate on what that reversal relates to? And, also, I was under the impression there was gonna be some cash tax payments that you would have to take care of in the first half. Has the timing of that changed? Venkatesh R. Nathamuni: Yeah. So, yeah, thanks for the question. So as you pointed out, you know, a really good cash flow in the first fiscal quarter, I would say the vast majority of that strong cash flow was driven by really fantastic working capital performance across the entirety of our customer base. So that was number one. We also had a onetime, you know, impact from a customer in the data center space, you know, where we collect the revenue and the cash during a particular quarter. And then we pay the subcontractor in subsequent quarters. So that's what's gonna drive the free cash flow performance in Q2. But we have a very good visibility that, you know, in the first half, we'll still be free cash flow positive. And the tax payment, as you mentioned, is gonna be a Q2 phenomenon. That'll impact Q2. But when you look at first half and first couple of quarters, in aggregate, we feel pretty good about our free cash flow being positive for the six months of the year and, obviously, continued strength in Q3 and Q4. Such that we're able to get to the seven to eight and a half percent range. Sangita Jain: Got it. Thank you. Appreciate that. And then as a follow-up, can I ask about the size of fee contract that you press released a while back in the UK? And if you can elaborate on the size of that and if there is further scope if there's a chance that the scope on that may increase over time. Bob Pragada: It could. We're doing just to clarify on that, Sangita, we're performing the enabling works and the program management around the enabling works. And so that has continued through '24 actually, it started even before '25. '24, '25, and we'll continue into '26. There is for continued scope growth on that, and our relationship there with sizable c is strong. So we would anticipate so. Sangita Jain: Got it. Thank you so much. Operator: Your next question comes from the line of Steven Fisher with UBS. Please go ahead. Steven Fisher: Just in light of the backlog growth, obviously, we know from some of the press releases, descriptions of what scope is on some of these projects, but just curious what some of the pass-through things are that are going through there. And maybe if you can give us maybe a sense of maybe looking at the profit increase in backlog might be more representative. I know you said 15% year over year. Curious if you can give us some measure of that sequentially. Bob Pragada: Yeah. Let me go I'll go back to the sequential gross profit in backlog. But I'd say that see, the majority of the pass-through is related to, as you know, in a data center, tremendous amount of electrical equipment and equipment purchase that will be and it was announced on who's gonna be providing that equipment in modular form. So the interconnects and how that equipment is arriving to site in modular form would all be around the envelope of a pass-through. We would do the design and not just that, but also the balance of plant to house as well as the interconnections of all the utilities. The trade contractors also end up making that pass-through too. And traditionally, we put a fee on both of those. On the gross profit sequentially, growth, say it's high single digits sequentially quarter to quarter, year on year, that 15% number is a strong number. Steven Fisher: Okay. Very helpful, Bob. And then just obviously, last quarter, and last few months, there's been lots of discussions and follow-ups about AI, and I'm just curious if there's been any change to either what you've observed in your own business, anything that has developed or your own thinking or message that you'd like to give on sort of the AI outlook and impact for the industry and the company? Bob Pragada: Yeah. Absolutely, Steve. Nothing has changed. We felt strongly about AI before the November event. That happened, and we feel equally and more strong about AI moving forward. Kinda the main things we've been about, not just in Q1, I'm sorry. For the Q4 call in Q1 and that we've been talking about since 09/02/2019. We are getting great data advantage in what we do. Our datasets and our information are continue to be strong, strong platforms for us to use as for insights as well as build the models that we're building for our clients. It is helping I say it, digital enablement and AI with the scarcity of resources that we are continuing to face. We are growing headcount while we're using digital enablement to continue to grow at the same time of that scarcity. And I'd say the biggest piece has really been around you know, what's happening in the AI ecosystem from chip manufacturing to power and water requirements all the way to the data center, you know, we're playing across that continuum. And seeing that we well, we're seeing it in the numbers. Right? So kind of the ultimate test of the power of AI is coming through in our bottom line results. Steven Fisher: Terrific. Thanks, Bob. Operator: Your next question comes from the line of Adam Bubes with Goldman Sachs. Please go ahead. Adam Bubes: Hi, good afternoon. Maybe just one follow-up on the AI point. So you've been talking about AI machine learning for a couple of years now. So, just wondering if you could expand on to what extent AI machine learning is impacting projects and productivity today and just how those conversations with clients have gone in terms of your ability to capture value from either improved productivity or high grading your offerings? Bob Pragada: Yeah. So a couple of things. One, as far as how we're talking to our clients about it and how we are driving it as a value differentiator for our clients, if you think about the speed right now that we are going at especially just in the private sector, but also in the water market as well. And transportation. The schedules and the delivery model for these can't be done without the use of the AI platforms. When I say AI, machine learning, the automation of tasks that we put into play. So it is driving backlog growth through differentiation in us in our award rates and the bookings. The other is that in the field, we're using some strong predictive analytics. It's a platform called Acuity in order to really get out in front of field level issues that are coming up in real time. And that's been a real game changer for us. We've got Acuity deployed across all of our end markets. In the field program management work that we do. And then the last thing and we've talked about this several times, but we're seeing more you know, we use replicas, our digital twinning. But now digital twinning not just in the water sector, but now in the manufacturing sector, and the data center sector is allowing for us to get to the data insights in the simulation technologies. Well, with the simulation technologies in a much faster rate in order to solve for some really, really complex issues that we're solving for our clients. So overall, it's coming through. We've got a whole slew and suite of platforms that we're using. Adam Bubes: And then a really strong PA consulting margin performance, I think 24% this quarter. Any outsized benefit to call out there, or what's the right way to think about sustainability of those margins in the balance of the year? Venkatesh R. Nathamuni: Yeah, Adam. Great questions. I would say, yeah, as you point out, really strong performance. I know most of it is driven by the fact that, you know, there's solid top line beat, and we had some operating leverage there as well. What we have stated all along is that we wanna balance, you know, really high single-digit growth for PA with margins that are, as you know, already industry best. So a 22% margin is kind of the way we think about the long-term model there, and we wanna make sure that we have a good balance between high revenue growth and high industry-leading margins. So the way to model the PA margins going forward is about 22%. But, clearly, we had a really strong performance there in the just concluded quarter. Adam Bubes: Great. Thanks so much. Venkatesh R. Nathamuni: Welcome. Operator: Your next question comes from the line of Jamie Cook with Truist Securities. Please go ahead. Jamie Cook: Hi. Congratulations on a nice quarter. I guess, sorry, Bob, another on AI. Just as you sit here today, and think about AI and the opportunity for Jacobs Solutions Inc. both on the revenue on the margin side, how do you balance the two know what I mean? I mean, over time, do you if you had to pick one versus the other, do you think there's an opportunity to grow the top line at a quicker rate and perhaps operating profit more so versus the margin, just sort of how you're thinking about that balance as AI impacts your business model. I guess it's my first question, and then I'll then I'll ask another one after that. Bob Pragada: Okay. Great. Jamie, if the world was plentiful with qualified resources for all the work that's out there, from, you know, filling the denominator of the TAMs that we play in. I think that, you know, we would probably be making choices between top line and bottom line. We're not. We are in a resource-constrained market that AI is enabling us to grow the top line, while we're operating with, you know, in a resource-constrained environment and driving efficiencies in the type of solution that we're delivering to our clients. So not a choice as well as not a pivot. We feel like we're well-positioned to do both. Jamie Cook: Okay. Thank you. And then, I guess, Venk, just on the margin performance in I and AF in the back half of the year. Obviously, we're expecting some margin improvement to achieve besides PA Consulting strong margins to help get to your full-year adjusted EBITDA margin forecast? Just what's driving that? Is it more mix? Is it self-help? Just trying to understand what's driving the margin improvement in I and AF in the back half of the year. Thank you. Venkatesh R. Nathamuni: Yes. Jamie, thanks for your question, and thanks for your comments as well about the quarter. I'd say, you know, lots of really positive trends for us from a margin perspective. You know, obviously, Q1, you know, we came in at 13.4%. And Q2, we're guiding for a 50 basis point sequential improvement. And then we see a linear progression in Q3 and Q4. So few things, you know, that drive that margin expansion for us. Number one, you know, continued operating leverage. So gonna maintain the discipline in terms of ensuring that our OpEx grows at a slower pace than revenue growth. And then, you know, clearly from the standpoint of some of the gross margin drivers that we talked about Investor Day, with the way we expect our global delivery to step up, which is already happening, and we see more of that coming in Q2, Q3, and Q4. And then also on the commercial model side. Right? So with the extent to the extent that we are engaging more with the life sciences and advanced manufacturing clients, that also helps, you know, from the standpoint of driving those commercial models. So I'd say it's not one thing. It's a combination of several things that we talked about in Investor Day, more of that coming to fruition in Q3 in Q2, Q3, and Q4, and we feel really good about our margin performance for the full year. Obviously, you know, just for context, you know, in fiscal 2025, we grew our margins by 110 basis points. And we're guiding for a range of 50 to 80 basis points increase in fiscal 2026. Bob Pragada: Maybe one add to that is that in the second half, is really where we're starting to see the advanced facilities or some of these bookings that we have from a mix perspective. Have contribution to that linear progression in our margins. Jamie Cook: And confidence. Operator: Thank you. That's very helpful. Your next question comes from the line of Andy Wittmann with Baird. Please go ahead. Andy Wittmann: Great. Thanks for taking my questions, guys. I wanted to ask about this very good backlog. Very exciting. Obviously, some of these really marquee projects, Bob, I thought maybe given that there's a little bit more mix here to some of this EPCM scope, I'd wanna ask about how you're managing the risk criteria here. Are these contracts are you basically able to offload any risk to these to the subcontractors that you are managing on this? Or do you bear any? I'm just wondering because obviously, some of these projects are pretty significant and you know, percent changes on large numbers can actually kinda matter in the future. So maybe I'll let you address that, please. Bob Pragada: Yeah. Absolutely. So our risk profile, Andy, has not changed. And so the same EPCM delivery model that we, you know, that we've been very focused in for the balance of twenty years. In life sciences. We do a lot in the water sector as well. Those are the same risk profiles we're taking now. And as you know, we've been pretty consistent on how we flow those to our supply chain. So the awards that we're getting right now, we have not inflected to a different risk profile. Utilizing the same risk profile we have for the balance of the twenty years in those sectors. Andy Wittmann: Okay. Great. And then I just wanted to get a clarification. On PA and the capital deployment that went along with that as well. You know, it's obviously a large capital deployment. So when I was looking at the press release, the EBITDA increase that you're getting from PA is because PA is already consolidated, the EBITDA that you're picking up is really only the reduction of the noncontrolling interest. Obviously, noncontrolling interest is after tax. You'd have to gross that $52.3 million up to a larger number. But even when you do that, against the $1.6 billion capital outlay, the math that I get here from the multiple is substantially larger than the 13 times. And so I know there's some kind of different accounting GAAP accounting that's maybe around this, and I just thought for to the benefit of everybody, you could address, how that works and why it works out that way. Please. Venkatesh R. Nathamuni: Yeah. Andy, thanks for the question. And I know that we know, obviously, you mentioned that in your report as well. So at a high level, as you rightly pointed out, there's a slight difference between the accounting and economic ownership. Just for everybody's benefit here, you know, the economic ownership was 65% and the accounting ownership was 70. But there's obviously some dilution from what we call c shares, which are basically shares that the employees own. So, to make a long story short, you know, that the delta. But in terms of the absolute valuation, as we mentioned in the press release, you know, it's a 13 x multiple on EBITDA. And then if take into account the synergies, it's a 12.3 multiple. So we feel really good about the valuation for this and the value creation. But, you know, happy to take additional questions and maybe Bert, you can add to it as well. Happy to be Yeah. Sure. Andy, Bert Subin: you know, what is actually what's happening here is when you take the accounting ownership, which was 70% you reduce it by the employee benefit trust, we get down to 60% ownership. And so we acquired 40% of the stake, which we highlighted. On the NCI, what we did is we reduced EBITDA by an after-tax number, and so it reduced the EBITDA by a smaller amount. So essentially, you know, we'll be adding back that NCI component to our EBITDA going forward. I think the important takeaway that we, like, highlighted in his prepared remarks is you know, we expect this to be accretive to earnings and we see a lot of opportunity from both the revenue and cost synergy with the collab with the combination of PA and Jacobs Solutions Inc. So we can take some of the more specifics offline, you know, when we talk later on. Andy Wittmann: Okay. Thanks for clarifying that, guys. Bob Pragada: Yep. Operator: Your next question comes from the line of Chad Dillard with Bernstein. Please go ahead. Chad Dillard: Hey. Good evening, guys. So I wanted to spend some time on the project pipeline. I think you talked about it being up double digits. Could you break that down by the core end markets? And then you can comment about fixed versus reimbursable. And then finally, just on the global delivery model, you know, how much of that is deployed using that method versus what's in your revenue today? Bob Pragada: Yeah. Maybe I'll simplify it, Chad. If you look at our three main verticals, water and environmental, up the pipeline is up when I say double digits, pretty much double digits that are 25% and above. In life sciences and advanced manufacturing, double-digit pipeline growth. Those are 50% and up. And then our transfer and our critical infrastructure, we're talking kinda high single digits and low double digits pipeline growth. That's not acutely focused on the US. That's a global number. And so, you know, the pipeline is strong, and that's a twelve to eighteen-month pipeline that we look at. That you know, then there's win rates and everything else. But the markets that we're serving are in a really strong state right now. Chad Dillard: Gotcha. That's helpful. Then just maybe circling back on the AI topic. So how are you communicating to your customers the value creation from deploying AI? Like, in a particular project? Are you having explicit conversations about sharing that? Maybe just, like, talk about, you know, if you can even give, like, a particular example. That'd be very helpful. Bob Pragada: Yep. Well, in order to do that, you think you gotta go back and our client's issues right now, we're not solving for issues that were around or even contemplated five years ago, ten years ago, twenty years ago. And so how we're articulating this to our clients is not in the form of bots or agents or people being replaced with AI figures. How we're discussing it is the use of data, to get greater data insights to solve for complex issues and deliver outcomes at a faster, and more predictable rate. That's how we're describing it to our clients. And our clients are cocreating with us in the platforms that we develop. Kind of part one. The second where we go to market is around AI advisory. But we have whether it be in the aviation space, or it be in the transportation space, we've got, you know, a lot of our clients that want to understand how AI can enable their business even more. And so now with PA, we've now doubled the size of our AI, not just on the development side, but also AI consultancy. Component as well. And this is an AI consultancy just driving business transformation. This is AI consultancy on how they can effectively serve their client base even greater. So we've you know, the investment thesis around increasing our investment in PA coupled with how PA is growing in that space across all the end and then us going to market together is really creating an exciting story going forward. Chad Dillard: K. Thanks, Bob. Operator: Your next question comes from the line of Andy Kaplowitz with Citigroup. Please go ahead. Andy Kaplowitz: Hey. Good afternoon, everyone. Bob Pragada: Hi. Good afternoon. Andy Kaplowitz: Bob, I just wanna dig in on a couple of areas. I think historically, you guys have been very strong at semicon, particularly on the side. So what are you seeing in terms of investment there? Could we actually be in acceleration mode again? Like, seems like we are, but maybe any more detail there would be helpful. Bob Pragada: Absolutely. Short answer is yes. Yes, Andy. We are in acceleration mode. You know, there are three main players around the world. One is American. And in the advances in high bandwidth memory that the American provider is going to market with. At record pace. You know, to twenty years during the traditional DRAM cycle to advance nodes. That twenty years is now being shortened into two to three. And so to get the plant ready and delivering on those chips is a big deal. So they've made some announcements. In Idaho and New York, and we're squarely in the middle of those. Andy Kaplowitz: And then, Bob, like, just following up on the water vertical. I mean, I think you answered a question earlier about environmental. Water has been strong for you guys for a while. I get some questions occasionally about municipal spending, what eventually happens as IIJ starts to run down. So maybe you can talk about I think you've had good bookings here in water, but maybe you can talk about the longevity of the water infrastructure cycle as you see it. Bob Pragada: Yeah. It's high single digits for us right now and how it's flowing through, Andy. And so maybe I'd kinda divide it between US and international. Maybe start with the real positive. You know, the result of the AMP eight cycle in the UK is driving kind of double-digit growth for us in the water market. There in Europe, but we're also seeing strong tailwinds in The Middle East and in Australia. Australia has been a real highlight for us both in water and in transportation. You know, the municipal spending and the tie to IJ never really was a strong one. IHA really was focused heavily on transportation. And so that has continued. And, again, the whole water scarcity aged assets and just the sheer effects of climate. These aren't I'm not saying they're completely delinked from funding opportunities that states and locales have. But definitely have risen up on the priority list just because of the severity. So we see kind of a long-term tail on that. And, Andy, if you could add to this what Rob said, you know, there's been tremendous Venkatesh R. Nathamuni: strength in bookings in water over the last several quarters. I know we've highlighted some marquee wins that typically take multiple years to play out. So we see that pipeline continue to grow, and the visibility for a multiyear period, so we feel really good about our water market overall. Andy Kaplowitz: Appreciate the color, guys. Operator: Your next question comes from the line of Jerry Revich with Wells Fargo. Please go ahead. Jerry Revich: Hi. Good afternoon and good evening. Can I ask on Critical Infrastructure, really impressive performance relative to the end markets that you folks are clearly gaining share? Could you just double click for us in terms of the drivers of the share gains? Is it just part of the market where you folks have higher concentration? Have you been on the right projects moving forward? Can you just expand on the drivers of what looks to be about five, six points of end market outgrowth that you're delivering? Bob Pragada: Well, maybe I'd most succinctly talk about it in two main areas. Jerry. One is that our international business in transportation not that it has been strong, very strong. And that's been highlighted by really key wins that we've had in Europe, in The Middle East, and in Australia. Australia it's been real, really nice growth there as well. Aviation and rail. Has really been the strong drivers there. We still do a lot of work on the highways work. But those two have been really strong drivers. And then The US, you know, with continued growth in the aviation sector there, coupled with now some high-speed opportunities as well as pass-through rail. In locations. We've been capturing share gain in that area as well. So strong internationally, driven by aviation and rail and highways, strong in The US. Driven by aviation and rail. Jerry Revich: And, you know, if we could just pull on that market share thread, you know, into the AI theme you folks on the semi plant side with the use of digital twins have been able to allow your customer to deliver projects really quickly. Just it sounds like based on your comments earlier on the call, Bob, you see yourselves as gaining share in that type of environment. What's the outlook for the broader industry structure as you see it? Five years down the line, ten years down the line? Do companies that look like Jacobs Solutions Inc. can share companies like Jacobs Solutions Inc. do more EPCM type work? For an integrated solution like you're doing here on the data center example that you gave us. Can you just talk about how you see this all playing out for the industry as a whole? Because you know, you folks have been ahead of the pocket terms of your digital twin investments, etcetera. Bob Pragada: Yeah. So maybe and just to clarify, Jerry, you were talking specifically about semi, or were you talking kind of broader base across the you know, kind of the tech landscape? Jerry Revich: Yeah. Thank you, Bob. I was just talking across the broader tech landscape. Right? So in other words, you folks have clearly used digital tools and let the market have gained share. And I'm just want your perspective on where you see the industry headed in five years now that the tools are getting better and better. Bob Pragada: Got it. Got it. So I kind of talk about it from with our participation across the ecosystem. Of call it the electron landscape, everything from the chip at the semi side through power and water whether it be at the grid level or eventually goes into the data center. Our participation across that ecosystem, I think, has been a big differentiator. And so when I look out five years from now, you know, the partnership that we have with NVIDIA and the kind of the tech relationship down to the chip design. And how that affects utilities for these plants whether it be with any of the high bandwidth memory players or other traditional logic players. That's what's driving that out year growth. Because as these plants no plant is the same. As these plants are continuing to become more and more complicated, we're out in front. Of those. And you back all that up with design automation, AI tools in order to get greater data insights, and we're continuing to really end that digital twins like you said in I'm sorry, Jerry? Then your you know, that protective I don't know if I'm allowed to call it a mode, but I will. That mode starts to develop, and we go from there. So we're excited about where we're positioned. This is something we've been in for the better part of forty years, and we see that going forward for another forty. Jerry Revich: Thank you. Operator: And that concludes our question and answer session. I will now turn the conference back over to Bob Pragada for closing comments. Bob Pragada: Thank you, Krista. Thank you, everyone, for joining the earnings call. Some great questions. Really excited about the performance last quarter. And our performance for the balance of the year, and we look forward to engaging with many of you over the coming days and weeks. Everyone. Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Hello, and thank you for standing by. My name is Tiffany, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Q3 fiscal year 2026 quarterly earnings results call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star, then the number one, on your telephone keypad. I would now like to turn the call over to Nicole Shevins, Senior Vice President of Investor Relations and Corporate Communication. Nicole, please go ahead. Nicole Shevins: Good afternoon. Thank you for joining our conference call to discuss our results for the 2026 ended December 31, 2025. Today's call will be led by Strauss Zelnick, Take-Two Interactive Software, Inc.'s Chairman and Chief Executive Officer, Karl Slatoff, our President, and Lainie Goldstein, our Chief Financial Officer. We will be available to answer your questions during the Q&A session following our prepared remarks. Before we begin, I'd like to remind everyone that statements made during this call that are not historical fact are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors. These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-Ks, quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors. I'd also like to note that unless otherwise stated, all numbers we will be discussing today are GAAP and all comparisons are year-over-year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. Our press release also contains a reconciliation of any non-GAAP financial measure to the most comparable GAAP measure. In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC can be obtained from our website at take2games.com. And now I'll turn the call over to Strauss. Strauss Zelnick: Thanks, Nicole. Good afternoon, and thank you for joining us today. I'm pleased to report that we delivered another outstanding quarter, including net bookings of $1.76 billion, which surpassed meaningfully the high end of our guidance. All of our labels outperformed substantially our expectations and contributed to our ongoing success. Due to our strong results and positive momentum that has continued in the current quarter, we're once again raising our outlook for the full fiscal year. We now expect net bookings to range from $6.65 billion to $7 billion, which represents 18% growth compared to fiscal 2025. At the midpoint, our revised net bookings forecast is approximately $725 million above the initial outlook we provided in May 2025, which reflects the creative passion, hard work, and consistent execution of our teams. Turning to highlights from the period, I'll begin with the fantastic performance of our mobile business. Peak's forever franchise, TuneBlast, grew 43% year-over-year and surpassed $3 billion in lifetime net bookings, an extraordinary achievement for a title that has been engaging players for more than eight years. The game continues to rank among our most valuable franchises, showcasing the long-term value of our match-three portfolio. Match Factory, another hit from Peak, grew approximately 17% over last year. The title remains a top contributor two years after its launch, affirming our strategy of building a diverse portfolio of games with vast global appeal. Color Block Jam remains Rolex's all-time top-performing title and was featured in Apple's 2025 free games list in the US, underscoring the title's success. Empires and Puzzles and Words With Friends grew 116%, respectively, over last year. Advertising revenues grew 10% over last year, driven by higher average revenue per daily active user, and we're highly confident in the future of this component of the business. 2K's mobile offerings also had another solid quarter, with WWE SuperCard surpassing 38 million lifetime downloads, NBA 2K's Mobile continuing to expand its audience, NBA 2K26 Arcade Edition holding its top five position on the Apple Arcade charts, and NBA 2K All-Star in China growing to nearly 9 million registered users after less than one year in the market. Mobile direct-to-consumer business delivered its strongest quarter on record. We've introduced recent enhancements that enable more personalized offers, flexible pricing, reduced payment friction, and alternative payment methods. With the regulatory environment becoming even more favorable to us, we view direct-to-consumer as a meaningful growth driver that will help accelerate net bookings, margins, and profitability. NBA 2K26 delivered another stellar quarter, yielding significant upside to our forecast. To date, the title has sold in approximately 8 million units, representing a high single-digit percentage increase over NBA 2K25. Recurrent consumer spending, daily active users, and MyCareer daily active users all grew 30% year-over-year. Based on its phenomenal year-to-date performance, NBA 2K is on track to generate the highest level of annual net bookings and recurrent consumer spending in franchise history. I'd like to thank the NBA and NBA Players Association for their extraordinary partnership and support. Grand Theft Auto series also vastly outpaced our forecast, with recurrent consumer spending growth of 27%, led by GTA Online's A Safe House in The Hills update, which featured long-awaited mansion properties and the return of the fan-favorite protagonist, Michael DeSanta. Full game sales of Grand Theft Auto V remain strong, with the title now having sold in over 225 million units since its launch in 2013. GTA Plus continues to thrive with membership levels nearly doubling over the same period last year, and we're excited about its potential to add even more value to the player experience in the future. In December, Rockstar Games expanded Red Dead Redemption and Undead Nightmare onto new platforms, bringing these classic blockbusters to PlayStation 5, Xbox Series X and S, Nintendo Switch 2, and iOS and Android mobile devices for Netflix subscribers. We're immensely proud of our teams and their ability to deliver consistently the highest quality and most engaging entertainment experiences. As we continue to explore and invest in new technologies, particularly AI, we'll unlock greater efficiencies that will allow our talent to focus on the kind of innovation that has enabled us continually to set new creative and commercial benchmarks in interactive entertainment. Our execution throughout fiscal 2026 has been extraordinary, and we're highly confident as we approach fiscal 2027, which promises to be groundbreaking for Take-Two Interactive Software, Inc. and the entire entertainment industry, led by the November 19 release of Grand Theft Auto VI with Rockstar's launch marketing set to begin this summer. With ongoing momentum in our business, coupled with our robust forward release schedule, we continue to project record levels of net bookings in fiscal 2027, which we believe will establish a higher financial baseline, set us on a path to enhanced profitability, and further provide balance sheet strength and flexibility. I'll now turn the call over to Karl. Karl Slatoff: Thanks, Strauss. I'd like to thank our teams for delivering another fantastic quarter, which reflects our world-class talent and the breadth and depth of our portfolio. I'll now discuss our recent and planned product offerings for the balance of fiscal 2026. On January 14, 2K and HP Studios announced an array of new content for PGA Tour 2K25, including three new courses for the 2026 major championships: the 2026 PGA Championship at Oraneman Golf Club, the 126th US Open at Shinnecock Hills Golf Club, and the 154th Open at Royal Brookdale Golf Club, with more to come, including new seasons. Additionally, we look forward to growing the community with the launch of PGA Tour 2K25 on Nintendo Switch 2 on Friday. Paroxys Games will continue to deliver a steady cadence of updates for Sid Meier's Civilization VII, and on Thursday, 2K will launch Civilization VII for mobile devices exclusively on Apple Arcade, representing an exciting opportunity to expand the Civilization audience. On March 13, 2K and Visual Concepts will once again raise the bar for a wrestling franchise with the release of WWE 2K26. Featuring the biggest roster in the series' history, players will be able to choose from over 400 legends and current superstars and enjoy new customization options throughout the game. We plan to support the release with a new ringside pass live service model and a series of add-on packs that can be purchased individually or together as part of the season pass. 2K and Gearbox Software will continue to support Borderlands 4 with new content and updates, and we expect the title to achieve strong sell-through over its lifetime. Zynga will continue to deliver new features and drive innovation across its live services, as well as pursue the development of new titles. Looking ahead, we believe strongly in our upcoming launches and will provide our initial three-year pipeline for fiscal 2027 through fiscal 2029 with our Q4 results in May. I'll now turn the call over to Lainie. Lainie Goldstein: Thanks, Karl, and good afternoon, everyone. Our third-quarter results were fantastic, with all of our labels delivering excellent results, and we are pleased to once again raise our outlook for the fiscal year. Many of our core franchises continue to thrive, and fiscal 2026 is on track to be one of our strongest years in recent history. I'd like to thank our teams for their vision, passion, and dedication. Turning to our performance, we delivered third-quarter net bookings of $1.76 billion, which was significantly above the high end of our guidance range of $1.55 billion to $1.6 billion. This reflected better-than-expected performance from NBA 2K, the Grand Theft Auto series, and several mobile titles, including TuneBlast, Empires and Puzzles, and Top Eleven. Recurring consumer spending rose 23% for the period, which strongly outperformed our guidance of 8% growth and accounted for 76% of net bookings. NBA 2K grew 30%, Grand Theft Auto Online increased 27%, and mobile increased 19%, all of which exceeded our expectations. During the quarter, we launched WWE 2K's Mobile for Netflix and Red Dead Redemption and Undead Nightmare for several new platforms. GAAP net revenue increased 25% to $1.7 billion. Cost of revenue increased 26% to $754 million, and operating expenses increased 10% to $984 million. On a management basis, operating expenses rose 13% year-over-year, which was in line with our guidance and represented significant operating expense leverage on our fantastic top-line growth. Turning to our guidance, I'll begin with our full fiscal year expectations. We are once again raising our net bookings outlook and now expect to achieve $6.65 billion to $6.7 billion, which represents 18% growth at the midpoint over fiscal 2025. The increase reflects our third-quarter outperformance and higher expectations for several of our key titles during the fourth quarter. The largest contributors to net bookings are expected to be NBA 2K, the Grand Theft Auto series, TuneBlast, Match Factory, Empires and Puzzles, Color Block Jam, Borderlands, Red Dead Redemption series, and Words With Friends. We now expect recurrent consumer spending to grow approximately 17% and represent 78% of net bookings. This is up significantly from our prior forecast of 11%, driven by strong momentum across most of our major franchises. Our revised recurrent consumer spending forecast assumes that NBA 2K grows 37%, mobile increases approximately 13%, and Grand Theft Auto Online increases slightly. All of these expectations are raised from our prior forecast. We project the net bookings breakdown from our labels to be roughly 46% Zynga, 38% 2K, and 16% Rockstar Games. We are raising our operating cash flow forecast to $450 million, which is up from our prior expectation of $250 million, with the increase reflecting the strength in our business. We remain on track to deploy approximately $180 million in capital expenditures. We are also updating our forecast for GAAP net revenue, which is now expected to range from $6.55 billion to $6.6 billion, and cost of revenue, which is expected to range from $2.78 billion to $2.8 billion. Our total operating expenses are now expected to range from $3.96 billion to $3.97 billion, compared to $7.45 billion last year, which included a $3.6 billion impairment of goodwill and intangible assets. On a management basis, we now expect operating expense growth of approximately 8% year-over-year, which is down slightly from our prior forecast due to a shift of some marketing expenses into next year. Given our strong net bookings outlook, this assumes meaningful operating expense leverage over last year. Now moving on to our guidance for the fiscal fourth quarter. We project net bookings to range from $1.51 billion to $1.56 billion, compared to $1.58 billion in the prior year. Our release slate for the quarter includes Sid Meier's Civilization VII for Apple Arcade, PGA Tour 2K25 for Switch 2, and WWE 2K26. The largest contributors to net bookings are expected to be NBA 2K, the Grand Theft Auto series, TuneBlast, Match Factory, WWE 2K, Empires and Puzzles, Color Block Jam, Red Dead Redemption series, and Words With Friends. We project recurrent consumer spending to increase by approximately 7%, which assumes a high 20% increase for NBA 2K, mid-single-digit growth for mobile, and a modest decline for Grand Theft Auto Online. We expect GAAP net revenue to range from $1.57 billion to $1.62 billion, and cost of revenue to range from $675 million to $692 million. Operating expenses are planned to range from $973 million to $983 million. On a management basis, operating expenses are expected to grow by approximately 3% year-over-year, primarily driven by higher performance-based compensation and user acquisition investments to support robust performance in our mobile portfolio, which is partly offset by lower production expenses. In closing, our business momentum remains outstanding. We are very confident in our future. With Grand Theft Auto VI and other eagerly anticipated titles on the horizon, we believe that we will generate higher earnings power, strengthen our balance sheet, and deliver sustainable shareholder returns. I'd like to thank you all for your support and look forward to sharing more details in the coming months, including our initial outlook for fiscal 2027 when we report our fourth-quarter results in May. Thank you. I'll now turn the call back to Strauss. Strauss Zelnick: Thanks, Lainie and Karl. On behalf of our entire team, I'd like to thank our colleagues for their shared commitment to excellence and Take-Two Interactive Software, Inc.'s long-term success. To our shareholders, I want to express our appreciation for your continued support. We'll now take your questions. Operator? Operator: Press star, then the number one on your telephone keypad. To withdraw your question, simply press star 1 again. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Doug Creutz with TD Cowen. Please go ahead. Doug Creutz: Hey. Thank you. The last few days, the equity markets have really punished your stock and those of other video game makers because of fears about what AI means for your business. I wondered, Strauss, if you'd like to expound upon whether you think what's happening in the market is an accurate reflection of the threats and opportunities you see coming from AI. Thank you. Strauss Zelnick: Thanks, Doug. Oh, I have to admit I'm a little confused. You know, the video game business since its inception was built on the back of machine learning and artificial intelligence. We create our games in computers with technology. And ever since questions began about generative AI about eighteen months ago, I've been incredibly enthusiastic about what the future can bring. As it happens now, we're actively embracing generative AI. We have hundreds of pilots and implementations across our company, including with our studios, and we are seeing opportunities to drive efficiencies, reduce costs, and create the opportunity to do what digital technology has always allowed, which is the mundane tasks become easier and less relevant, which frees up our creators to do the more interesting tasks of making superb entertainment. The history of the interactive entertainment business has been one of great creators using technology to do amazing things to please audiences. And that's our job around here, and that remains unchanged except perhaps accelerated. Just a reminder, our strategy has three parts: be the most creative, be the most innovative, and be the most efficient company in the entertainment business. And generative AI squarely falls within the category of innovation and is already moving into the category of efficiency. I'm hopeful that it will also move into the category of creativity as it allows our creators to use digital tools to expand what we do to make it even more beautiful, engaging, and exciting. Thank you. Operator: Our next question comes from the line of Eric Handler with ROTH Capital Partners. Please go ahead. Eric Handler: Yes. Good afternoon. Thanks for the question. Strauss, you just had another really strong quarter with mobile. Strauss Zelnick: And mobile has just been on a very big tear for the last seven quarters now. Wondering if you could talk about some of the initiatives or bold beats, as they used to call them, that you thought what are you finding that's really resonating? What is keeping these games that have been out for a number of years still relevant and drawing in new players? Strauss Zelnick: Well, our Zynga team still refers to bold beats. They're a big part of what we do. And just to put a fine point on it, you're right. Our mobile business is up 19% year-over-year. TuneBlast was up 43%, Match Factory 17%, Empires and Puzzles 11%, Words With Friends 6%, and Color Block Jam is a huge hit for Rolex. And that really is the tip of the iceberg. We really are firing on all cylinders at Zynga and also with 2K's mobile properties. What do I think is going on? Look, I think we are actually making hits, and that is still pretty unusual in the mobile business. The hardest thing to do is create new hits in the mobile business. And Zynga has proven an ability to do so by doing what we do, which is creating a home for the best talent in the business, encouraging them to pursue their passions, and supporting them and marketing with an A-plus structure and a really strong balance sheet. It's really hard to do that. There aren't very many companies that are doing it. I believe we're the only company that's doing it over and over again. You are right also, though, that the backdrop is strong. There was a disappointing moment in mid-2022, which is as it happens when we acquired Zynga, where for the first time the mobile market was down post-pandemic. And it was down more than we expected, and it took a while to rebound. The market has rebounded. There are tailwinds. So much as I'd like to take credit for all of the team's success, that's not really my style. I do think a rising tide lifts all ships, and we are benefiting from consumer engagement with mobile games. Eric Handler: Great. That's helpful. I also wondered, would you be willing to sort of give some type of indication of what percentage of your mobile recurring spending is coming from direct-to-consumer? Strauss Zelnick: It's meaningful. We haven't given a number. The environment for direct-to-consumer is improving. It has been a big strategy since we acquired Zynga. You may recall we talked about the synergies that we would find on the revenue side. I said in calls right after the acquisition that we thought the potential for direct-to-consumer could be seen as a revenue synergy because effectively what happens is we are actually capturing a higher share of those revenues and enhancing our margins. The recent regulatory environment has become much more favorable, and we also predicted that. I do think we're going to continue to see third-party take rates decline, which will drop to the bottom line. Eric Handler: Thanks. Operator: Your next question comes from the line of Colin Sebastian with Baird. Please go ahead. Colin Sebastian: Yes. Thanks, everyone. A couple of questions for me. And maybe first, continuing on the RCS theme of growth. Maybe you could expand a bit on the SafeHouse expansion in terms of driving higher levels of engagement. Are there specific learnings from that informing other future content updates? And I guess, secondly, maybe to Strauss, how are you thinking about capital allocation priorities with the growing cash balance, which is likely also going to expand quite a bit later this year? Thank you. Strauss Zelnick: So what we learned from a Safe House in the Hills update is that you deliver great material, consumers show up. And Rockstar always aims to do the best possible work. Some of the content updates have performed better than others, and this one has been nothing short of stellar. But I think the broader point is the one that matters, which is as we head into the release of GTA VI, I think there was some trepidation on the part of market participants that GTA V or GTA Online would somehow become less relevant. And I think the contrary is true. The anticipation is yielding even more engagement with GTA. GTA V, of course, has now sold in 225 million units. But what's it all driven by? It's the reason that GTA is so extraordinary is because Rockstar makes an extraordinary game and continues to make extraordinary features and additions and opportunities, and the Safe House update basically shows that. So this is an example of where our strategy pays off. We're focused on creativity, and it pays off. Strauss Zelnick: I'm sorry. On your second question, capital allocation remains unchanged. So you know, we have three uses of our capital. And I agree that if things go well and as planned, our cash balance should continue to grow. And, of course, we are generating significantly more operating cash flow than expected this year. These results. The first is, of course, to support organic growth. That's been our story here. This is an organic growth company with a handful of very selective acquisitions, thankfully, all accretive ones, most notably the acquisition of Zynga in 2022. So that leads me to the second use of our capital, which is inorganic growth opportunities, and we'll continue to pursue those in just a selective and disciplined way, and we are looking only for accretive opportunities. And the third is to return capital to the shareholders, which we've done over and over again. We've typically done so opportunistically with buybacks. And, thankfully, our buybacks have all turned out to be good for the shareholders in the fullness of time. I am a believer that you do buybacks when your balance sheet can afford it, on the one hand, and when you can do so at deep value, on the other hand. Our most recent buyback was executed at about $158 a share. There were some moments where people thought that was a bad thing. Turns out it was a very good thing. Operator: Your next question comes from the line of Chris Schoell with UBS. Please go ahead. Chris Schoell: Great. Thank you. You've seen consistent outperformance with NBA 2K and continue to post very strong growth despite the difficult comparisons. Can you just touch on what is resonating most, do you think, with players? And as you think about the next leg of growth for the franchise, what do you see as the biggest opportunity? Is it going to be growth internationally, expanding the user base, or enhancing monetization? Thank you. Karl Slatoff: So it's hard to say that one particular thing is driving the success of NBA. Obviously, it's been an incredible year for us, selling a lot of units, and also the performance of RCS across the board and engagement has been off the charts, 30 plus percent year-over-year on basically every mode that we have. Those things don't come easy, and I think the best way to describe why this works for us is because of the way that VC and 2K run their business, which is really in a state of perpetual diligence. They're constantly communicating with the consumer, seeing what the consumer is doing, watching how they play, seeing what works, doesn't work, and refining the game year after year. And it's that maniacal attention to detail when you add it up year over year, that culminates in so much success. And this is one of those years where everything was just humming in the right direction. And on top of that, there's always an effort every year to do something a little bit different, a little new. For example, the cruise this year, which is a really interesting concept. People can pair up together with 50 people, play against other teams, and it's a really exciting thing, a social thing, which has had a pretty big impact on the MyCareer mode. So it's not one thing. It's everything. And I'd say it's culture, as much as it is anything else. I think there was a second part. Oh, biggest opportunity. Well, first of all, the biggest opportunity is to continue to do more of what I just described, which will lead to a higher installed base of folks and also to higher engagement, which ultimately leads to higher monetization. I do believe that there is a significant international expansion opportunity. The NBA continues to be an amazing partner for us. They're expanding internationally. Basketball is a global sport, and we've got that going for us. So I think that will help us drive. And just without regard to just the NBA expanding, there are lots of opportunities for us to expand also in North America as well. As we grow with the brand and partnership with NBA. So at this point, I think the sky is still the limit. We surprise ourselves every year. The game does better and better, so we're very optimistic about the future, obviously. Operator: Your next question comes from the line of Andrew Marok with Raymond James. Please go ahead. Andrew Marok: Hi. Thanks for taking my question. Maybe specifically, again, back to the commentary on generative AI. You know, we hear loud and clear Take-Two's ability to harness that. But maybe on Genie specifically, we've been getting a lot of questions from investors about the similarities and differences between world models and game engines. Can you maybe give us an overview of what you think tools like Genie can and cannot do as it relates to some of the proprietary game engines that you operate? Thank you. Karl Slatoff: So in terms of commenting on the specific technology, I think we're not going to go into great details about the tech differences because, frankly, Genie's early in its iteration at this point. And trying to make a comparison to a game engine is just really they're not even in the same ballpark. Genie is not a game engine, and I would it's very exciting technology, and I think the question is, how can it benefit our creators? And I think there will be a moment in time where that will become more defined. It certainly doesn't replace the creative process. And I would say, look, it looks to me more like a procedurally generated interactive video at this point. There are limitations, and Google has said as much. So to compare the technologies, I think there's really no way to do that because they're so far apart. And there are so many more elements to game development that go beyond, you know, quote, world creation. And the question is, what is a world creation? So even beyond world creation, there's everything else that's involved. There's the storyline, there's emotional connection, there's vibe, there's mission structure. All of those things, you cannot capture through AI. And certainly not through a world builder. So that's just a very, very small component of what we do. And if this tool bears out, it will make a component of what we do all that much better and more efficient. Andrew Marok: Great. Thank you. Operator: Your next question comes from the line of Edward Alter with Jefferies. Please go ahead. Edward Alter: For the question. I want to dig into your app mobile advertising results. I think it's the second time you guys have grown that year over year since acquiring Zynga. I wanted to dig into what's going so right there and where kind of the opportunity for continued growth in the mobile advertising space is for you guys. Strauss Zelnick: That's pretty simple. When we took over Zynga, there weren't a lot of ad units in most of the games, and we have selectively added ad units pretty much across the board, not entirely certain games. Don't merit that. Also, I think Zynga's been very smart about the way they go about monetizing that advertising. And there really is much more opportunity there without interfering with the experience at all. The strategy ultimately is to make sure that one way or another, we monetize the bulk of our users. As you know, in the mobile games business, fewer than 20% of your users actually engage with you to pay. Edward Alter: And given your comments on how the impending GTA VI is a positive for GTA Online in its current form, what is your view on what GTA Online is going to continue to be the current iteration once GTA VI does come out? Strauss Zelnick: Look, Rockstar Games is the locus of information about, you know, where the titles go, content, and marketing. Generally, you know, we have a pretty light touch when we talk about the labels' creative activities. At the same time, I have every reason to believe we'll continue to support GTA Online. There's a great community that loves it, that stays engaged. And, again, in this quarter, Rockstar has shown that when you deliver great additional content, despite how long GTA Online has been in the market, people show up. Edward Alter: Great. Thank you. Operator: Your next question comes from the line of Jason Bazinet with Citi. Please go ahead. Jason Bazinet: I think this is a while back, but I think when you first talked about GTA VI coming out, you noted that you expected your non-GAAP earnings to grow the year after it was released, not just the year. You know, the year is released being the base. I just wonder, is that still true? And do you mind just sort of unpacking sort of the main drivers of that? Presumably, one of it is just getting four quarters attribution, but what else would you say are the key drivers of that expectation if it is still true? Lainie Goldstein: What we have been saying is that we expect that our release schedule is going to drive sequential growth next year. And then that will bring us to establish a new baseline for our business going forward. So we haven't really been talking about detailed guidance beyond fiscal year 2026. And now in our May earnings call, we'll give our guidance for fiscal year 2027. And we're not planning on providing detailed guidance for any years beyond that at this time because our release schedule includes numerous titles each year, and even modest shifts can have a significant effect on results in any given period. So all of our years will be driven by our release schedule, and we have a very robust release schedule over the next couple of years, and that's what's really driving the growth in the business. Jason Bazinet: Perfect. Thank you. Operator: Your next question comes from the line of Alec Brondolo with Wells Fargo. Please go ahead. Alec Brondolo: Yeah. Hey. Thank you so much for the question. It seems like the market is creating potential opportunities for M&A. So in that light, could you maybe refresh our understanding of what makes a studio appealing to Take-Two? You noted in response to a prior question that any M&A has to be accretive. And so with that said, what are the other qualities in the studio you look for? Thanks. Strauss Zelnick: Well, you're right to ask that because accretive is a financial calculation based on the decision to proceed. The decision is based on the talent, the technology, and the intellectual property. And we think there may be some opportunities out there that, you know, you have to be incredibly selective. You know, broadly in the market, as you know, most corporate M&A fails because most corporate management teams love the notion of presiding over a bigger and bigger empire. Don't look at the world that way. You know? Our job is to entertain the world. Our job is to make the most creative properties that anyone can make and to bring them to consumers wherever they are. If there is an enterprise available on favorable terms that sits within that strategy and can operate within our unique culture, then it's potentially interesting to us. Alec Brondolo: Thank you. Operator: Your next question comes from the line of Michael Hickey with Benchmark Company. Please go ahead. Michael Hickey: Hey, Strauss, Karl, Lainie, Nicole. Good quarter, guys. Congratulations. I guess the first question, you've got two. Is on GTA VI. Glad to hear that summer marketing is going to start here. That's encouraging. But just sort of curious, Strauss, how much marketing you really have to do here if there's leverage versus prior releases just given the strength of GTA V, GTA Online, in fact, this is, you know, massive pent-up demand for what will be probably the largest entertainment release of all time, seem like you have to market much. So just curious your view there. And then, I guess on the topic of affordability, which is obviously very topical, certainly within the video game space, just curious your specific thoughts given that we're sort of year five here approaching year six of the current console cycle and pricing of consoles are going up. We've got now memory cost issues, so they can even go up further by the time the GTA VI comes out. We've also seen some inflation on software. So just broadly speaking, how do you think your fits within that affordability picture and how you think about providing value, which I know is a centerpiece of what you've done in store? Thanks, guys. Strauss Zelnick: Hey. Thanks, Mike. I mean, I love your question, your first question. Like, are we just going to sit back and relax as we head into the release of GTA VI? And I think the opposite is true. You're talking to a team that you've known for seventeen years, and the business of eating red meat for breakfast. I think we'll be having a lot more red meat in the coming months. So we are very fortunate. The consumer anticipation for GTA VI is indeed huge. And one does have to be judicious in the way one markets such an extraordinary property. But rest assured that you'll be pretty astonished by the creativity that Rockstar's marketing team brings to consumers in the coming months. On the affordability question, you know, we do feel a compact with the we've talked about for a very long time to deliver way more value than what we charge. I think we're known for that. And you know, we're in the business of entertaining people. We're not in the business of creating revenue. Revenue comes from entertaining. And interactive entertainment on a real basis is getting more and more affordable all the time because we offer extraordinary value for the money. You know, people engage with our properties for hours and hours and hours, and on a real basis, frontline prices have declined in the past twenty years. Meaningfully declined. So we see it the same way, which is we, you know, we do believe in democracy access to what we do around here. We want everyone to be able to engage. I just mentioned it in terms of mobile. You know, you want to have a great mobile experience. We offer the best mobile experiences on earth free. And you can play them and have a wonderful experience completely free. On the console side, of course, you know, that's not expected by consumers. Because of the deep value that we bring, and consumers do expect to pay for that. But on a real basis, we're making it more and more affordable and more and more accessible. Operator: Your next question comes from the line of Drew Crum with B. Riley Securities. Please go ahead. Drew Crum: Okay. Thanks. Hey, guys. Good afternoon. So you have a few undated mobile titles as part of your frontline release schedule. Recognizing it's been a tough launch market for new titles for a while now, based on the strength you're experiencing with your mobile business, can you comment on what you're seeing in terms of market dynamics for launching new games and whether the backdrop is more supportive of delivering new hits? Strauss Zelnick: Thanks. You know, there are really only two companies in the mobile space who are delivering new hits in the last five years. We're one of them. It's super hard. Incredibly hard. It's been hard. You're quite right. Ever since you had to pay for user acquisition, which is, you know, the better part of, I guess, nine years, it's become much more difficult. And, you know, the early days of mobile, of course, now is a new market and people are very accepting of new IP and new markets. So we're exceedingly respectful of the difficulty of launching any new hit, that includes in our mobile space. I do think the Zynga team has come up with an approach that is more likely to succeed more regularly than our prior approach because while they arrive at this. And once again, it's sort of, you know, be selective. And focus on the best talent in the business and make sure that that talent pursues their passion. And then, of course, listen to the data. Iterate according to the data. But you can't iterate at the beginning to create a hit. You need creative passion to create the hit from which you build. Operator: Your next question comes from the line of Brian Pitz with BMO Capital Markets. Please go ahead. Brian Pitz: Thanks for the question. Strauss, we saw your recent announcement of the CFX marketplace, which appears to be a push in the direction of UGC gaming. Can you talk more about this launch and how you're thinking about the broader opportunity? And also, maybe any insights around developer economics in the marketplace with respect to bookings? Thank you. Strauss Zelnick: I mean, I think that we've always welcomed quite some time user-generated content. We have that in numerous parts. Of course, we have the role-playing server business at Rockstar. So we see this as an important and interesting development with more opportunity to come. At the end of the day, you know, what we're known for here is our creators making the very best in entertainment. That's our job, and we think that that never goes away as a driver of the business. At the same time, there are users who want to create and engage, and we want to create a home for them as well. And tools that make that more viable and more accessible could be an opportunity for us. Brian Pitz: Great. Thanks. Operator: Your next question comes from the line of Martin Yang with Oppenheimer. Please go ahead. Martin Yang: I have a question on engagement and a follow-up on monetization. Personal engagement, can you maybe talk about how the GTA player base is engaging with the game? Is it primarily GTA Online? Or do you see still the full game getting substantial playing hours per user or MAUs? Strauss Zelnick: Look. We've, you know, we sold a whole bunch of units of GTA V in the quarter. And Rockstar continues to bring new consumers into the tent. It's both. It's the full game and it's the online version, which, you know, is up meaningfully year-over-year, about 27%. Operator: Your next question comes from the line of Omar Dessouky with Bank of America. Please go ahead. Omar Dessouky: Hi. It's Omar Dessouky. So I think you mentioned that Zynga comprised a little bit less than half of your revenue of the entire business. You know, over the last couple of years, it's been well known that, you know, solutions to avoid App Store fees would become commercially available, and, you know, there have been several that have been announced, such as, for example, Unity's cross-platform ecommerce solution that would help reduce the amount of fees that game developers have to pay to the app stores. How much of your fees that the distribution fees that you pay to the app stores do you think are addressable, you know, through such a third-party solution, you know, outside of the fact that you already have, you know, growth in your own DTC channel, are the two mutually exclusive? And how much, how much do you think you can save and how much time will it be before you implement, you know, such a third-party solution? Karl Slatoff: So I'm not really going to comment on third-party solutions. So the fact is a lot of our DTC efforts, we really do in-house at this point. That's not to say that third-party solutions can't be helpful now or in the future. But primarily, this is an internally driven thing for us. And in terms of the opportunity, I think we've said before, right now, it's still pretty early. It's growing in terms of not all of our games, even some of our really large games, don't have DTC components to them. I think all of them at one point could. We'll see how that shakes out. So we're pretty early in the process, and we think there's a lot of growth ahead of us. But it's something that we're certainly excited about. It improves our margins. And as Strauss mentioned earlier, the legislative environment has been favorable towards that. Strauss Zelnick: Thank you. Operator: That concludes our question and answer session. I will now turn the call back over to Strauss Zelnick for closing remarks. Strauss Zelnick: Thank you so much for joining us today. Obviously, we're thrilled with the company's results. We're thrilled with our revised outlook for the rest of the year. And we're beyond thrilled with our expectations for next year, including WWE coming up this year and, of course, NBA 2K, and then most notably, GTA VI. I want to just take a minute to thank our teams, our creative teams, for showing up every day, bringing their passion to the table, not taking no for an answer, and always willing to push as far as they can to deliver the most extraordinary entertainment experiences. And I want to thank our executive teams who subscribe to our strategy of creativity, efficiency, and innovation and who also show up every day doing their very best work in service of our collective goal to be the best entertainment company on earth. Thank you too to our shareholders for your support. These are really exciting times, and we're happy that you're along for the ride. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Jessica Hazel: This dynamic is reflected in the $0.11 year-over-year increase in adjusted loss per share, even as our net loss improved. Our disciplined approach to capital allocation continues to drive meaningful value for our shareholders. We generate significant, stable cash flow, and expect this year to be no different. We then invest in the business, grow the dividend, and return excess capital to shareholders through share repurchases. In the first half of this fiscal year, we have returned $508 million to shareholders in the form of dividends and share repurchases. We have approximately $700 million remaining on our current share repurchase program. Turning to our full year outlook, we are reaffirming the following ranges as provided in today's earnings release: Revenue between $3.875 billion and $3.895 billion, EBITDA between $1.015 billion and $1.035 billion, an effective tax rate of approximately 25%, and adjusted EPS between $4.85 and $5. Our outlook continues to contemplate certain key assumptions: First, industry growth in line with historical norms, or about 1%; continued emphasis on achieving a healthier balance of volume, price, and mix over time; the strategic prioritization of assisted and paid DIY, the two areas that deliver the strongest lifetime value for H&R Block; an expanding contribution from small business as a meaningful revenue driver in fiscal 2026 and beyond; and continued franchise acquisitions when opportunities arise at attractive EBITDA multiples, which remains a prudent and value-accretive use of capital. Taken together, these inputs underpin our fiscal 2026 outlook and reinforce our focus on disciplined execution of our strategy, which we believe positions us well to continue delivering meaningful value for our shareholders. With that, I'll turn it back over to Curtis for closing remarks. Curtis Campbell: Thanks, Tiffany. Our priorities are clear: focused on the client, equipping our tax pros to build trust and deliver meaningful outcomes at every turn. Coupled with products designed for clarity, confidence, and convenience, we focus on meeting clients where they are, on their terms. Combining disciplined execution with a commitment to progress, we're positioning H&R Block, Inc. for lasting growth. I am confident in our team's ability to adapt, deliver, and strengthen our company for the future. Thank you for your continued trust and partnership. Now, operator, we will open up the line for questions. Operator: Star 11 on your telephone, and wait for your name to be announced. To withdraw your question, please press 11 again. Please stand by while we compile the Q and A roster. Our first question comes from Alex Paris with Barrington Research. Your line is open. Alex Paris: Hi, guys. Thanks for taking my call. Congrats on the better-than-expected off-season quarter. Jessica Hazel: Thanks, Alex. Curtis Campbell: Yeah. How are you doing, Alex? Thank you for the question. So, Yeah. I'll go ahead and jump in. We don't see any material impact from the government shutdown, and I'll remind everybody that Block has been in business for seventy years, so we are not unfamiliar with government shutdowns. Our tax pros are prepared to guide our clients through any uncertainty, especially any connected to the one big beautiful bill. Alex Paris: Gotcha. And then, you know, again, it's very early in the tax season. But any trends to note out of the first ten days or so? Curtis Campbell: It's early in the tax season without a doubt. So e-file opened up last Monday. Tiffany talked about this, but we expect the industry to grow at approximately 1% this year. I'll tell you, I'm confident in the work the teams have done to prepare for this season. I mentioned in my prepared remarks, we're focused on executing not just for the season, but we're also focused on testing and experimenting with new capabilities and experiences that are connected to our multiyear strategy that we'll share more about as we go throughout the year. I also want to highlight, Alex, a couple of important changes that we made: the second look to scale it, the work we've done to embed AI-enabled tax pro assistance into the tools of our tax pros, advancements we've made to TPR, the work we've done to optimize our assisted virtual experience, and especially the training our tax pros have to help clients navigate any uncertainty due to the one big beautiful bill. I feel like we're well positioned for the season. Alex Paris: Yeah. No. Sounds like it. One of the other things I think we talked about in the call is you expect, not only normal growth, 1% ish, you know, for tax filing this year. But also, that assisted should, take some share from DIY again, say, to the tune of about 20 basis points. Any change in that expectation? You know, perhaps driven by one big, beautiful bill, and increased complexity. Curtis Campbell: No. We'd expect the tailwind from the One Big Beautiful bill. What we have historically seen is when there's significant tax complexity, it drives clients to seek assistance. Alex Paris: And you're still thinking low single-digit price increases across both assisted and DIY? Curtis Campbell: That's correct. Alex Paris: Great. Alright. Well, thank you for that. I appreciate it. Good luck on the balance of the season. We'll have checkpoints between now and then, and I'll get back in the queue. Curtis Campbell: Thank you, Alex. Operator: Thank you. Our next question comes from Kartik Mehta with Northcoast Research. Your line is open. Kartik Mehta: Hey. Good evening. Curtis, as you look at this tax season, are you anticipating similar behavior to last year in terms of the peaks, or do you think the One Big Beautiful Bill will change that in any way? Curtis Campbell: Hey, Kartik. How are you doing? Thanks for your question. You know this, what we've seen over the last several years is slower starts to the season from an industry perspective, I wouldn't expect that to change. Without a doubt, the one big beautiful bill will drive uncertainty. Don't think that it's going to dramatically change taxpayer behavior other than the fact that they may reach out for assistance more. But I don't think that's going to change the timing of which they reach out to get their taxes done. Kartik Mehta: And then, Curtis, I know it's early, but have you seen a change in the refund amount? Is that know, the expectation is that it'll be larger than last year. Have you is that come to fruition? Curtis Campbell: Yes. It's really, really early, but I would say that I expect, depending on the client, there to be a portion of their client base that does receive a bigger refund. You know this, look at the standard deduction, that's up $750. Incremental changes with the tips income deduction, the overtime pay deduction, the new senior deduction. Increase in default deduction are, in some cases, pretty big moves. Depending on who you are as a taxpayer, you could see a slightly higher refund. Perfect. Thank you very much. It's too early for us to share data that confirms what we're seeing, but I would expect that to be the case. Kartik Mehta: Okay. Thank you. I appreciate that. Curtis Campbell: Thanks, Kartik. Operator: Thank you. Our next question comes from George Tong with Goldman Sachs. Your line is open. Sammy for George Tong: Hi, this is Sammy on for George. Given expectations for greater complexity and a shift towards the assisted filing this tax season, what's driving your outlook for assisted share loss rather than stabilization or even gain since this type of environment is your strength? Curtis Campbell: Yeah. Let me jump in on this one. What's important to understand is why our market share hasn't consistently grown in assisted. I start with a CEO perspective. We've got names of clients that choose to with us every year. And we lose far too many in our mid to lower funnel. This comes down to, at the end of the day, us understanding why. We've spent quite a bit of time over the last six months examining every aspect of the client journey in our assisted business, and the same thing for our tax pros, examining every step of the journey for tax pros as they work to engage with our clients. A large portion of the reason why we've had some challenges is a significant amount of manual processes that are dependent on our tax pros to operate consistently at a high level. As I mentioned in my prepared remarks, we're focused on leveraging technology to reduce that manual non-value-added work. We believe this will help automate workflows, ensure consistent funnel management, and at the end of the day, deliver a better client experience. Our clients care about confidence, convenience, and the way they get every dollar they deserve. Enabling tax pros via technology ensures that. This journey will be multi-year, not overnight, but we believe it's the best for improving client experience at Block. Tiffany Mason: And just to clarify, we've been chipping away at assisted share loss over the last couple tax seasons, That's point number one. Number two, for our full-year outlook, the high end assumes we hold share in the assistant category. That’s top of guidance, and I want to make that point clear today. Sammy for George Tong: Got it. Implementing AI tools like AI Assist, is that a long-term threat to the assisted business if DIY becomes easier? Curtis Campbell: Thank you for your question. We don't think so. Meeting clients where they are makes blended experiences important. DIY clients can connect with pros when facing uncertainty, aligning with our multiyear strategy. Sammy for George Tong: Got it. Helpful. Thank you. Operator: Thank you. As a reminder, to ask a question or reenter the queue, please press Again, that is 11 to ask a question. Our next question comes from Scott Schneeberger with Oppenheimer. Your line is open. Scott Schneeberger: Thanks very much. Good afternoon. Curtis and or Tiffany, with the 1% industry volume growth, what drivers might lead to upside or downside as you look out over the season? Thanks. Tiffany Mason: Hi, Scott. Thanks for the question. Surely, 1% industry growth is historical. For both channels, especially assisted, we expect a positive shift due to the One Big Beautiful Bill. Any larger refunds might modestly boost growth, but I anticipate no outsized impact. So, 1% seems right and is reflected in guidance. Scott Schneeberger: Okay. Thanks, Tiffany. On marketing approach this year? Timing and spending nuances year over year, if you care to share. Thanks. Curtis Campbell: Sure. No big change in historical marketing spending. But focus this season is on meeting customers where they are, highest lifetime value. Expertise of tax pros navigating complexity is in TV commercials, digital ads. Connecting AI impacts marketing as consumer behavior shifts toward AI engine optimization, not just SEO. Jessica Hazel: From H&R Block’s perspective, AI as an enabler of significant client and pro experience improvements. AI tools like the AI-tax pro assistant, streamlining manual processes, and enhancing experiences, aim for pros to build relationships, guidance, and coaching. Clients choose assisted for confidence, trust, judgment, not just math. Fifty-five percent consistently seek assistance, seeing AI as an opportunity, not a disruptor. Scott Schneeberger: Great. Thank you, Curtis. Tiffany, on increased consulting costs year over year, will that continue? Tiffany Mason: Thanks, Scott. Engaged a consulting firm for strategic sourcing to drive cost efficiency. This engagement completed first half of the year, will yield sustainable savings to reinvest in strategic growth areas. This was all in our outlook, no step changes. Scott Schneeberger: Understood. Alright. Thanks very much. Curtis Campbell: Thanks, Scott. Operator: Thank you. I’m showing no further questions at this time. I would now like to turn it back to Jessica Hazel for closing remarks. Jessica Hazel: Thank you, everyone, for joining us today. Look forward to reconnecting with you soon.
Operator: Good day, and welcome to the Chipotle Mexican Grill, Inc. Fourth Quarter and Full Year 2025 Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch-tone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Cindy Olsen, Head of Investor Relations. Please go ahead. Cindy Olsen: Hello, everyone, and welcome to our fourth quarter and full fiscal year 2025 Earnings Call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.tpole.com. Additionally, supplemental investor information is available on our site as a reference for today's call. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements. These statements are based on management's current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-Ks and in our Forms 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the presentation page within the Investor Relations section of our website. We will start today's call with prepared remarks from Scott Boatwright, Chief Executive Officer, and Adam Rymer, Chief Financial Officer, after which we will take your questions. Our entire executive leadership team is available during the Q&A session. And with that, I will turn the call over to Scott. Scott Boatwright: Good afternoon, and thank you for joining us. Today, I will spend a few minutes upfront discussing the highlights of our financial results, and Adam will cover the details. My remarks will cover a broader view into my vision for Chipotle Mexican Grill, Inc., and my deep confidence in our growth strategy, as well as opportunities we have to sharpen our competitiveness by harnessing the core values of our brand. The results we issued this afternoon were in line with expectations and guidance for the full year. 2025 should be seen as a year of progress and resilience for our brand. For the year, revenue grew 5.4% year over year, which included a 1.7% decline in comparable sales. Adjusted diluted earnings per share grew 4.5% year over year to $1.17. We opened a record 334 new company-owned restaurants and 11 international partner-operated restaurants. We also made progress in the strategic areas that matter most for our long-term success, including investing in operational excellence, marketing and menu innovation, deploying new back-of-house technology, and growing our footprint internationally. It's important to emphasize all of this was achieved against a dynamic consumer backdrop, with our guests placing heightened focus on value and quality and pulling back on overall restaurant spending. This makes our investments and progress even more significant and highlights Chipotle's commitment to succeed through consumer cycles. With that in mind, I want to commend the incredible efforts of our teams for their thoughtful response and dedication during the recent winter storm. We have not seen a multistate storm like this in many years, and our operational excellence and prioritization of speed and agility were instrumental in reopening restaurants as quickly and safely as possible to serve our guests. Turning to our path forward, serving as Chipotle CEO is an incredible honor. From our guests to our people, to our partners around the globe, there is a deep love for our brand and the food we serve. Over the past year, I've had the privilege of visiting Chipotle restaurants around the world, including our restaurants in Europe, Canada, as well as the opening of our CityWalk restaurant in Dubai. These experiences have reinforced my conviction and our momentum and our ability to continue delivering exceptional service and elevated experiences for our guests in our restaurants. So what actions are we taking to build a stronger, more profitable Chipotle? Over the last several months, we conducted a comprehensive review of our business as well as the current market landscape and consumer trends, which are fundamentally different from what we experienced a year ago. Here are a few key learnings. Chipotle's brand and value proposition built on high-quality, delicious culinary, and best-in-class operational throughput remain strong and relevant across all age groups and income cohorts. We are seeing positive momentum in the business, with room to accelerate our growth and sharpen our competitiveness without compromising on the core values that define our brand. Our path for further success lies in leaning into what differentiates our brand, accelerating innovation into new offerings and occasions that are of growing importance to our guests, and optimizing the in-restaurant and digital experience. And the strength of our business model and balance sheet allows us to execute against our long-term strategy and emerge from this consumer cycle in a position of greater strength. These insights have shaped the next evolution of our five key strategies, which we are calling our recipe for growth. These strategies include protecting and strengthening the core by driving operational and culinary excellence to deliver exceptional value for our guests, evolving the brand messaging and accelerating menu innovation and new occasions that drive demand in our restaurants, modernizing our business model with industry-leading technology in leveraging AI and relaunching our rewards program to elevate the experience for our guests and our teams, expanding our global reach by scaling with intention proven company-owned and partner-operated markets, as well as strategic new regions, and cultivating the best talent in the industry that is energized and focused on speed and agility. We are acting on these strategies now and are already seeing results. First, we enter 2026 with a strong foundation. We aim to solidify that through a relentless focus on and culinary excellence across all our channels. This will be critical as we continue to scale our brand and meet the need or demand for the future. Driving this key strategy is the acceleration of our rollout of our high-efficiency equipment package, which will improve speed and consistency in our restaurants, delivering a better experience for our teams and our guests. As a reminder, this equipment improves prep by two to three hours, helps eliminate prep time during peak periods, and results in stronger and more consistent throughput execution. It also diminishes the learning curve for new team members in more challenging areas like the grill and improves the consistency of culinary with juicier steak and chicken and is cooked to perfection every time to meet our guests' expectations. For now, we are reinvesting the two to three hours of efficiency back into our restaurants to deliver greater hospitality. The results in the restaurants with the new equipment are compelling. In addition to higher taste of food and overall guest satisfaction scores, we are beginning to see better throughput and meaningful improvement in comp sales. A reminder, 350 restaurants have the full equipment package today, and we anticipate about 2,000 by year-end. Second is our brand positioning and menu innovation. Beyond our food, Chipotle excels at brand marketing. We have strong insights into what our guests want and powerful brand-building and demand-generating programs that have helped to establish our company as an industry leader. As we move into 2026, the consumer landscape is shifting with a heightened focus on value as well as high-quality protein, fiber, and clean ingredients, all of which are fundamental to Chipotle's North Star brand positioning. There remains significant opportunity to expand our leadership in this fast-growing segment by sharpening our positioning, increasing spend, and refreshing our campaigns to strengthen our value perception and further engage our guests through new occasions and increased menu innovation. A perfect example of this is the recent rollout of our high-protein line, which highlights our extraordinary value across a range of price points. Starting with a single taco with 15 grams of protein, at just $3.50, to a double protein bowl with over 80 grams of high-quality protein. Also includes a new high-protein cup for around $3.80 and is inspired by hacks that our guests rely on to boost their intake and offers a solution to those looking for smaller portions, which is a fast-growing trend with the adoption of GLP ones. Early results are strong, with incidence of extra protein increasing 35% and our recent double protein promotion achieving a record digital sales day. When I said that we will harness what is great about Chipotle and reinforce our value proposition to propel us forward, this is it in action. We also know from our data that our core guest is more likely to choose a restaurant that has a new menu item. To further drive demand, we will increase our menu innovation cadence to four limited-time offers in 2026, giving our guests more reasons to visit Chipotle. This will include the return of Chicken Al Pastor next week, which is the most celebrated limited-time offer in history, with two times the request on social media to bring it back compared to any other LTL. Limited-time offers are not just delicious. They yield traffic by bringing in new guests while increasing the of the existing base. Additionally, the LTO acquired guests demonstrate higher long-term value, maintaining elevated spend and frequency levels throughout the year. In addition to limited-time offers, we will roll out new sauces and build a strong pipeline of innovation in untapped sales layers like sides and beverages. As new menu items make their way through the stage gate process, we can pace and sequence these growth layers to provide a long path for transaction growth for years to come. We also see the group occasion as a big longer term. We are currently building awareness around build your own Chipotle for families or groups of four to six as well as testing the expansion of catering. Today, these two group occasions represent less than 3% of combined sales yet could be double-digit percentage of sales longer term. Build Your Own Chipotle continues to perform. It is also highly incremental and driving strong repeat purchases, which is why we are extending our trial promotion into 2026. To build on our momentum, we will scale awareness across our marketing channels, leaning into moments that bring people together like sports, holidays, and other shared occasions where we have seen our highest incidents. Regarding our catering tests, our teams are getting up to speed with the new equipment and technology that will support a bigger catering business. And we are ramping up our marketing efforts, including the recent rollout of one of the large third-party delivery platforms. While it is still early in a testing phase, we are seeing the catering orders begin to build, and we remain optimistic that we have found the right solution to help scale our catering business moving forward. Third, we are in the process of relaunching our rewards program this spring to widen the funnel, leverage our data and AI to power more personalized and impactful user experiences. In 2025, we grew our active members to over 21 million, thanks in part to our summer of extras campaign, as well as more engagement through programs like Free Potlait throughout the second half of the year. Through that, we experienced an acceleration in loyalty comps in the back half of the year that outpaced total comps by several hundred basis points. Currently, about 30% of sales are realized through our rewards platform, and the momentum gives us confidence that there remains significant runway for growth by bringing more guests into the funnel, deepening engagement, and driving sales throughout the year. One of the biggest opportunities is in-restaurant, as only about 20% of transactions are through our rewards program, compared to nearly 90% of our app transactions. Looking ahead, we have a strong campaign planned around the spring launch of a more engaging rewards program specifically designed to target the in-restaurant guest and remove friction from the checkout experience. Additionally, the campaign will include more programs like summer of extras and continuing to leverage gamification, which has resonated well with our guests. We look forward to sharing more details about rewards in the coming months. Fourth, accelerating global expansion. In 2025, we opened a record 345 new restaurants and saw over 9% new restaurant growth. We opened 334 company-owned restaurants where we surpassed 4,000 in December. This included 21 openings in Canada, an increase of 38% year over year for that country. We remain confident in our ability to reach 7,000 restaurants in North America longer term. And we are accelerating growth globally. In Europe, we ended the year with positive comps and another step change in the economic model. In fact, Central London and Frankfurt have reached strong cash-on-cash returns, which has unlocked growth for these markets in 2026. Now turning to the Middle East. With our regional partner, Al Shia Group, we opened seven more partner-operated restaurants in the fourth quarter and 11 for the year, with a total of 14 restaurants in the region. I recently had the opportunity to experience an opening in Dubai, where the energy was electric and thousands of guests chanting Chipotle as we unveiled the new restaurant, powerfully demonstrating the brand's affinity and enthusiasm for our delicious food. With Al Shire Group, we plan to nearly double our footprint and sales in 2026, including entering new markets like Saudi Arabia. Longer term, we believe we can have hundreds of restaurants in this region. Additionally, we remain on track to open our first restaurants in three new partner-operated markets this year, including Mexico, Singapore, and South Korea. The global growth story is gaining momentum across all markets, and we know that when we deliver our fresh, delicious culinary experience, with speed and exceptional hospitality, it resonates around the world. Fifth is the team. None of these strategies would be executable or goals attainable without our people. We know that when we take care of our team members, they take care of our guests. It's that simple. I'm extremely proud of the way in which our teams work this year, both in restaurants and at our support centers to deliver for our guests. Key to our culture that sets us apart from the others is promoting top talent from within. In fact, in 2025, Chipotle had 23,000 internal promotions, including 100% of our regional vice president roles, over 83% of our field leader positions, and nearly 90% of our restaurant management. We will always keep opening doors for our people, creating more pathways for career growth, and advancement at every level in our company. We move forward are building a culture of speed and agility and adding exceptional talent to drive our strategy. As you may have seen last month, we announced that Roger Theodoretas and Chris Brandt transitioned out of their current roles. I want to thank Roger and Chris for their leadership and many contributions. Roger has been a trusted adviser while Chris has been instrumental in helping Chipotle become a purpose-driven lifestyle brand as we grew our footprint more than 4,000 restaurants. We have promoted Aileen Eskenazi to be chief legal and human resources officer. He will bring her extensive experience overseeing a broad range of legal and compliance matters as well as talent management and compensation and benefits to help us execute our talent strategy. As I mentioned earlier, our marketing team and how we engage with our guests are at the heart of Chipotle's success. We have grown our marketing capabilities by leaps and bounds over the past eight years, which makes us the exact right moment to take it to the next level build upon our strong foundation. We are conducting a national search for our next chief marketing officer, I look forward to sharing more on that front soon. Additionally, to accelerate our approach to technology and innovation, we are hiring a new chief Digital Officer and a Vice President of Emerging Technologies. Each will play a critical role in helping us to become more efficient, enhance our operations, and develop and deploy industry-leading technology. Combination of our existing team, internal succession planning, and external response to searches gives us a high degree of confidence that we will have exceptional talent executing the recipe for growth strategy. And our leadership teams are committed to staying close to our guests and the frontline experience because the fact is the answers are in the restaurants. To close, I want to highlight that we recently celebrated the twentieth anniversary of Chipotle's IPO in 2006. Looking back over the last twenty years, what stands out to me is the consistency of our brand. Two decades later, we still have the same unwavering transparent commitments to sourcing the best ingredients. We continue to deliver exceptional value for our guests, and we are investing in the development and growth of our world-class teams. We look forward to the next twenty years I've never been more confident in the strength of this brand and our ability to win. Our recipe for growth and 2026 plan will position us for success in any environment. And we're confident it will drive transactions allow us to move faster, and create long-term sustainable growth for our people, our guests, and our shareholders. I will now turn it over to Adam. Adam Rymer: Thanks, Scott, and good afternoon, everyone. I'm pleased to report that we delivered sales results that were in line with our expectations with the accelerating trends throughout the quarter and into January. To support this performance, we made the strategic decision to elevate our marketing activity to ensure Chipotle remained top of mind with our guests. Now turning to our results. For the fourth quarter, sales grew 4.9% to reach $3 billion, with a comp decline of 2.5%. Sales benefited from a $27 million true-up following an annual gift card breakage analysis. This true-up did not impact comparable restaurant sales. Digital sales were 37.2% of total sales. Restaurant level margin was 23.4%, down 140 basis points year over year. Restaurant level margin also included a 70 basis point benefit from the gift card true-up. Adjusted diluted earnings per share was 25¢, consistent with last year. And we opened 132 new restaurants, including 97 Chipotlanes as well as seven additional partner-operated restaurants. As we move into 2026, we anticipate our full year comparable restaurant sales to be about flat. We are confident in our recipe for growth strategy, and we are encouraged by the meaningful improvement and underlying trends we've seen in January following the launch of our new protein menu and marketing campaign. However, we believe it's prudent to keep our full year guidance grounded in a conservative baseline given the evolving consumer dynamic. We will continue to take a disciplined and measured approach to pricing but do not expect it will fully offset inflation in the near term as we remain committed to delivering exceptional value for our guests. We anticipate the impact of pricing in the first quarter will be about 70 basis points compared to our expected inflation approaching the mid-single-digit range. We expect the gap between our pricing and inflation to be at its widest point in the first quarter, and then we'll narrow meaningfully throughout the year. I will now go through the key P&L line items, beginning with cost of sales. Cost of sales in the quarter were 30.2%, a decrease of about 20 basis points from last year. The benefit of menu price, lower dairy prices, and cost of sales efficiencies offset inflation, primarily in beef, and chicken, as well as the impact of tariffs. Tariffs impacted the quarter by about 30 basis points. For Q1, we anticipate our cost of sales to be in the mid-30% range primarily driven by higher costs across several items. Most notably beef, avocados, and cooking oils, partially offset by the benefit of carne asada ramping down, modest pricing leverage, and lower tariffs. With the recent removal of tariffs on beef and other agricultural goods, we now anticipate our ongoing tariff impact to be around 15 basis points. Overall, we anticipate cost of sales inflation to be higher in the first half of the year, and will step down to the low to mid-single-digit range in the second half of the year as we lap elevated beef costs. This results in full-year cost of sales inflation in the mid-single-digit range. Labor costs for the quarter were 25.5%, an increase of about 30 basis points from last year. As higher pricing and lower performance-based bonuses were more than offset by lower volumes, and wage inflation. For Q1, we expect our labor cost to be in the high 25% range, with wage inflation in the low single-digit range. Other operating costs for the quarter were 15.5%, an increase of about 100 basis points from last year. Primarily driven by higher marketing, delivery, utility costs, as well as lower sales volumes, an increase of about 50 basis points from last year. Marketing costs were 3.5% of sales in Q4. As I mentioned earlier, we accelerated our marketing spend in the quarter which helped us remain top of mind with our guests. We expect our marketing costs to remain in the mid-3% range for Q1 and in the low 3% range for the full year. For Q1, we anticipate other operating costs to be in the mid-15% range. G&A for the quarter was $160 million on a GAAP basis, $162 million on a non-GAAP basis. Excluding a $4 million reduction in legal contingencies and around $2 million related to retention equity awards granted to key executives in August 2024. G&A also includes $145 million in underlying G&A, $21 million related to noncash stock compensation, which included a reduction in our performance share accruals, $1 million related to our upcoming all-manager conference which will be held in Q1 of this year, offset by $5 million lower bonus accruals. We expect G&A in the first quarter to be around $203 million on a non-GAAP basis, which will include $142 million in underlying G&A, around $26 million in noncash stock compensation, although this amount could move up or down based on our actual performance, and is subject to the final 2026 grants, which are issued in Q1. Around $28 million related to our upcoming all-manager conference, and around $7 million related to employer taxes associated with shares that vest during the quarter. Depreciation for the quarter was $93 million or 3.1% of sales. For 2026, we expect it to remain around 3% of sales. Our effective tax rate for Q4 was 23.7% for GAAP and 23.4% for non-GAAP. Our effective tax rate benefited from an increase in US federal income tax credits. For fiscal 2026, we estimate our underlying effective tax rate will be in the 24% to 26% range, though it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $1.3 billion in cash, restricted cash, and investments and no debt. During the fourth quarter, we purchased $742 million of our stock at an average price of $34.14, bringing our full year 2025 total to a record $2.4 billion at an average price of $42.54. During the quarter, the board authorized an additional $1.8 billion to our share purchase authorization and at the end of the quarter, had $1.7 billion remaining. To close, the momentum we are seeing today reinforces our confidence in our recipe for growth strategy, enabling us to build on what differentiates Chipotle and to compete and win with greater efficiency and impact. We remain committed to the financial discipline required to both protect and strengthen our strong economic model. And with our brand strength and customer loyalty as our foundation, we will continue executing our strategy and expanding our runway for extraordinary growth. We look forward to sharing our progress along the way, and we are ready to take your questions. Operator: We will now begin the question and answer session. For the interest of time, please limit yourself to one question and one follow-up. To ask a question, you may press star then one on your touch-tone phone. If you were using a speakerphone, please pick up your handset before pressing the keys. Please press star then 2. At this time, we will pause momentarily to assemble our roster. First question comes from Brian Bittner with Piper Sandler. Please go ahead. Brian Bittner: Hey, thank you. Just a question on the guidance for about flat same-store sales. I guess, one, can you just help us understand the components embedded in there? For transactions and menu price and mix, that would be helpful to understand. And then just to anything you can offer on the cadence you'd expect. And I'm asking because you mentioned being encouraged by January. It would seem like there's some easy compares ahead, so just anything you could offer there would be helpful. Adam Rymer: Yeah. Definitely. Thanks, Brian. So for the full year, like we said in our prepared comments, we're excited about the momentum that we've seen in our underlying trends in January after the launch of the protein menu and that whole campaign. We're confident in our recipe for growth strategies and that they'll continue to drive transactions up throughout the year, including with chicken al pastor launching next week. But with that said, we think that it's still very early in the year, and consumer trends have been really tough to predict. So we wanted to be conservative in our full year guide to account for this. And our full year guide only includes, I would say, really a modest impact from the initiatives that we have this year. And then when you're thinking about how this works out throughout the rest of the year, we expect comps to improve throughout the year as our initiatives drive transactions. And as our compares get a little bit easier throughout the year. Brian Bittner: Okay. Thank you. And then just on the high-efficiency package, in the prepared remarks, you're referencing some increased throughput, maybe a lift to comp sales at those 250 restaurants. Just wondering at those restaurants, any quantification you could provide on what you're seeing at those stores and that's something you might I think you said 2,000 at the end of the year, but would you look to accelerate that over the next couple of years? Scott Boatwright: Hi, Brian. Excuse me. It's Scott. Thanks for the question. We're really excited and encouraged by the results we're seeing with the heat package. We're seeing better engagements, consumer engagement scores, we're seeing better scores around food quality and taste of food. And like we said in the prepared remarks, we're seeing hundreds of basis points of improvement in comp sales in those restaurants alone. That gives us confidence that we are approaching the strategy the right way, and it's having a meaningful impact for our team members and for our guests. We have already accelerated the program. We should be at 2,000 restaurants by the end of the year. And then you could see that there is a path to probably finish the rollout at some time in 2027. And we will go as absolutely fast as we possibly can. Brian Bittner: Thank you. Operator: Our next question comes from Sara Senatore with Bank of America. Please go ahead. Sara Senatore: Thank you very much. I guess maybe two quick questions. One is if you could talk about the LTO. I know that that's something you're gonna do more frequently. You talked about chicken al pastor being, I guess, twice as requested as anything else. I think about the fourth quarter, I think carne asada was maybe it didn't act exactly how you expected, although you can correct me if I'm wrong. So I guess how are you thinking about the LTOs? Are you gonna market it differently, or maybe it's more accessible price point just in terms of, you know, ensuring that you get the biggest lift from the LTO that, you know, what you would normally expect. So and then I'll have a follow-up, please. Scott Boatwright: Hi, Sara. It's Scott. Thank you for the question. So carne asada did perform as it relates to incidents just as well as it did in 2023, and I'm confident it did move the needle on transactions. To what extent, I can't really parse out at present. Here's what I will tell you is what we know from what we learned in 2025, which is really a year of progress, as I said, and resilience, is that the LTO consumer, the consumer that chooses an LTO at Chipotle has a higher lifetime value, visits the brand more often, and spends more. We're gonna lean into that moment with our core consumer. We've done exhaustive work around who the Chipotle customer is this past year. What they're looking for from our brand, and menu innovation and new news really at the top of the list. As it relates to how we'll market those components, we've increased the spend this year to account for fully supporting four stand-alone LTOs. I think the marketing message you'll see will begin to evolve. Hopefully, you've already seen the high protein wash that just happened, the Choices ad that just ran a couple of weeks ago. We're approaching the messaging differently, and we're gonna celebrate what is unique and different about Chipotle in a more meaningful way in the upcoming year. And you'll see that evolve as we continue to as the year unfolds within the marketing strategy. Sara Senatore: Okay. Thank you. Very helpful clarification. And then just a follow-up as related. You mentioned doing a national search for Chief Marketing Officer. Just curious, since you are, as you noted, spending more, you know, the percentage of revenues and, you know, multiple LTOs. Does that the fact that you, you know, perhaps are doing a search, is there any, I don't know, just risk of disruption or that, you know, the plan changes? Just trying to understand kind of the cadence. Scott Boatwright: Yeah. I would think of this, Sara, more as a chapter change. And here's what I would tell you. As we have both great internal candidates for the position as well as a lot of interest externally, and what we want to do is ensure that we stay on brand. We're gonna stay core to who we are. And we're just gonna lean into celebrating what, again, our points of differentiation. And our uniqueness in a more compelling way. So think of it as a chapter change for the brand. Chris Brandt did a tremendous job making us a purpose-driven lifestyle brand. That doesn't change, and that doesn't go away. They give us the next evolution of the marketing strategy. That really pushes us into the next phase of growth for Chipotle. Sara Senatore: Thank you. Operator: Our next question comes from Lauren Silberman with Deutsche Bank. Please go ahead. Lauren Silberman: Thank you very much. I have a question on comp and then one on the value side. Just on the comp in January, I know there's a lot of noise. Can you just help level set what you're seeing quarter to date, perhaps pre-storm, if that's the best you know, thought on what's going on there. And then are you assuming underlying trends from January continue throughout the year? Or just help contextualize what's embedded there. Scott Boatwright: Yeah. You know, I've said in the prepared remarks, we saw a lot of momentum coming into January. Recall that the protein menu launched kinda late December. And we really saw an acceleration in the trends. All the way up until the storm hit, you know, a multistate impact with massive restaurant closures. So it's a lot of noise in the underlying trend at present. But I'll pass it to Adam. Adam, do you have anything you want to add to that? Adam Rymer: Yeah. And I would just say, you know, for Q1, this gets us to an underlying trend somewhere in that minus 1% to minus 2% range, and that's what's embedded in our expense line guidance and our prepared comments. But you have to keep in mind that that comp range includes about 100 basis points impact from the restaurant closures from the large winter storm that Scott mentioned. And that's 100 points of impact on the quarter. On the quarter. Correct. Yeah. Lauren Silberman: Okay. Very helpful. On the value proposition side, you guys have you're talking about opportunities to strengthen that. You've been promoting protein. With a single taco, the cup of protein for under $4. Is there more opportunity for entry-level pricing or how you're thinking about smaller portions overall and just how you're thinking about balancing that with not cannibalizing the core business? Scott Boatwright: Thank you. Yeah. What's great about the offering in the protein menu is we're not discounting the product. We're just celebrating something that's on the menu that may have little awareness today. I think having a taco at $3.50 and a protein cup around $3.80 across the country is really an approachable price point that really gives the consumer a meaningful way into the brand, but also solves for, you know, those people that are looking for a different choice whether they're GLP one users, or looking for other dietary restrictions, more high protein, or high fiber. We will test and learn on a couple of new ideas that may be price-pointed throughout the year. And see if they make their way through Stage Gate and actually make a national calendar. But we feel really comfortably situated where we are today. Given the pace of LTOs that will all unfold starting with chicken al pastor on February 10, we have some new news. We have a, you know, a couple of tried favorites. True favorites that have performed well historically. I think the marketing calendar I don't think the marketing calendar this year is more robust and it'll be better supported. With targeted media than we've seen historically in the brand. Thank you. Operator: Our next question comes from David Tarantino with Baird. Please go ahead. David Tarantino: Hi. Good afternoon. I have a question on the margin outlook. And Adam, I was wondering if you could comment on where you think the full year restaurant margin would shake out on a comp that's about flat. I, yeah, I think you have some pricing coming in. You said you're gonna narrow the gap versus inflation. But just any comment on where the full year might shake out given the guidance on the comp? Adam Rymer: Yeah. Yeah. Definitely, David. So margins in 2026 will be under pressure, and it's mostly due to our investment of taking less price compared to the inflation that we're experiencing. But again, I would emphasize that's temporary. And we'll balance it out towards the end of the year. And like I said in my prepared comments, that gap will be the widest in the first quarter. So to put some numbers into it, we expect pricing to be about 70 basis points of impact in the first quarter. While inflation is closer to about 4%. So just then and there, that's about a 250 basis point margin headwind. We'll chip away at throughout the year. When you think about it on a full year basis, I would anticipate pricing to be in that 1% to 2% range. While inflation will be closer to that 3% to 4% range. So just that dislocation alone will be about a 150 basis points. On a year-over-year decline. And then there's a little a couple other adjustments in there, like ad promo is gonna go up maybe 10 or 20 basis points. You have the gift card benefit in 2025, which is another 20 basis points or so. Then, of course, you've gotta make the adjustment for transactions on a flat guide. There'll be a slight degradation in the margin from there. But the good news is that dislocation is temporary. We'll get that back by the end of the year. And all the initiatives that we have in place to drive transactions will resonate with our guests this year, and we're confident that we can drive up above that full year guide with some upside potential from us. So that's a good way to think about it, though, thinking from '25 to '26. Scott Boatwright: David, I would add to that. You know, we still have confidence in the long-term algorithm. Of getting to $4 million AUVs and approaching 30% margins. Although this year will be challenged for a couple of reasons, we have no reason to think that the long-term algorithm doesn't hold. David Tarantino: Great. I was just gonna ask about that, Scott. So thanks for preempting my question. But I guess, what is the path then from this baseline to get to, I guess, margins approaching 30%? I guess, is as simple as getting the volumes up, you know, a million dollars or so a unit? Or, I guess, is there something else, you know, or levers that you have to pull to strengthen, you know, productivity or, I guess, what is your framework for getting to that higher margin? Adam Rymer: Yeah. I'll start and then Scott definitely jump in. And so in the short term, it's definitely that dislocation that I talked about earlier, but we'll solve that by the end of the year. From there, it's all about driving transactions north and getting the flow through on those additional transactions. That will allow us to get not only back to the historical margins that we're a year or two ago at the volumes slightly above where we're at now, but to continue to increase those margins into the 27-28 range and beyond as we approach $4 million in AUVs. Scott Boatwright: Great. Yeah. And I'll tell you, David, the pricing approach we're taking this year at 1% to 2% compared to where the industry is closer to 4% will continue to strengthen our value proposition and give us pricing power in years to come. And so that combined with other initiatives that we have identified, whether it's in supply chain, or in labor, as we make this reinvestment in the business around heat, could still be opportunity down the road to capture some margin savings there as well. David Tarantino: Great. Thanks very much. Operator: Our next question comes from David Palmer with Evercore ISI. Please go ahead. David Palmer: Thanks. Just a couple of follow-ups on that topic of pricing power and, you know, efforts you could make to lean into boosting your value perception. I, you know, first, you know, there's been some pricing rolled out so far. Is there any learnings you have from that pricing? You know, what does price elasticity look like as you've rolled those out selectively? Adam Rymer: Yeah. Yeah. So as you know, we started the approach probably about, what, October, November, so last year. And it's going really well, and it's pretty much as anticipated. And so we expect to continue down this path of this really disciplined and measured approach to raising prices throughout the year. As I mentioned earlier, I expect the full year impact to be about 1% to 2%. But the beauty of this approach is it allows us to adjust throughout the year depending on what we're seeing, get much better data points, as well as get better reads throughout the year on inflation. But so far, so good with this approach. David Palmer: And I wonder, you know, you're gonna be existing among these giant fast food players that are rolling out value menus. And you know, you've done some things along the way. You've you have an entry price point cup with the new protein menu. You said you have some price-pointed things. Looks like you have a new style of advertising where you've pointed out, you know, pretty clearly there's a difference in the way Chipotle makes food versus what you'd see at a traditional fast food place. I just wonder if is there any, you know, do you feel like the offense might be working with these price-pointed things and the messaging and I'm just wondering if there's anything you can do to really shorten this cycle, this, you know, reinvestment in cycle rather than just wait for your price to underprice inflation for a while? And thank you. Scott Boatwright: Yeah. Thanks, David. You know, I'll tell you, you know, with what the momentum we saw in early January, the January gives us confidence that the strategy is exactly what our consumer is looking for. I talked earlier about doing this deep dive on the core Chipotle consumer to truly to really parse out who that consumer is and what they want. What we've learned is the guest skews younger, a little more higher income, is typically a digital native. And that their grounded purpose aligns with our North Star as a brand around clean food, clean ingredients, high protein, and we are the way they wanna eat. We're gonna lean into that in the most meaningful way. I'll tell you, after looking at the data last week, we learned that 60% of our core users are over $100,000 a year in income. In average household income. That gives us confidence that we can lean into that group in a more meaningful way, whether it's the solo occasion and or group occasions to really drive meaningful transaction performance in the year. Operator: Our next question comes from John Ivankoe with JPMorgan. Please go ahead. John Ivankoe: Hi. Thank you. Okay. I'm gonna follow-up on the income question, and then I'll have a question on development. You know, first on the income side, 60% of customer is over $100,000. You know, there's a lot of puts and takes, you know, with tax refunds and just overall changes in tax rate and student loans, what have you. Do you think the core consumer that Chipotle has will actually benefit in '26 from all the different puts and takes that are just, you know, kinda happening out of DC in terms of affecting the customer's wallet and spending ability? Scott Boatwright: Yeah. Hey. I would tell you that we believe it's gonna be a nice tailwind to spend and aligns nicely with our ramp-up and menu innovation. As it is a larger percentage of overall guests. And I think initially for the under $100,000, there'll be a nice bump after tax season and spending in general. And I think we have an opportunity to really garner more than our fair share in that window as well. John Ivankoe: Okay. Thank you. Helpful. And the second question is on development, specifically North America company development. Have we, you know, don't know if, you know, exactly the number 330, 340, 350, you know, something, you know, between 25 and 26. So just correct me on that exact number. Are we kind of hitting a natural level of, hey, we should be thinking about nominal growth rates of units in this core important market as opposed to expecting. What has been historically some, you know, pretty decent leg ups. You know, in development. In other words, now I'll ask the question more succinctly. Are we at the kind of development level in company North America that should just be the absolute level going forward, or do you think you actually have an ability to ramp it? Maybe that's a better way to ask it. Scott Boatwright: You know, we built 334 restaurants in 2025. And we did it successfully. And we had the right teams ready, prepared, at the right development level to take on new growth. And not affect or impact negatively the core business. This year, we'll build 350. So think one new Chipotle restaurant almost every day. And we think that's the right growth rate for our brand. And gives us a lot of confidence that we'll continue to build them and have returns in the 60% range. And so we still can neck up to the 9, 10% new unit growth if we add in partner-operated restaurants into the mix as well. But we feel really comfortable at that growth rate out to 7,000 restaurants in North America. John Ivankoe: And the final one, you know, just give confidence outside of Central London and Frankfurt. Those are obviously two very specific type markets. Are you feeling, you know, good elsewhere in UK, good elsewhere in Germany? And I'll conclude there. Scott Boatwright: Yeah. France is a tough one, I'll be honest with you, because of wage inflation, because of occupancy costs. It's not to say we don't like France as an opportunity. We're just not seeing we're seeing some recovery there, but not at the same pace. But so we just need a little more time in France, I believe. As it relates to London proper or UK proper, Central London is our biggest opportunity. We've made some strategic bets a couple of years back outside of Central London. That didn't perform at the level we wanted them to perform at. So we think about the strategy for London more lot more similar to New York or Downtown Chicago, where there's so much opportunity to build within Central London and have, you know, very successful return on investment. That that's where we're gonna lean into. But then we'll look to expand to other adjacent markets, whether that's Benelux, the Nordics, Poland, or Spain. Operator: Our next question comes from Danilo Gargiulo with Bernstein. Please go ahead. Danilo Gargiulo: Great. Thank you. Scott, in the past, you mentioned that you may have identified 100 to maybe 150 basis points of margin upside opportunities that over time, you should be able to unlock. Was wondering if you can give more color on the timing of those opportunities and what levers you can pull today without impacting demand? Thank you. Scott Boatwright: Yeah. So we are in the throes. Great question. Thank you for that, Danilo. We're in the throes of going through a very comprehensive supply chain review and there are strategic savings that are there that don't affect the ingredient quality that we bring in the back of our restaurants. So we have a lot of confidence we'll be able to pull margin there. But, also, the equipment high equipment high equipment package has margin savings that we are reinvesting at present. That over time could have a meaningful impact to margin as well. Danilo Gargiulo: Great. And I would like to follow-up also on the snacking occasions. Specifically, handheld seem to be another area where you could be leaning more into. I was wondering how does this fit into your marketing strategy, and more importantly, how are you gonna be enhancing your value orientation while ensuring that you're not cannibalizing your own sales and using consumers to trade down. Thank you. Scott Boatwright: You know, that was, you know, consumer trade down concern was one of the concerns we had around the high protein menu. And, frankly, we just didn't see it. Extra protein incidence is up 35% during the menu launch. Which gives us confidence that the core consumer is not like necessarily looking for a smaller, lower price-pointed component to the menu. What they are looking for is excellent culinary, excellent in-restaurant and digital experiences, and then product that is on brand and on trend. And so that gives us confidence in the strategy. We will test ideas like, dare I say, a happier hour to see what that looks like for our brand. I don't know if it'll be a meaningful unlock for Chipotle, but we're gonna test the idea. And stage gate it and give it the appropriate resources necessary. Operator: Our next question is Dennis Geiger with UBS. Please go ahead. Dennis Geiger: Great. Thank you. Wondering if you guys could talk a little bit more about how you're sizing up those key sales drivers in '26, many of which I know you commented on. But I believe you mentioned only embedding a modest impact from the initiatives this year. So I'm just curious if you could sort of unpack is that sort of consistent with your methodology on often not embedding LTOs in the comp guide or is it much more of a let's be conservative in thinking about a lot of these impactful initiatives, just given the environment that we're in. Just curious if you could unpack that for us, guys. Thank you. Scott Boatwright: Yeah. I'll let Adam jump in on his reference as it relates to embedding in guide. LTOs, or other strategies. Here's what I'll tell you. We have sized up the opportunities whether that's, you know, relaunching or reimagining rewards. Or group occasions, or what the heat equipment package will do for our brand. Of course, we're still early days on many of those things, so we dare say, you know, what that will look like. We have a pretty broad range on each of those items. But I think they're more multiyear than a 2026 initiative. Adam Rymer: Yeah. And then in terms of, you know, looking at the guide, if you look at more of our short-term guides, what I mentioned example for Q1 of a minus one to a minus -two percent, that does not include any further initiatives the quarter. So think of Chicken Al Pastor, or that momentum that we're getting from the protein menu and campaign that can provide upside to it. But then when we're thinking about full-year guides, we usually include a modest impact from the initiatives throughout the year. And this year, we definitely took into account there, like I said earlier, just what's going on in the consumer environment. We just wanted to be a little bit more conservative on that full year just because of that. Dennis Geiger: Thanks, guys. I appreciate it. Operator: Our next question is Chris O'Cull with Stifel. Please go ahead. Chris, your line may be muted. We're unable to hear you. Chris O'Cull: Sorry about that. Can you hear me now? Scott Boatwright: We have you, Chris. Go ahead. Chris O'Cull: Okay. Great. Scott, I had a follow-up question regarding the CMO search. I'm just wondering what specific next-level expertise are you looking for in a leader to help drive Chipotle into this next phase of growth? Scott Boatwright: Yeah. We're just looking to evolve our key messaging, really talk about our points of differentiation in a new way that's compelling. Continue to drive strong menu innovation for our brand that is on brand, and that drives really consumer demand. And then support and help as it relates to digital to help support our new chief digital officer as we think about digital commerce differently in the years to come, whether that's reimagining the loyalty program which you talked about, or better partnership with our third-party aggregators and really figure out meaningful ways to drive transaction through those channels. Because we know those channels to be different whether you're talking about Uber or DoorDash. One is heavily focused on price differentials for in-restaurant versus delivery. Other one's more promotionally driven. And so figuring out the right approach to that. And then also, really making our white label experience more approachable to really accelerate the transactions we're seeing in that channel as well. So holistically, I know I said a lot there, Chris. Looking for I guess, a unicorn. Good news is, I talked about this earlier, we have great internal talent. We have great external excitement for the job. So I think we'll have someone in the chair in the coming months that is world-class, and that'll deliver on the expectation. And deliver on our recipe for growth strategy. Chris O'Cull: Okay. And then just my second one. How are you thinking about communicating to light or lapsed users who probably represent a big opportunity but are likely not going to see the first-party loyalty offers? Scott Boatwright: Yeah. So I think we've talked about personalization in the past, Chris, and we're starting to really accelerate the personalization journey. I'll give you an example. We're leveraging the AI model to really identify those lapsed users and create journeys that get them reengaged with our brand. More importantly is we're able to parse out deals or offers for based on how often they frequent our brand in the past. And what we anticipate their lifetime value to be. Which is really a meaningful step change in how we really drive demand in the channel and targeting lapsed and at-risk consumers. Chris O'Cull: Okay. Great. Thanks, guys. Operator: Our next question is with Andrew Charles from TD Cowen. Please go ahead. Andrew Charles: Great. Thank you. Scott, you reiterated the 2026 development guidance, and I'm curious what you would need to see to slow development to intensify the focus on improving traffic. Is it overly simplistic to think if 2026 comps were to be negative instead of flat, then this would make you reconsider development plans? Scott Boatwright: Yeah. I think it's a couple of things. I think number one, is if we started to see cannibalization that exceeds our historical levels, which we haven't seen any deterioration there to date, or in the last couple of years. And or if we stop seeing the performance of new restaurants at 80% or better of the existing asset base, or we see margins or return on investment start to be marginalized, that would cause us to slow down. Fortunately, we're not seeing any of that to date, which gives us confidence we're on the right track. Andrew Charles: Very clear. Okay. Thank you. Then my follow-up question is just for the four new LTOs this year, should we think about them being roughly evenly spaced around three months each? Or Al Pastore obviously has been a hero for you guys in 'twenty three and 'twenty four. Might that one run a little bit longer than the, you know, implied three months each? Scott Boatwright: Yeah. So think about them between eight to twelve months in total. So there'll be different cadences, and we have the ability to extend or reduce that timeline based on how we see the market trending. But I think you're thinking about the right way. Andrew Charles: Very helpful. Thanks, guys. Operator: Our next question is from Sharon Zackfia with William Blair. Please go ahead. Sharon Zackfia: Hey. Thanks for taking the question. There was a lot of talk over the summer about the younger consumers slowing down. And I'm curious as you've seen the comps accelerate, it sounds like through the fourth quarter and into January, have you seen that consumer as well kind of a comeback? Is there anything to call out from a demographic standpoint? Scott Boatwright: Yeah. So I'll tell you, Sharon, that I'll give you an anecdote, then I'll tell you the story. So we started down the path in the fourth quarter of really finding out how to reengage that younger consumer or lower-income consumer and get them reengaged with the brand. I'll tell you our digital team worked wonders as it relates to finding ways to gamify the experience and create rewards that were meaningful enough to drive that cohort back into our restaurants. One of those examples, I was in Florida just before the holidays, and we launched our free potlait campaign. I was in a restaurant, and I was like father time standing in the line that was out the door. The average age of the customer in the line that day had to be 20 maybe 21 years old. And so I'll tell you that worked tremendously getting those consumers back in our restaurants, and it will be used to inform the 2026 strategy as we engage that cohort more meaningfully. Adam Rymer: Yeah. And I would just add to that as well. I mean, a lot of the initiatives that we've done since last summer, especially with Red Chimichurri, the new protein menu and campaign, as well as just LTOs in general, really have outsized performance with that group. So you're gonna see us continue to lean in on those well for that reason. Sharon Zackfia: Thanks for that. And then as a follow-up, on the high protein launch, was that successful in bringing in new customers to Chipotle or was it really kind of a frequency or upsell kind of dynamic? Scott Boatwright: It did both actually, Sharon. So new customers to our brand, who really didn't know about the high-quality proteins that we have. And I shared this with the marketing team, and they share my enthusiasm around the topic. We have the best proteins in the world. Why wouldn't we celebrate those in the most meaningful way to really, again, drive our points of differentiation compared to our competitors who may also be promoting protein at the same time. And I think we had a meaningful impact on the trend change in the business. But more importantly, the adoption of the protein cup protein side being up 35% is evidence that the strategy works. Operator: Thank you. Our final question will come from Christine Cho with Goldman Sachs. Please go ahead. Christine Cho: Hi, thank you for taking the question. So just a quick follow-up on the performance of the high protein cup. So are you seeing any specific consumer cohorts responding more favorably, such as the younger consumers? And did you also see any impact on the late afternoon traffic? And then also, incremental color on your plans to address the new kind of side and beverage occasions throughout the year would be appreciated. Thank you. Adam Rymer: Yes. I'll start on the protein side. So absolutely. I think this protein trend that we're seeing across the nation right now is having an outsized impact on the younger cohort. Really is across the board. But we're definitely seeing an outsized impact there. And again, it's mostly coming through additions. There's a little bit coming in and just getting the cup or just getting the single taco, the vast majority are utilizing that as a checkout on. And then you had a second question about drinks. Christine Cho: Yes. Your plans for the sides and drinks. And occasions throughout the year. Scott Boatwright: Yeah. So we will, Christine, we will pepper in new sides and beverages. We'll do a beverage in the summer. And we will look at different sides that we're bringing, whether they're dips or other sides that we'll bring in that really tested really well through Stage Gate that we're really excited about. I wish I could tell you. I think if I did, my marketing team would throw me out of the building. But we're super excited about what we have to offer. Look forward to an incredible year. Thank you. Operator: This concludes our question and answer session. I would like to turn the conference back over to Scott Boatwright for any closing remarks. Scott Boatwright: Thanks, everyone. Hey, I just want to close by thanking our team members for their hard work and dedication across our 4,000 restaurants and around the globe. They truly are the backbone of this great brand. I also want to reiterate my deep confidence in our growth strategy. We are doubling down on what uniquely differentiates our brand to position Chipotle for what I talked about earlier, our next phase of growth. We will win by investing in operational excellence, accelerating innovation into new offerings and occasions, relaunching our rewards program, deploying new back-of-house technology and equipment, and growing our global footprint. As I laid out, we're already seeing progress and validates that our focus on these strategic priorities is already resonating with our consumer. Our recipe for growth plan will position us for success in any environment and I am confident we'll drive transactions, allow us to move faster, and create long-term sustainable growth for the brand. And with that, I just want to say thank you, and have a great day, everyone. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.