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Amy L. Baker: Thank you for joining today's Capital Southwest Third Quarter Fiscal Year 2026 Earnings Call. Participating on the call today are Michael Sarner, Chief Executive Officer, Chris Rehberger, Chief Financial Officer, Josh Weinstein, Chief Investment Officer, and Amy L. Baker, Executive Vice President Accounting. I will now turn the call over to Amy L. Baker. Thank you. I would like to remind everyone that in the course of this call, we will be making certain forward-looking statements. These statements are based on current conditions, currently available information, and management's expectations, assumptions, and beliefs. They are not guarantees of future results and are subject to numerous risks, uncertainties, and assumptions that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Capital Southwest's publicly available filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements whether as a result of new information, future events, changing circumstances, or any other reason after the date of this press release, except as required by law. I will now hand the call over to our president, and chief executive officer, Michael Sarner. Michael Sarner: Thanks, Amy. And thank you all for joining us for our third quarter fiscal year 2026 earnings call. We are pleased to be with you today. And look forward to walking you through our results for the quarter. During the third fiscal quarter, we generated pretax net investment income of 60¢ per share, supported by strong recurring earnings across the portfolio. Our undistributed taxable income balance remained robust, at $1.02 per share reflecting consistent realization activity. In fact, over the last twelve months, we have harvested $44.5 million in realized gains from equity access. Driving UTI growth from 68¢ per share in December 2024 to today's level. Subsequent to quarter end, we realized an additional realized gain of $6.8 million from another equity exit. Which should further support our UTI balance going forward. Our board of directors has declared a total of 58¢ in regular dividends for January, February, and March 2026, and has also declared a quarterly dividend, supplemental dividend, of 6¢ per share payable in March bringing total dividends declared for March to 64¢ per share. Turning to originations. Deal flow in the lower middle market remained healthy this quarter. We closed $244 million in total new commitments across eight new portfolio companies, and 16 existing portfolio companies. Add-on financings continue to be an important source of originations for us. As over the last twelve months, add-ons as a percentage of total new commitment have been 29%. These opportunities allow us to deploy capital into businesses we know well with proven management teams and sponsors. The weighted average spread on our new commitments this quarter was approximately 6.4% which we view is very attractive given today's competitive spread environment. On the capitalization front, last quarter we strengthened our balance sheet by issuing $350 million in aggregate principal, of 5.95% notes due 2030. This quarter, we used a portion of the proceeds to fully redeem our $150 million notes due 2026 and $71.9 million notes due 2028. Extending our maturity profile at an attractive cost of capital. We also raised approximately $53 million in gross equity proceeds through our equity ATM program. At a weighted average share price of $21.11 per share or a 127% of the prevailing NAV per share. Reinforcing our ability to raise capital efficiently and accretively. Subsequent to quarter end, we announced a first out senior loan joint venture with a private credit asset manager which I would like to spend some time discussing. We believe this new JV will enhance our competitiveness in our core lower middle market by enabling us to participate in larger, higher quality deals with tighter spreads while maintaining disciplined hold sizes. The structure also allows us to earn outsized economics due to our role as originator and administrator of the JV. And higher relative yields on last out loans. Which is extremely important in an environment where SOFR is declining and loan spreads on new deals remain very tight. The first out loans within the JV are expected to be conservatively levered, approximately 1.5 times debt to EBITDA or less, and once fully ramped, expect the JV to generate a low to mid teens equity return for Capital Southwest. Finally, our partners in the JV is a highly regarded, well-capitalized asset manager with whom we are extremely excited to build a long-term relationship. We believe this relationship may open up other unique opportunities for co-investment in the future as we continue to expand our platform. Overall, we are pleased with our performance this quarter, enthusiastic about the prospects for this new venture. We look forward to giving further updates on the funds in the coming quarters. I will now hand the call over to Josh, to review more specifics on our investment activity and the market environment. Josh Weinstein: Thanks, Michael. This quarter, we deployed a total of $199 million of new committed capital. Consisting of a $197 million in first lien senior secured debt and $2 million of equity across eight new portfolio companies. We also completed add-on financing for 16 existing portfolio companies. Totaling $44 million in first lien senior secured debt and $405,000 in equity. Our on-balance sheet credit portfolio ended the quarter at $1.8 billion representing 19% year-over-year growth from $1.5 billion as of December 2024. Importantly, 100% of new portfolio companies debt originations were first lien senior secured And as of quarter end, 99% of the credit portfolio remained first lien senior secured. With a weighted average exposure per company of only 0.9%. This level of portfolio granularity reflects our disciplined approach to risk management as we continue to scale the balance The vast majority of our deal activity continues to be in first lien senior secured loans to private equity-backed companies. Approximately 93% of our credit portfolio is sponsor-backed, which provides strong governance operational support, and when needed, the potential for junior capital. In the lower middle market, we frequently have the opportunity to invest on a monthly on a minority basis in the equity of our portfolio companies parry pursuit with the private equity firm where we believe the equity thesis is compelling. As of quarter end, our equity co-investment portfolio consisted of 86 investments with a total fair value of 183 representing 9% of our total portfolio at fair value. This portfolio was marked at a 133% of our cost. Representing $45.2 million of embedded unrealized appreciation. Or 76¢ per share. These equity positions continue to give our shareholders meaningful upside participation in growing lower middle market businesses driven by both operational improvement and strategic add-on acquisitions. This is evident from the recent realized gains, which Michael mentioned earlier. The lower middle market remains highly competitive, as this segment of the market continues to attract both bank and nonbank lenders. While this has resulted in tight loan pricing, for high-quality opportunities, the depth and strength of our sponsor relationships the team has cultivated over the years have continued to result in our sourcing and winning opportunities with attractive risk return profile. Today, our portfolio includes investments from 90 unique private equity firms, And over the past twelve months, we closed 14 new platform investments with sponsors we had not previously partnered with. Since launching our credit strategy, we have completed transactions with over 129 private equity firms nationwide. Including more than 20% with whom we have completed multiple deals. Our portfolio now consists of 132 portfolio allocated 90% to first lien senior secured debt, 0.8% to second lien senior secured debt, and 9.1% to equity co-investments. The credit portfolio generated a weighted average yield of 11.3% with weighted average leverage through our security of 3.6 times EBITDA. We remain pleased with the overall performance of the portfolio. At origination, all loans are initially assigned an investment rating of two on a five-point scale, with one being the highest rating and five being the lowest rating. As of quarter end, 90% of the portfolio at fair value was rated in the top two categories. Cash flow coverage remained strong at 3.4 times, reflecting an improvement from the 2.9 times low observed during the peak of base rates. This strength is further supported by the fact that our loans represent on average, only 44% of portfolio company enterprise value. Our portfolio remains broadly diversified across industries, and our average exposure per company of less than 1% continues to provide meaningful protection against idiosyncratic risk. For new platform deals closed during the December, weighted average senior leverage was three times debt to EBITDA, and weighted average loan to value was 36%. Providing a substantial equity cushion for each of our debt. Over the past twelve months, new platform originations have averaged 3.3 times senior leverage, and 37% loan to value. Underscoring our consistent commitment to conservative underwriting. I will now hand the call over to Chris to review the specifics of our financial performance for the quarter. Chris Rehberger: Thanks, Josh. Turning to our financial performance for the quarter. Pretax net investment income was $34.6 million or 60¢ per share. Total investment income increased to $61.4 million up from $56.9 million in the prior quarter. The increase was driven primarily by a $1.8 million increase in PIK income a $1.1 million increase in fees and other income, and a $1 million increase in dividend income. The increase in PIC was driven by an amendment to one of our portfolio companies, in which the sponsor provided significant new cash equity support and a debt pay down in exchange for a pick option. As of quarter end, nonaccruals represented just 1.5% of our investment portfolio at fair value. During the quarter, paid a 58¢ per share regular dividend and a $06 per share supplemental dividend. For the March 2026 quarter, our board has again declared a total of $0.58 per share in regular dividends, payable monthly in each of January, February, and March 2026 and maintained the 6¢ supplemental dividend also payable in March, bringing total dividends declared to 64¢ per share. We continue to demonstrate strong dividend coverage, with a 110% cumulative coverage since launching our credit strategy. With UTI of a dollar and 2¢ per share, and a sizable unrealized appreciation balance in our equity portfolio, we remain confident in our ability to continue distributing quarterly supplemental dividends over time. LTM operating leverage ended the good quarter at 1.7%. Significantly better than the BDC industry average of approximately 2.6%. As our asset base continues to grow, our near-term target for operating leverage is 1.5% or below, reflecting the inherent efficiency of the internally managed BDC model. The internally managed model has and will continue to provide meaningful fixed cost leverage to shareholders while still allowing us to invest in talent and infrastructure as we continue to scale a best-in-class BDC platform. NAV per share increased to $16.75 per share up from $16.62 per share in the prior quarter. Driven primarily by our equity ATM program. As Michael noted, last quarter, we issued $350 million of 5.95% unsecured notes due twenty third. During the December, we used a portion of the proceeds to fully redeem our $71.9 million August 2028 notes and a $150 million October 2026 notes. With no make-whole payments required. We view this refinancing as a highly favorable outcome for shareholders strengthening our balance sheet and positioning us well across a range of market environments. Our liquidity position remains robust, with approximately $438 million in cash and undrawn leverage commitments across our two credit facilities plus $20 million available on SBA debentures. In total, this represents more than 1.5 times coverage of the $285 million in unfunded commitments across the portfolio. Regulatory leverage ended the quarter at 0.89 to one debt to equity, down slightly from 0.91 to one in the prior quarter. While our target leverage remains 0.8 to 0.95, we continue to factor in the macroeconomic backdrop and intend to maintain a prudent leverage cushion to help mitigate capital markets volatility. We will continue to raise secured and unsecured debt capital, as well as equity through our ATM program in a methodical and opportunistic manner to ensure we maintain significant liquidity at a conservatively constructed balance sheet with adequate covenant cushions. I will now hand the call back to Michael for some final comments. Michael Sarner: Thank you, Chris, Josh, and Amy. Thank you to all of our employees who work tirelessly behind the scenes to help us deliver for our shareholders and communicate our progress each quarter. Your dedication is a critical part of what makes this platform so strong. And it remains a deep source of pride for me. And to everyone joining us today, we appreciate your continued interest engagement, and support. We remain focused on executing our strategy maintaining disciplined growth and creating long-term value for our shareholders. That concludes our prepared remarks. Operator, we're ready to open the line for Q and A. Operator: And wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from Doug Harter with UBS. Douglas Harter: Thanks. I was hoping you could just expand a little more, talk about the lower middle market. Just how do you view that from a competitive dynamic today? What are you seeing in terms of players or is anyone, you know, kinda moving back into that market, moving out of the market, you know, how are you seeing that? And what's the outlook for spreads as a result? Michael Sarner: Yeah. I do not think it's really changed much over the last probably six months. I think over the last twelve and eighteen months, we have seen regional banks that I've noticed this before. They've dropped down historically they only landed, you know, to maybe one and a half turns of leverage in a maybe in a senior measure. Structure. And more recently, we're seeing regional banks actually underwrite a whole unitranche loan. Now they come and go. Certainly anytime you're seeing headlines of know, private credit issues, they sort of back off. But by and large, I think that it was kind of the same players mean, what we probably have seen in the last I would say, one to two months is that there's particularly on the BDC space, there's 27,042 BDCs that cut their dividends And I think we're only seeing five BDCs trade above book right now. So there's a little less competition from our peers. As they sort of lick their wounds right now. Other than that, I think that, you we're in a very strong competitive position Obviously, we've announced this joint venture, which we think is gonna strengthen our ability to continue to win deals that are in our core competency, the lower middle market. Douglas Harter: Great. And I guess just then on the spread outlook, how that kind of those comments would lead to kind of how you think spreads progress over the coming quarters? Michael Sarner: Yeah. So we look at it in our the spread on debt is actually from 03/31/2025. It was 7.35%. Today, seven point two four. So we've held in pretty well from a spread perspective. I think we say that we've seen spreads the spread compression has seemed to stop the last twelve months and even the last three months we've seen our spreads on our newly originated deals the mid sixes. And those are with, you know, three times leverage and 36% loan to value. So very conservatively structured deals. With decent with decent decent spread. So I I think for us, we'll continue to be somewhere between seven percent and and seven and a quarter if we would expect for the next twelve months. Douglas Harter: Appreciate that. Thank you. Operator: Our next question comes from Mickey Schleien with Clear Street. Mickey Schleien: Yes. Good morning, everyone. Michael, could you give us a sense of the breakdown of the portfolio between sponsored and non-sponsored at this time? Michael Sarner: I think it's 93% sponsored and 7% non-sponsored. And that's probably I thought it's been it's typically been somewhere between 85-95% sponsored deals. Mickey Schleien: And how are those sponsors behaving in terms of their appetite for deals in the in the current market environment? You know, I mean, we go quarter to quarter, and you know, sometimes it's risk on, sometimes it's risk off. We're there's so much going on. Can you give us a sense of just the backdrop? Michael Sarner: Josh, you wanna take this one? Josh Weinstein: I think there's there's still a lot of capital in the private equity lower middle market private equity funds. So this they're still looking for deals. I think that if you ask most private equity sponsors in the lower middle market, they would say last year was a pretty quote, unquote, weak year from a deployment perspective, and they're hoping 2026 there'll be more opportunities for them. But yeah. So I think that they're looking for deals. They have capital to spend, but they're not you know, last year, they didn't find as many deals available to them. You know, the other thing I would add is that the lower lower middle market where we play the 3 to 15,000,000 in EBITDA, you know, we're not volume you see isn't as typical with what you hear on the headlines of you know, m and a going up and down. There are founders as an aging pop aging population where, you know, companies are turning over. There's been a steady drumbeat I wouldn't say that there's been there's clearly not the same peaks and troughs that you see in the upper and middle middle market. So I I think the sponsors that that Josh is referring to, they're they're they're still seeing plenty of of deal flow. Mickey Schleien: And and, Michael, with that in mind, I mean, we're we're certainly reading a lot about pressure from LPs on these sponsors to to provide them some liquidity. But I'm getting the sense that you know, the sponsors you work with, which are know, focused on the lower middle market, is that less of an issue for them? Michael Sarner: I think it's I mean, I I think it can be an issue. Depends on where they are in the life cycle of fund. I mean, I think that they're that you're I think that they're looking for opportunities to exit as well. To provide that liquidity to LPs, but but probably a little bit less pressure than you'd see in the middle market or upper middle market. But but you know, we obviously talk to a lot of sponsors in the country and have deep relationships with them. But you know, speaking specifically about their you know, their liquidity situations and all that stuff is a little bit tough for us. Mickey Schleien: Right. No. I get it. Michael Sarner: Yep. And the other thing I would note for you, this is when we go through our investment committee process, on new deals, we definitely focus on where this investment stands in a fund life. So if a comp if if a fund or a sponsor, this is, you know, one of the last deals, and we're you know, there's only 5 to 10,000,000 of dry powder. That's allocated with the rest of the portfolio. That's certainly gonna be a negative and something that we're gonna discuss to see whether we still feel good about the credit. So we typically want these deals to be in, you know, beginning or the middle stages of of a fund line. Mickey Schleien: Understood. Michael, given what we've just talked about in terms of sponsors, any sense of you know, how active you expect to be, you know, this calendar year and and maybe even next year in terms of deal flow and know, repayment risk in the portfolio and essentially, you know, what's your sort of business plan for net portfolio growth? Michael Sarner: No. I I honestly I feel very bullish for for several reasons. One, you know, we've grown our sponsor relationships think we cited the numbers earlier over time. We've recently added another MD under originating MD, Brian Mullins, who brings his own unique set of sponsors. Who's gonna be covering know, the contrary. We recently promoted Grant Easton, one of our principals, to MD, and he's you know, he's firing on all cylinders, and he's been so he's another source of origination. And then, you know, the joint venture, I'm looking back to it. So the joint venture allows us to compete on the same deals we're looking at today, but we've historically held the line at around 5.75% because that's you know, that's a moving target. But most recently, 5.75% spread kinda meets our ROE target. And anything below that, you know, with the we we didn't view as accretive to the portfolio and and helpful to our dividend. By doing this joint venture, we're able to compete and win on deals that 5% or above, while still actually, you know, incorporating additional arranger fees profit allocation, and this enhanced spread that increases the yield on the deal by a 100 basis points. So we're gonna be able to see the same amount of deals from one perspective, but be winning more of them. And these are typically the reason this venture was really important to us is we were focused over the last twelve months saying, look, You've seen a lot of really high-quality deals that we would love to put in our portfolio that we thought were, quote, unquote, you know, sleep at night credit. But we weren't getting our DLC and the ability to go below $5.05 75. This is giving them another you know, arrow and a quiver to to actually go out and compete And, these are deals that we can consider cleaner and more high quality. And it also allows us to maintain granularities. We think that's been a huge part of our success is maintaining granularity through the last ten years and then not really getting greedy, staying below that 1% on average. Mickey Schleien: Michael, did you say in your prepared remarks that the JV would be primarily a last out fund? Did I hear you correctly? Michael Sarner: No. So well, I'd say it's primarily, but there's gonna be different types of assets that go into the fund. But the the probably the best example of what this fund is is if you look at a a $10 million EBITDA company, that's levered three and a half times with say, 35% loan to value at a you know, five fifty spread. That's a $35 million total debt check. So in our in the example I give you, the first out we go into the joint venture, So probably correct myself. The only thing that's pretty much going into the joint ventures would be first out position. So they would hold $10 million at $3.75 spread one turn of leverage, and 10% loan to value. On our balance sheet, we would hold $25 million of that debt of the debt stack and that would get a, you know, 66.25% spread and still levered at the same 3.5 times and 35% loan to value. So that kinda gives you an idea of what what what it'll look like on balance sheet and and in the JV. Mickey Schleien: Understood. And and what kind of leverage do you expect the JV's balance sheet to have? Michael Sarner: So I'll start. The asset level is gonna be between one and one and a half turns. Of leverage for for individually on the asset side. The fund itself will be probably something around two and a half turns plus or minus. Mickey Schleien: Okay. And that gets you to your ROE target. I understand. And lastly, and I appreciate your patience, the portfolio has about 21% at fair value in consumer products and services, restaurants, and and movies. You know, those are, you know, sort of cyclical segments. Can can you discuss your underwriting approach to those segments and how are those portfolio companies doing given know, everything we're reading about a k shaped economy? Michael Sarner: So I think maybe Josh, wanna take this one? I would tell you that when I look at our weighted average leverage for consumer services that fall into the buckets you're referring to, leverage is is slightly elevated at 4.2 times. When we look at, you know, where other portfolios begin at five and a half to six times in upper middle market, we would say it's still pretty conservatively levered because, you know, our entry multiple on many of these companies are gonna be somewhere between one and a half to three times leverage. Okay. We're we're certainly cognizant of of consumer discretionary. So I would say there's a decent amount of that consumer probably the majority that consumer, we think, well positioned for consumer pullback or economic pullback. And on top of that, we do structure our deals you know, recognizing, you know, where we are with the know, with the with potential consumer pullback. Mickey Schleien: Understood. I appreciate you taking my questions. That's all I have this morning. Thank you very much. Michael Sarner: Thanks, Nick. Operator: Our next question comes from Erik Zwick with Lucid Capital Markets. Erik Zwick: Good morning. This is Justin Marco on for Erik today. Just going back to the spread conversation, it was wondering if you guys could talk about the current state of underwriting conditions and if you're seeing any other signs of pressure on structure terms? Michael Sarner: We have from a performance standpoint, I would tell you that we're not seeing pressure on any particular industry. Any issues in the portfolio continue to be idiosyncratic. I think you're asking about the the structures of the of new deals we're doing. I I think is is that your question? Erik Zwick: Yeah. Yep. Michael Sarner: Yeah. So so I think we said this, and it it can stay consistent that we've we've definitely seen we had seen spread compression over the last twelve, eighteen months considerably. But but structurally in the lower middle market, we have not seen, you know, sort of weak credit agreements or asks coming through from our private equity sponsors. It's it's pretty status quo from a structural perspective over the last bunch of years. I think that where where the lower middle market has moved in the last kinda eighteen months or so, has been on the pricing and spread, not on the structure. So it's still seeing good covenants and and and solid credit documents. Yes. I mean, almost, I'd say, 100% of our portfolio or close to it. You know, I have a fixed charge covenant and leverage covenant. We have a CapEx covenant. And then to the extent that there's a DDTL, you'll see an incurrence covenant as well. Erik Zwick: Okay. Thanks for the color there. And for me. Any other additional details on the new JV expecting to be fully ramped up? whether, you have like a targeted size in mind or when you're Michael Sarner: Sure. So we've actually we've been negotiating that for a bit of time. We've already started ramping. We we closed three deals that will be contributed closed three deals in the $12.30 mark quarter that contributed in the coming weeks. And we're close to closing a credit facility I think how many? $300 million credit facility. I think the answer to question is each party was contributing committed $50 million of equity to date. We think it's gonna take probably at least a year to get probably up to the the full leverage. So it's gonna probably it'll it'll eventually be a a mid teens return. I think it'll be, you know, double digits return. By the end of the year. Erik Zwick: Got it. Thanks for taking my questions today. Michael Sarner: Of course. Operator: Our next question comes from Dylan Hines with B. Riley Securities. Dylan Hines: Hey, thanks for taking my I was just wondering, I noticed you talked about the in the quarter for the originations. I was wondering, do you have do you know what the weighted average yield was for your originations in the quarter? Michael Sarner: Wait over to you. Well, we I think I said earlier. So the spread on the new deals this quarter was six and a half percent. And leverage was three times, and loan to value is 36%. So are you just saying I mean, with the so far, so the weighted average yield is approximately ten fifty. Dylan Hines: Gotcha. Right. Okay. Deals. Gotcha. Yeah. And then I was wondering about the ATM issuances. Do you expect to continue doing that as long as the premium's favorable? Do you have a do you have a target rate that you generally wanna issue at? Or Michael Sarner: Yeah. Sure. So, yeah, if you look, you know, past history, we do somewhere between 30 and 50,000,000 every quarter. That vacillates depending on deal flow and repayments and and liquidity needs. But certainly, with the with the premium we're trading at, you know, somewhere in that range it is would be a good expectation for the coming quarter. Dylan Hines: Okay. Alright. That'll be it. Thank you. Michael Sarner: Welcome. Operator: Our next question comes from Robert Dodd with Raymond James. Robert Dodd: Hi, everybody. Hope you can hear me with the much background noise On the JV, we can go back, is there any impact? Mean, you've said you don't need to expand kind of your your your net currently in terms of being able to to to stock that up. But is there any intent to can you expand maybe the size of the businesses or the the, the type of leverage multiple, anything like that. Maybe once it gets closer to to to scale, or is it is it just it's exactly the same assets, just the the lowest spread ones going in that JV? Michael Sarner: I I think that's right. It's pretty much exactly the same as this. I think these deals that are really targeted for this are gonna be deals that are between 5 and 10,000,000 of EBITDA. So there, like I said, many times are very clean. They're deals? And they're priced between 5 and $5.75. I would say it's the extent that we're seeing deals that are slightly larger, so let's call them you know, 35 to $40 million check, which we don't prefer to hold, because our our our preference for granularity, this does give us the ability on those deals to put 10 to 15,000,000 in the JV. While, you know, still maintaining a, you know, 20 to $30 million hold. to be feel more comfortable in putting So I think it on the margin, it allows us to start to feel that are slightly larger. But for the most part, it's just the cleanest deals in our course base. Robert Dodd: Got it. Thank you for that. One more quick. It's it's been topical over the last couple of days. How are you evaluating AI risk both within the assets you already have in the portfolio, but then when you look at new originations and opportunities, how much, if any, is is AI risk being factored into your underwriting case Michael Sarner: Honestly, that is it's something that we started taking up about probably a year ago. We formed an AI committee And then actually created a segment in our investment committee process which rates the various aspects of a company in terms of the the AI risk or so because, look, when we look at companies, sometimes AI is gonna be helpful. We see in some financial services companies, they're gonna be using AI to to know, basically become more efficient. In other deals, we're seeing AI as a potential. We just saw a deal maybe two weeks ago that we we couldn't get comfortable with because the advent of AI may not impact business in the next two years, but it would impact the business in five. And therefore, you know, the concern of how it's gonna get sold and at what valuation would that cover the debt. So I think looking at we're we're certainly it's definitely a a a heavy segment of our investment committee discussion. And then internally, we're looking to see how we can utilize AI as well to become more efficient as an organization. And that's something that's it's begun in our Robert Dodd: Got it. Thank you. Operator: That concludes today's question and answer session. I'd like to turn the call back to Michael Sarner for closing remarks. Michael Sarner: Yeah. I wanna take one minute to just pause and reflect. Our our company, our balance sheet, just passed $2 billion in assets. I know, you know, growing the balance sheet is not the goal here. It's creating value. It is a testament to everybody who's worked here and all the value that's created to allow us to continue to grow. And my optimism today, and I think our optimism as a group has never been higher, I mean, we've mentioned the two you know, new MDs that are you know, helping enhance the business. The joint venture, which we spent a lot of time discussing, You know, we've we've talked about we've over the last twelve months, we've exited to date, like, $50 million in equity. And I'd remind everybody that's on 5000005% equity portfolio at cost. So we're punching way above our weight, which tells you, you know, our underwriting both on our debt and and our ability to to create equity gains has been has been strong. That's created the dollar 2 per share of UTI. We have 76¢ of unrealized appreciation and we would tell you majority of that are in companies that are in the market. Some in the 2026 and other in the back half. Our operating leverage of the company is 1.4% on a run rate basis. Excluding the onetime charge in from from last year. Conservative leverage at active corporate level of 0.89, conservative leverage at our portfolio level of 3.6 times, significant liquidity. And and all of that is brought us to a place where we have a a 40% plus premium to book on our stock. Which reflects, I think, all the strong work we've done in the company. So, you know, as we leave this call, I I just I'm I'm thankful to all of the shareholders that support the company. I'm extremely proud of of all of the employees who who've done this great work. And as we look forward, we, you know, we see this optimism and and hope you understand it as well. Thanks to everyone, and and have a great week. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, ladies and gentlemen. And welcome to the Hamilton Lane Fiscal Third Quarter 2026 Earnings Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press 0 for the operator. This call is being recorded on Tuesday, February 3, 2026. I would now like to turn the conference over to John Oh, Head of Shareholder Relations. Please go ahead. John Oh: Thank you, Natasha. Good morning, and welcome to the Hamilton Lane Q3 Fiscal 2026 Earnings Call. Today, I will be joined by Erik Hirsch, Co-Chief Executive Officer, and Jeff Armbrister, Chief Financial Officer. Earlier this morning, we issued a press release and a slide presentation, which are available on our website. Before we discuss the quarter's results, we want to remind you that we will be making forward-looking statements. Forward-looking statements discuss our current expectations and projections, relating to our financial position, results of operations, plans, objectives, future performance, and business. These forward-looking statements do not guarantee future events or performance and are subject to risks and uncertainties that may cause our actual results to differ materially from those projected. For a discussion of these risks, please review the cautionary statements and risk factors included in the Hamilton Lane fiscal 2025 10-Ks and subsequent reports we file with the SEC. These forward-looking statements are made only as of today and except as required, we undertake no obligation to update or revise any of them. We will also be referring to non-GAAP measures that we view as important in assessing the performance of our business. Reconciliation of those non-GAAP measures to GAAP can be found in the earnings presentation materials made available on the Shareholders section of the Hamilton Lane website. Our full financial statements will be made available when our 10-Q is filed. Please note that nothing on this call represents an offer to sell or a solicitation of an offer to purchase interest in any of Hamilton Lane's products. Let's begin with the highlights and I'll start with our total asset. At quarter end, total asset footprint stood at over $1 trillion and represents a 6% increase to our footprint year over year. AUM stood at $146 billion and grew $11 billion or 8% compared to the prior year period. The growth came from both our specialized funds and our customized separate accounts. AUA came in at $871 billion and grew $50 billion or 6% relative to the prior year period. This stemmed primarily from market value growth of the portfolio and the addition of a variety of technology solutions and back-office mandates. Total management and advisory fees for the year-to-date period were up 11% year over year. Total fee-related revenue for the period, which is the sum of management fees and fee-related performance revenues, was $57 million and represents 31% growth year over year. Fee-related earnings were $254.6 million year to date, and represent 37% growth year over year. We generated fiscal year-to-date GAAP EPS of $4.35 based on $183 million of GAAP net income, and non-GAAP EPS of $4.41 based on $240.1 million of adjusted net income. We have also declared a dividend of $0.54 per share this quarter, which keeps us on track for the 10% increase over last fiscal year, equating to the targeted $2.16 per share for fiscal year 2026. With that, I will now turn the call over to Erik. Erik Hirsch: Thank you, John, and good morning, everyone. As we look back on calendar 2025, Juan and I are very proud of all that has been accomplished. And we are enthusiastic about the significant opportunity that lies ahead. Our team successfully navigated changing markets and high client expectations. We delivered strong growth and outstanding results and we exited calendar year 2025 with real momentum. We have a larger, more global reach, a more diversified platform, expanded and deeper client relationships, and new product lines that are gaining traction and growing. While Juan and I have the privilege of witnessing what this team does every day, it is also rewarding to be recognized by those outside of Hamilton Lane. So I am honored to say that Hamilton Lane was once again recognized by pension and investments as one of the best places to work in money management. We have now earned this recognition for the fourteenth consecutive year and are one of only five companies that has been recognized every single year since the award's inception in 2012. Our people are our asset. And we have worked hard to create an environment that is collaborative and growth-oriented where we all focus on what matters. Doing the very best we can for our customers. Let me move now to a quick update on the strategic partnership with Guardian that I highlighted on our last call. I'm proud to announce that the partnership has officially closed, and we are already hard at work. As a reminder, Hamilton Lane will oversee nearly $5 billion of Guardian's existing private equity portfolio, and these assets will be reflected in our total asset footprint beginning next quarter. Also, we expect to receive additional annual commitments of approximately $500 million for at least ten years, enabling Guardian to access a broad range of private market opportunities across primary, secondary, and co-investment strategies through our platform. This also includes support for Hamilton Lane's global evergreen platform where at least $250 million of capital will be invested into our evergreen. In addition, the partnership also provides Guardian with HL and E equity warrants and other financial incentives driving alignment and opportunities for long-term value creation. The initial economic impacts of the partnership will be recognized in our fiscal 2026, and we will provide additional details on our next call. Our partnership with Guardian is a clear proof point of our ability to work alongside the world's most sophisticated institutional investors to design and execute comprehensive private market programs. In a very short period of time, we are already fully engaged. Capital has been allocated to our US secondaries and venture evergreen funds. Complemented by a sizable commitment to our latest closed-end direct equity fund and to the upcoming first close of our next secondary fund. Additionally, we have also successfully onboarded three of our US Evergreen offerings onto their Park Avenue securities platform and we look forward to working closely with their extensive adviser network to deliver evergreen solutions for their clients. We remain excited about this partnership and all the opportunities for mutual success that lie ahead. Let me now turn to an update on our capital raising and fee-earning AUM. Total fee-earning AUM stood at $79.1 billion and grew $8.1 billion or 11%, relative to the prior year period. Net quarter-over-quarter growth was $2.7 billion or 4%. Fee-earning AUM growth continues to be largely driven by our specialized fund platform with our semi-liquid Evergreen products leading our strong momentum. The combination of our net positive fundraising, product additions, and strong performance has driven the growth of total fund net value in our Evergreen offering. We have also executed well on our closed-end offerings as evidenced by recent closes and momentum for those funds in market or that have recently held final closes. I will provide more detail on that shortly. Before I move on, I want to reiterate that our blended fee rate continues to benefit from the shift in the mix of fee-earning AUM towards higher fee rate specialized funds most notably our Evergreen products. Today, our blended fee rate stands at 67 basis points with the mix of separate accounts to specialized fund fee-earning AUM at 52% and 48% respectively. This fee rate is 10 basis points or 18% higher than when we went public in 2017. Then our mix was 67% customized separate accounts and 33% specialized funds. We view this shift as a powerful component of our business model and an important driver supporting the trajectory of our management fees over time. Let's move now to specialized funds where fee-earning AUM ended fiscal Q3 at $38.1 billion having grown $6.9 billion over the last twelve months. This represents an increase of 22%. Quarter-over-quarter net growth was $2.4 billion or 7% with much of this driven by our evergreen platform with a strong combination of net new flows and positive net asset value appreciation. Additionally, we benefited from Evergreen non-fee-earning AUM that turned to fee-earning AUM in the quarter as I had detailed on our prior call. In addition to the growth numbers we are experiencing, we have in front of us, several recent closed-end fund launches, most notably our seventh secondary product, which we discussed on our last call, and more recently, our second venture access product. To put that in context, our sixth secondary fund raised $5.6 billion and extended our track record of raising larger funds in that franchise. We believe we are capable of successfully managing increasingly larger pools of capital in both of these spaces, and in neither space, are we anywhere close to the largest player? We have plenty of room to continue to grow. On the venture side, we're looking to build on the success of our inaugural venture access product, which closed in February 2025 with nearly $610 million of investor commitments. We currently expect to hold first closes for both the new secondary fund and the second venture access fund sometime in 2026. Now let's move to the rest of the product suite, and I'll start with our sixth equity opportunities fund. As a quick reminder, this fund focuses on direct equity investments alongside leading general partners and it offers two fee arrangements that either charge management fees on a committed capital basis and a 10% carry, or fees on a net invested basis with a 12.5% carry. Our prior direct equity fund offered the same arrangement and raised $2.1 billion. Now during the quarter, we held additional closes totaling nearly $300 million of LP commitments. Then in January, we held another close of approximately $500 million. So taken together, the fund now stands at over $2.3 billion. And at that size, we have surpassed the prior fund by nearly 15%, and we have solid visibility on additional capital in the pipeline that has yet to close. The management fee mix is currently about 35% on committed capital, and 65% on net invested. Jeff will provide additional detail on the retro fees associated with the capital that closed both in the quarter and post quarter end. We expect to hold a final close of this fund over the coming months. And we remain focused on finishing this fundraise on a strong note. Turning now to our second infrastructure fund. As a reminder, this strategy focuses on direct equity and secondaries across the infrastructure landscape and the fund earns management fees on a net invested basis. I am pleased to report that just yesterday, we announced the final close bringing total capital raised in and alongside the fund to nearly $2 billion. With over $1.5 billion coming into the fund and nearly $400 million alongside the fund and related vehicles. At this size, we have now more than tripled the capital raised in our inaugural infrastructure fund. This second vintage is off to a strong start with over 40% committed as of December 31. We view this outcome as evidence of our ability to launch and scale new strategies, and we remain confident in our ability to further grow this franchise. Let's now turn to our annual strategic opportunity fund, which is our closed-end direct credit strategy. As a reminder, this fund charges management fees on a net invested basis. On December 31, we held the final close for the ninth series, and raised a total of $527 million of investor commitments. This will be our final series of our strategic opportunities franchise. When we launched our strategic opportunities franchise more than a decade ago, private credit looked very different. Investors were looking for a blended approach between senior and junior credit and we built a product to match. Now over time, private credit has scaled and has become more segmented and investor preferences have followed. We're now reshaping how we position and construct this closed-end franchise so it's set up for the next leg of growth. And better align with how clients are allocating across senior, junior, and opportunistic credit. We are in the process of launching a variety of closed-end credit funds that are more segmented, and those will sit alongside our credit evergreen funds but they will now follow a more traditional fundraising cadence. Where we raise capital every few years. Importantly, the management fee dynamics will be unchanged. Fees will continue to be charged on a net invested basis, and will move into fee-earning AUM as capital is deployed. We launched our first credit vehicle ten years ago, and then we managed a sum total of $70 million in credit product AUM. Today, across closed-end and evergreen, we are managing nearly $4 billion in fee-earning AUM, reflecting a compounded growth rate of more than 45%. While we are proud of this success, we also recognize how modest this is in the context of the credit markets, and we are excited to continue scaling this business in a very significant way and believe we have a clear path to do just that. Let's now move to our Evergreen platform. Our Evergreen platform delivered another strong quarter. For the quarter ended December 31, 2025, we generated over $1.2 billion of net inflows across the suite driven by a combination of expanded product offerings, robust fundraising, and solid investment performance. At quarter end, total Evergreen AUM reached over $16 billion representing over 70% year-over-year growth. Within that total, our core multi-strategy private markets offering continues to anchor the platform. It ended 2025 at over $11.7 billion of AUM, and once again delivered sustained positive net inflows. Recurring flows from existing partners. We are making real progress broadening distribution for this flagship strategy in the US and internationally while also seeing healthy many of whom are now adding allocations to our newer evergreen strategies. Turning to credit. Despite recent headlines and volatility in certain parts of the private credit market, our international credit Evergreen Fund remains on extremely solid footing. It continued to generate positive net inflows in the quarter, with AUM surpassing the $2 billion mark at calendar year-end 2025. Performance remains strong with a since inception net annualized return of over 9.5% and positive monthly performance throughout all of calendar year 2025. December net inflows were the fourth highest month since its launch in 2022, and for calendar year 2025, we averaged over $90 million of monthly net inflows. In addition to that, we remain on track to introduce its US registered counterpart in the coming months. Finally, we are encouraged by the trajectory of our newer Evergreen offerings. Both our infrastructure Evergreen, which was launched in 2024, and our secondaries Evergreen, which was launched in early 2025, are both approaching the $1 billion AUM threshold respectively. That progress reinforces our conviction that the Evergreen platform can be and is increasingly becoming a multi-strategy, multi-asset growth engine for the firm over time. Let's wrap up here with customized separate accounts. At quarter end, customized separate account fee-earning AUM stood at $41.1 billion and grew $1.3 billion or 3% over the last twelve months. Net quarter-over-quarter growth was $280 million or 1% with the growth gross contributions stemming from a mix of new client wins, re-up activity from existing clients, and contributions for investment activity. This was offset by fee basis step-downs and returns of capital stemming from exit activity. We continue to carry substantial committed and contractual dry powder ready to deploy, supported by a strong pipeline of mandates that have been awarded, and are currently moving through the contracting stage. Across our platform, we have long-dated relationships with the majority of our separate account clients, and have experienced minimal churn over our history, underscoring the durability and depth of these partnerships. Because separate account programs are highly tailored rather than formulaic, the pace at which they move from sale to full deployment can vary. Introducing timing variability in which assets and revenues come online. In fact, in December alone, we closed on more than $2 billion of new SMA capital coming from a mix of existing client re-ups, new service lines with current clients, and new relationships to Hamilton Lane. Behind that, our pipeline of live opportunities to various stages of negotiation remains sizable and in the multibillion-dollar range. That said, we continue to see our clients adopting and desiring product solutions at a faster pace than SMAs. We believe that serves them and us well. Let me move now to the update on our latest addition to the Hamilton Lane Innovations portfolio where we utilize our balance sheet capital to invest in differentiated technology solutions that broaden access to the asset class, enhance the investor experience, and strengthen the overall infrastructure of the private market ecosystem. On January 6, we announced an investment in Pluto Financial Technologies, alongside Apollo, Motive Ventures, and Portage. Pluto operates at the intersection of two important trends for our industry. The continued expansion of private markets and the growing need for sophisticated technology-enabled infrastructure to support that growth. Pluto's platform is built specifically for private market investors and uses AI-driven technology to connect directly to underlying portfolios, providing access to credit without forcing the sale of positions or the need to work through multiple intermediaries. The objective is straightforward. Give investors a practical liquidity tool while allowing them to stay committed to their long-term private market allocations. As individual investors continue to allocate more capital to the private markets, and in turn become incrementally larger and larger parts of investor portfolios, the importance of liquidity has only increased. Historically, many individual investors and their advisers view limited liquidity as a barrier to meaningful allocation even when they were convinced of the return and diversification benefits. As structures, secondary solutions, and product design have evolved to offer more frequent liquidity windows, and better tools for managing flows, we are seeing that hesitancy begin to fade. We believe that continuing to improve the liquidity experience for individuals in a thoughtful, risk-aware way is one of the keys to deeper penetration of private markets in the wealth channel. Simply put, the more we can marry institutional quality exposure, a liquidity profile that works for individuals, the larger the opportunity set becomes. We believe that Pluto is helping to drive increased liquidity in our asset class and uniquely leveraging technology to make that happen. We are proud to join them on this important journey, and look forward to providing you with future updates. And with that, I'll pass the call to Jeff to cover the financials. Jeff Armbrister: Thank you, Erik, and good morning, everyone. Year to date for fiscal 2026 management and advisory fees were up 11% from the prior year period. However, this includes the impact of nearly $21 million of retro fees from specialized funds. Namely the final close for our sixth secondary fund in the prior year period, versus $2 million in the current year-to-date period. Stemming primarily from our latest direct equity fund. Total fee-related revenue was up 31% largely driven by fee-related performance revenues recognized year-to-date fiscal 2026 versus a minimal amount during the same period in fiscal 2025. Year to date, specialized funds revenue increased by $35 million or 15% compared to the prior year period. Growth in specialized fund revenue was driven by continued growth in our Evergreen platform, which continues to be a key driver of specialized fund fee-earning AUM. Again, the year-over-year growth here was impacted by the retro fee element that I just alluded to. Moving on to customized separate accounts, revenue increased $4 million or 4% compared to the prior year period due to the addition of new accounts, re-ups from existing clients, and continued investment activity. Revenue from our reporting, monitoring, data, and analytics offerings increased by over $5 million or 24% compared to the prior year period as we continue to produce strong growth in our technology solutions offering. Lastly, the final component of our revenue is incentive fees, which totaled $136 million for the period. This amount includes fee-related performance revenues stemming primarily from the quarterly crystallization of performance fees from our US private assets Evergreen Fund with additional contributions coming from our more recently launched Evergreen Funds. Let's turn now to our unrealized carry balance. The balance is up 15% from the prior year period even while having recognized $77 million of incentive fees excluding fee-related performance revenues during the last twelve months. The unrealized carry balance now stands at approximately $1.5 billion. Moving to expenses, fiscal year-to-date total expenses increased $40 million or 14% compared with the prior year period. Total compensation and benefits increased $29 million or 15% due primarily to increases in operating performance headcount, and equity-based compensation. This was offset by lower incentive fee compensation due to a prior year period decrease in non-FRPR incentive fee revenue compared to the G&A increased by $11 million. We continue to see growth in revenue-related expenses, including the third-party commissions related to our US Evergreen product, being offered on wirehouses. We will continue to emphasize that while overall G&A expenses increased over time, the bulk of the increase stems from these revenue-related expenses. Which is a good thing and can be an indicator of growth to come. We continue to successfully offset this with cost savings and expense discipline in other parts of the business where we have discretion. Let's move now to FRE. And just a quick reminder, FRE will now include the fee-related performance revenues and exclude the impact of equity-based compensation in the calculation of FRE. With that, fiscal year-to-date FRE came in at $255 million was up 37% relative to the prior year period. FRE margin year-to-date came in at 50% compared to 48% for the prior year period. Both FRE and FRE margin benefited from strong fee-related performance revenues in the period. Before I wrap up and end with some balance sheet commentary, I wanted to reiterate and summarize the financial impacts from the Guardian partnership. And as Erik mentioned earlier, the initial financial impact will not be reflected until next quarter. We expect to earn management fees on capital invested into our Evergreen funds which will be reflected in specialized funds revenue as well as fees from a separate account that will resemble a typical institutional mandate in both portfolio construction and fee schedule. In both cases, there is also potential for performance fees aligned with the underlying strategies. The associated warrant package is expected to result in less than 1% dilution based on our fully diluted share count as of December 31, 2025, and be based on a vesting schedule. Additional details on the warrant package can be found in our prior Q2 10-Q and our upcoming October filing. I'll wrap up now with some commentary on our balance sheet. Our largest asset continues to be our investments alongside our clients in our customized separate accounts and specialized funds. Over the long term, we view these investments as an important component of our continued growth. We expect that we will continue to invest our balance sheet capital alongside our clients. With regard to our liabilities, we continue to be modestly levered and we'll continue to evaluate utilizing our strong balance sheet in support of continued growth for the firm. With that, we will now open up the call for questions. Thank you. Operator: Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. We ask that you please limit yourself to one question. If you have additional questions, you may press star one again. One moment, for your first question. Your first question comes from Ken Worthington with JPMorgan. Please go ahead. Ken Worthington: Hi. Good morning, and thanks for taking the question. Erik, can you talk about the product roadmap for wealth in calendar 2026? You opened a handful plus of new wealth-focused specialized fund products in '25, including the registration of existing funds into different regions. How should we see 2025 for new product launches really geared to this wealth customer? Erik Hirsch: Thanks, Ken. A couple of things. I think I had mentioned this on a prior call. I think the part that's been noteworthy for us is how these products are actually resonating with the institutional customer. So today, we're still seeing about 15 to 20% of our flows coming from the institutional. And I think we believe that as folks get more acclimated and more educated, that that number will continue to go up. So you mentioned that in calendar 2025, we launched a lot of products. I don't think 2026 will see nearly that volume coming from us. We've now built out strategies in a lot of our core areas. So while we will add some additional products, that won't be nearly at the rate as we saw a year prior, and our focus right now is really getting the products that we have in market to scale. Operator: Great. Thank you. Your next question comes from Alex Blostein with Goldman Sachs. Please go ahead. Anthony: Hey. Good morning. This is Anthony on for Alex. I wanted to ask about software exposure in the business, given recent events. You know, there's been a growing number of concerns around software exposure for a lot of your peers. So could you expand on what that looks like at Hamilton Lane and how you see those businesses performing given potential AI risk? Erik Hirsch: Thank you. Sure. Anthony, it's Erik. I'll take that. So I think than a lot of the other large publicly traded managers, our portfolios are much more diversified because we're not taking ownership directly of single assets. So that co-investment secondary and fund model for us results in our customer exposure being very, very diversified across sector, geography, size, etcetera. So one, we don't have any kind of concentration across portfolios in software. And so that's not a topic for us that right now we're that we see as an at all of an issue for us nor for the customers. Operator: Thank you. Your next question comes from Michael Cyprys with Morgan Stanley. Please go ahead, Michael. Michael Cyprys: Oh, hey. Thanks for taking the question. Just wanted to ask about exit activity. Just curious how you're seeing exit pathways evolve across your platform and the broader industry. And what would you say is maybe the one or two gating items that you're watching could make distributions accelerate sharply across the industry? Erik Hirsch: Sure, Michael. It's Erik. So we are seeing distribution activity pick up. I think this has been more of buyers and sellers reaching more of a kind of an equilibrium in how they're each viewing the market. The IPO market better, but as you know and as we've discussed in the past, that's not a huge exit activity for our business and not a what moves the needle more huge exit activity for our portfolios. So, generally, I think is simply having buyers and sellers agreeing where the markets aren't agreeing on price. So we see that happening. We see a rationalization occurring there. It's also driven by just the maturing of the assets and the fact that they're a lot of them are now reaching kind of their fourth or fifth or sixth year of ownership. The work has been done. The growth has been achieved, and now they're ready to go and harness the profit. So, I see 2026 as a stronger exit environment than we saw certainly in calendar 2025. Michael Cyprys: Great. Thanks. And if I could ask a question on the Evergreen platform that's quickly becoming multi-asset, multi-strategy and with a number of scaled products over a billion in size. Just how are you thinking about opportunities that can open up now as a result of that evolution, whether it's model portfolios, maybe even obtaining placement within target date or other liquid fund strategies in partnership with others, Curious how you're thinking about that. Erik Hirsch: Yeah. I think we're thinking about all of those pieces, Michael. I think what you're seeing is wave number one was sort of the introduction of these products to the market. Wave number two has really been focused on education around some of the benefits of these products. To both institutional and individual investors. And wave number three becomes more around kind of the structuring and partnership where you start using these products as tools in a variety of different ways, a number of which you mentioned. So we're kind of through wave one. We're getting towards wave, you know, finishing up wave two on the education piece, which still continues, and now we're heading into wave three. And so we're involved in dialogue across all of those aspects. Michael Cyprys: Great. Thank you. Operator: Your next question comes from Alex Bond with KBW. Please go ahead. Alex Bond: Hey. Good morning, everyone. I actually have a follow-up on the Evergreen side and specifically the increasing institutional base there. So you've highlighted previously that one of the reasons these products are attractive for institutional is their more liquid nature relative to a traditional drawdown fund. But maybe it would be helpful if you can help us think about maybe what the dispersion has been in terms of redemption requests between institutional and retail clients within the Evergreen suite to date, and maybe to what extent institutional clients have taken advantage of this feature to date? Erik Hirsch: Yeah. Alex, Erik. So I actually don't think the liquidity provision is one of the top two most attractive pieces to them. I think the top two most attractive pieces are much more around ease of use dealing with capital calls, distributions, and sort of severely lagging reporting schedules, not optimal. Benefit number two is the ability to actually tack manage your portfolio in a more thoughtful way. If you're a CIO today of an institution and you want to apply some sort of a credit overweight or an infrastructure overweight or a venture overweight, doing that through draw funds is really impractical. You have to go have us find the funds for you, subscribe to the funds, It takes years for those funds to get capital to put to work to see the net asset value grow. And so trying to do a tactical overweight using drawdown funds means that you need to sort of have a three to five plus year view outwards that that overweight is gonna sort of still be a good thing in that timetable. In Evergreen, they can simply put on an overweight instantaneously because the capital is obviously fully invested. So we're not seeing the institutional investor behave with a higher redemption rate or moving in and out. We're seeing them use this as a portfolio construction tool and ease of use. Third piece I'd mention is actually small institutional investors. Back in the day, they would be a fund to funds customer. And as you know, Hamilton Lane hasn't even offered a fund to funds product in years. That market segment altered that investor base, in some cases, left the class altogether. Or they got convinced that going into a secondaries or co fund was an okay solution. Today, that small institutional investor is much more embraced ever way reenter the private markets. So we see all those as thoughtful, good, and those are gonna be long-term sustaining trends. Alex Bond: Got it. That's helpful. Thanks, Erik. Operator: Your next question comes from Brennan Hawken with BMO. Please go ahead. Brennan Hawken: Good morning. Thanks for taking my question. I was hoping you could speak a little bit to what you're seeing on the ground in the wealth channel. I hear about a little bit of a sitting on hands with the headlines around private credit that we saw in the year-end. So curious what you're seeing there. And when we also have heard that there's the potential for a greater shift or a greater preference for model portfolios, you know, sort of centralizing the allocations. Are you seeing any early signs of that? And what are your thoughts about how to deal with such a shift? Erik Hirsch: Sure, it's Erik. I'll take those. So look, we kind of laid out our flows. We're not seeing the sitting on hands that you're sort of referencing. I think part of this is we're positioned as a differentiated product. That managed manager of managers is simply different than single manager strategy. And I think the market has obviously been very receptive to our positioning there. And our flows continue to be good. Model portfolio is certainly a topic of conversation. You're seeing early moves there. But to say today that you're seeing some massive sort of sea change, I would say just the data is not bearing that out. As I mentioned on the prior question, we're engaged in dialogue around that. We have some model portfolio exposure already. And I think this is gonna come down to investor preference. I don't see a world where all investors are gonna simply want the model portfolio. Investors generally, whether we're talking about buying private market assets, we're talking about buying food or clothing, investors want choice and they tend to want control. And so for some, that model portfolio will be ease of use, and that will be the most attractive aspect to it, and that will be sort of the guarding item. And for others, they're gonna want to make much more tailored individualized selection. So I think it's a world where you're gonna see both pieces exist. And we're all gonna have to make sure that our products and our lineup is meeting the customer where the customer is. Not trying to force the customer to kind of adhere to whatever game or structure that we want them to be playing. Brennan Hawken: Right. Thanks for that color, and thanks for taking my question. Operator: As a reminder, if you wish to ask a question, please press 1. The next question comes from Mike Brown with UBS. Please go ahead. Mike Brown: Great. Thanks for taking my question. Wanted to ask on the secondary side. So it's clearly a hot asset class, maybe the hottest asset class in the space at the moment. And the industry saw record capital raising for the industry last year. One of the funds that closed was over $30 billion. Expecting a $30 billion fund for Hamilton Lane yet, but when you think about fund seven, we look at fund six. That closed at $5.6 billion. That was up over 40% versus the prior vintage. So when you're thinking about fund seven, and the tailwinds for the space, any view on relative size versus the prior vintage? And maybe just touch on how investor sentiment and interest is in secondaries currently? Erik Hirsch: Sure. It's Erik. I'll take that. So as you noted, the space has grown. I frankly think if you step back and just look at that at a macro level, it's healthy. Liquidity investors is a good thing. It gives people more choices. And so invest more liquid options whether it's through traditional secondaries or whether it's through our recent partnership with Pluto. We think all that's good. Second point, it's still one of the most undercapitalized parts of our asset class. If you look at capital raised relative to the size of deals brought to market, huge capital mismatch. There's not nearly enough capital in the market to deal with sort of the demand and interest of transactions looking to get financed. So massively undercapitalized. The scale, third point, has also changed. So the industry is getting a lot bigger, funds are getting bigger as a result of that. And so what it means to be a big secondary player today is very different than what it meant to be that sort of big player ten years ago. I think for us, we've tended to be more of a mid-market oriented player. And so that has sort of caused us to still grow substantially, as you noted, from funds to fund to fund. Our goal is to continue to be one of those leading players, and so that means there's a whole lot of runway ahead of us. So as I said very clear on the call, we are not one of the top handful of largest players in the space. We have aspirations to continue to move up market we think we've got a lot of room to do that. And we are based on investor sentiment, management meetings, feedback, etcetera, all that feels encouraging. Mike Brown: Great. Thanks. Thanks, Erik. Operator: Thank you. And as one more reminder, if you wish to ask a question, please press star followed by the one. As there are no further questions oh, sorry. Mike Brown has one more question. Please go ahead, Mike. Mike Brown: Great. Thank you for taking the follow-up here. Erik, I just wanted to follow-up on the software question earlier in the call. Just given your unique visibility into funds and the underlying portfolio companies, and I'm sure you're active dialogues with the managers, you just maybe expand on your view on how AI disruption could really kind of flow through this software landscape and how certain parts of the market could be more impacted than others in certain areas that perhaps have better insulation from these AI disruption-related risks. Erik Hirsch: Sure. I think it's I think this is sort of the danger of painting with an overly broad brush. I think it's frankly not a lot different than what we're seeing in credit. You've got a handful of managers who have credit portfolio problems due to their own investment selection. And then we want to sort of turn that into kind of a broad industry issue. There's no question that there are some software businesses that were bought sort of pre-COVID. High prices were paid. AI was far away when those transactions were done. The impact was not sort of priced in. And there will be certainly some companies that are going to struggle and are gonna struggle to result in good performance or any performance for their investors. That said, the notion that every software business is going to suffer hugely negative consequences due to AI, I think is not true. And frankly, we're sort of seeing that we've got a number of companies in the software space that are continuing to grow, continuing to rack up customers. I think there's another way to look at this, which is in some cases, the AI solution is in need of the client and the traditional old-school software companies have the customer. I actually think you could see some mergers and acquisitions that are coming from kind of what we'll think of as new tech versus old tech and that that might be a completely fine outcome. So I think what we're saying to our clients today, whether it's around software, whether it's around credit, or whether it's around any sub-strategy, we need to have a much more granular conversation about companies, fund managers, individual funds rather than having big macro strategies, and that's one of the macro discussions, and that's one of the benefits of where we sit. We get to go in due diligence on every fund manager looking through every asset that they hold, and if we're looking at a secondary deal, we're getting to price through every company in that underlying portfolio. And so we're not making big investment decisions kind of thematically. We're making them kind of a bottoms-up asset by asset look through to figure out whether there's high-quality assets and making sure we're getting those at the right price with the right partner. Mike Brown: Thank you. Operator: And this concludes the question and answer session for today. I will now turn the call over to Erik Hirsch, Co-Chief Executive Officer, for closing remarks. Please continue. Erik Hirsch: Just wanted to say proud of the quarter. Juan and I are very proud of the team for the hard work. This doesn't happen by accident. It takes real effort, particularly in this kind of market environment. We appreciate your time, support, and the questions. And for those of you on the East Coast, stay warm. Thank you. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to the Eaton Corporation plc Fourth Quarter 2025 Earnings Results. At this time, after the speakers' presentation, there will be a question and answer session. To remove yourself from the queue, please press star one one again. As a reminder, this call may be recorded. I would now like to turn the call over to Yan Jin, Senior Vice President of Investor Relations. Please go ahead. Yan Jin: Thank you all for joining us for Eaton Corporation plc's fourth quarter 2025 earnings call. With me today are Paulo Ruiz Sternadt, Chief Executive Officer, and Olivier Leonetti, Executive Vice President and Chief Financial Officer. Our agenda today includes opening remarks by Paulo, then he will turn it over to Olivier, who will highlight the company's performance in the fourth quarter. As we have done in our past calls, we will be taking questions at the end of Paulo's closing commentary. The press release and the presentation we will go through today have been posted on our website. This presentation includes adjusted earnings per share and other non-GAAP measures, reconciled in the appendix. A webcast of this call is accessible on our website and will be available for replay. I would like to remind you that our comments today will include statements related to the expected future results of the company and are therefore forward-looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and presentation. With that, I will turn it over to Paulo. Paulo Ruiz Sternadt: Thanks, Yan, and thanks, everyone, for joining us. I'm happy to report we've delivered solid results. From a demand perspective, we continue to see tremendous strength. On a rolling twelve-month basis, our orders accelerated in Electrical Americas, up 16% from up 7% in Q3. Our Electrical Americas backlog grew 31% year over year, reaching an all-time record. In addition, demand in our aerospace remains very strong. We posted order growth of 11% on a rolling twelve-month basis and backlog expansion of 16% year over year. As a result, our book-to-bill for the combined segments was above 1.2 on a quarterly basis or 1.1 on a rolling twelve-month basis. We continue to deliver robust growth in the data center market. Our orders accelerated approximately 200%, and our sales were up above 40% versus Q4 2024. Our accelerating orders in 2025 demonstrate continued strong demand and a winning value proposition. Among the Q4 highlights, our adjusted earnings per share were up 18% versus the prior year, and our segment margins of 24.9% hit the Q4 quarterly record, up 20 basis points year over year. We reaffirmed our commitment to strategic capital allocation with $13 billion in announced investments in 2025, highlighted by the acquisitions of FiberBond, Resilient Power Systems, UltraPCS, and the announced addition of Boyd Terminal. In addition to that, we announced our intent to spin off the mobility business into a separate publicly traded company, further strengthening our portfolio and our growth trajectory. Lastly, we delivered on our 2025 adjusted earnings commitment, and we are strongly positioned to outperform against 2026 guidance. Olivier and I will deep dive into Q4 and the 2026 outlook. But first, let's move to slide four. We continue to drive Eaton Corporation plc forward with our bold strategy to lead, invest, and execute for growth. All three are designed to accelerate our growth and create sustained value for shareholders. Today, we will focus on investing and executing for growth, including our recent announcements to spin off our mobility business and sharing progress on the actions we've taken to best position us to execute operationally in Electrical Americas. Both exciting and meaningful to our strategy. So let's move to slide five and our intent to spin mobility. This is an exciting next step which will unlock greater long-term sustainable value for our teams, our customers, and shareholders for both of these world-class companies. The separation of mobility, including both our vehicle and e-mobility segments, builds on our track record and continues our work to reshape the company's portfolio. So I want to share more today about what this move means for Eaton Corporation plc and Mobility. Eaton Corporation plc will be even better positioned to capitalize on strong growth trends across electrical and aerospace markets. This will allow us to focus more sharply on these leading businesses that are powering strong revenue growth and margin expansion. For mobility, this move will allow the team to build on its strong leadership position in automotive and commercial vehicle markets. As a standalone public company, mobility will be the leading independent provider of engineered solutions to global vehicle auto and off-highway OEMs, with a strong portfolio and compelling organic growth prospects. Turning to slide six. As a standalone business with approximately $3 billion in revenue, mobility is a leading scale provider of engineering solutions that create, distribute, and optimize power for all types of vehicles and propulsion systems. It focuses on safety-critical components and systems on automotive and commercial vehicles. The mobility team has built a reputation that is highly valued in the market and recognized as a true innovation partner to its customers. We expect mobility to benefit from increased strategic focus to drive a more optimized capital allocation strategy, which will allow for more flexibility to pursue additional growth opportunities in the markets where it's best positioned. Now turning to Slide seven. The mobility spin is the right move at the right time. The decision to separate Eaton Corporation plc and mobility underscores our bold 2030 strategy to lead, invest, and execute for growth. This transaction will sharpen our strategic focus and optimize the portfolio. It will provide Eaton Corporation plc with improved agility and flexibility to meet the moments of generational growth. We will be able to advance our growth strategy by prioritizing capital on higher growth, higher margin markets with more earnings consistency. It will enable both companies to unlock greater value through fast decision-making and more tailored capital allocation. This separation builds on our strong track record of value creation and portfolio transformation and follows the divestitures of Lighting in 2020 and Hydraulics in 2021. We expect it to be immediately accretive to organic growth rate and operating margin. As we work to integrate UltraPCS and close Boyd Thermal, I'm confident that separating mobility will position both companies to sharpen their focus to drive long-term value. Moving to Electrical Americas on Slide eight, here's a quick update on mega projects, which we'll do annually moving forward. There's a clear correlation between the acceleration of these projects and our future order growth. The mega project secular tailwind is one of the many reasons we are expanding capacity to invest and execute for growth. Trends remain very positive. Mega project backlog is up 30% year over year, to $3 trillion, and now we are tracking 866 projects. Data centers continue to drive most of the growth, representing 54% of the year-to-date announcements, the rest is largely U.S. reshoring. Additionally, the U.S. large data center construction backlog is now up to eleven years at the 2025 build rates. The U.S. backlog stands at 206 gigawatts. The start rate for this project increased slightly to approximately 16%. Our mega project revenue grew more than 30% in 2025 over 2024. These large long-cycle projects typically convert to revenue over three to five years and provide a durable long-term growth tailwind. A market that will be stronger for longer. Now for Page nine, you see that not only does the mega project data support continuous strength, but so does our robust negotiation pipeline and backlog. Negotiations in Electrical Americas are up to nearly $10 billion in 2025. In fact, the pipeline has increased over four times since 2019, with a multiyear CAGR of 26%. On the right, backlog also continues to set records with Electrical Americas at $15.3 billion and Aerospace at $4.3 billion for a total backlog of $19.6 billion. Versus prior year, our backlogs grew 29% in electrical and 16% in aerospace. They also increased compared to Q3 by 9% in electrical and 3% in aerospace. We are clearly experiencing extraordinary growth, and as a result, we have a high level of confidence in our future demand and structurally higher organic growth rates through 2030. Turning to slide 10, let me share how we accelerate our execute for growth strategy in Electrical Americas. Electrical Americas is seeing unprecedented demand with all-time high backlog and record order intake. It's a good challenge to have, and we are well-positioned to meet it with our broad portfolio and strong engineering expertise. In response to this incredible demand environment, we've already announced investments around $1.5 billion to strategically expand capacity. At the same time, we are adapting quickly to our evolving customer landscape. We are partnering very closely with our customers to tailor solutions to their needs and deliver fast responses, including increasing our engineering velocity, scaling up the network of partners, and our supply chain to ensure timely reliable material availability across our operations. To meet this moment, we are ramping up quickly at a never-before-seen pace. We are laser-focused on the critical sites that are driving the majority of our growth. We've assembled tiger teams with deep specialized expertise and deployed them into our operations to accelerate focus. At Eaton Corporation plc, we have a strong operational track record of operational excellence across our businesses. We did this recently in our Electrical Global business to help us win larger power distribution projects and to grow margins. We also did it in aerospace, to post considerable gains both in our growth rates and margins. So as we turn to optimizing our largest business, the Electrical Americas, we are highly confident in our ability to do it again. While there's clearly complexity while we ramp, I'm confident that Eaton Corporation plc has the right actions in place to execute for growth in The Americas and meet our 2026 margin guidance of 30% at the midpoint in 2026 and a 32% margin target by 2030. Now I will turn it over to Olivier to walk through our financials. Olivier Leonetti: Thanks, Paulo. I'll start by providing a brief summary of Q4 results on page 11. Organic growth for the quarter was 9%, driven by strength in aerospace, electrical Americas, and electrical global, partially offset by weaknesses in vehicle and e-mobility. Otherwise, organic growth would have been almost 12%. We generated quarterly revenue of $7.1 billion and expanded margins by 20 basis points to 24.9%, adjusted EPS of $3.33 increased by 18%, which is in line with the midpoint of our guidance range. Now, let's move to the segment details. On Slide 12, we highlight the Electrical Americas segment. The business maintained strong operational momentum, delivering another record quarter on operating profit and strong margins. Organic sales growth of 15% was driven primarily by strength in data centers, up about 40%, along with strong growth in commercial and institutional. Operating margin of 29.8% was down 180 basis points versus prior year, largely driven by capacity ramp cost. Orders accelerated by up 16% on a trailing twelve-month basis, from up 7%. This reflects a powerful acceleration with total quarterly orders increasing sequentially by more than 18%. Building on that momentum, we achieved an all-time record level of orders booked in 2025, and orders in the quarter were up more than 50%. Book to bill increased to 1.2, and our backlog year on year grew by over $3 billion or 31% to $13.2 billion, providing strong visibility for our organic growth outlook. Data center demand is accelerating faster than ever, setting us up for an exceptional growth run rate in the years ahead. Now, I'd summarize the result for our electrical global segment. Total growth of 10% included organic growth of 6%, a very strong performance for the quarter. We had strength in data center, residential, and machine OEM. Operating margin of 19.7% was up 200 basis points over prior year, driven primarily by sales growth and EMEA continued operational improvement, partially offset by higher inflation. Orders climbed 6% on a rolling twelve-month basis, driven by broad end market momentum and exceptional strength in data center demand, reinforcing a powerful growth trajectory ahead. Backlog increased 19% from prior year, while book to bill remained above one on a rolling twelve-month basis. Before moving to our industrial businesses, I'd like to briefly recap the combined electrical segment's performance. For Q4, we posted organic growth of 12% and segment margin of 26.5%. On a rolling twelve-month basis, orders accelerated to up 13%, and our book to bill ratio for our electrical sector remains over one. This represents continued acceleration with quarterly orders up sequentially by 10%. In the quarter, electrical sector orders were up by more than 40%. As a result, total electrical backlog increased 29% over prior year. With demand surging, we're energized by the significant growth opportunity ahead. Page 14 highlights our aerospace segment. Organic sales growth of 20% remained at a high level and resulted in quarterly record sales, with broad-based strength across all markets, and particular strength in commercial OEM and defense aftermarket. Operating margin expanded by 120 basis points to 24.1%, driven primarily by sales growth. On a rolling twelve-month basis, orders increased 11%, driven by defense OEM and aftermarket up 13%, respectively. On a two-year stack basis, trailing twelve-month orders were up 21%. Our book to bill for our 1.1 on a rolling twelve-month basis, resulting in backlog increase of 16% year over year and 3% sequentially. We are excited to welcome the Ultra PCS team with the closing of the deal in January. Overall, aerospace delivered a strong Q4 and is poised for continued strength. Moving to our vehicle segment, on page 15. In the quarter, the business declined by 13% on an organic basis, primarily driven by weaknesses in the North America truck and light vehicle markets. Margins are down 230 basis points year over year, primarily driven by lower sales. On Page 16, we show results for our e-mobility business. Revenue decreased 15% from 17% lower organic, partially offset by 2% favorable FX. Operating profit was $10 million. Now I will pass it back to Paulo to go over the remainder of the presentation. Paulo Ruiz Sternadt: Thanks, Olivier. I want to take this opportunity to recognize Olivier's significant contributions to our company ahead of his leaving on April 1, 2026, as part of a planned transition. He has been a board director for five years and a valued member of the management team for two years, and he continues to help ensure a smooth transition. We wish him the best of luck when the time comes to leave Eaton Corporation plc. Merci, Olivier. Olivier Leonetti: Thank you. Paulo Ruiz Sternadt: Shifting our attention ahead to 2026 on page 17. Here's an update to our end market growth assumptions for the year. All in, this continues to equate to about 7% growth, and with some outgrowth, is consistent with our 2030 organic growth CAGR of 6% to 9%. We've increased our expectation for commercial aerospace to strong double-digit growth from solid growth. We now expect the residential market to be flat from slight growth. We continue to see many paths to sustainable growth, and we are confident in our end market positioning to deliver another differentiated year of growth. Moving to Page 18, we summarize our 2026 revenue and margin guidance. Following a strong 2025 in which we posted 8% organic growth for the year, we expect the total company to be between 7% to 9% in 2026, with strength in Electrical Americas at 10% at the midpoint. For segment margins, our guidance range is 24.6% to 25%. That's up 30 basis points over 2025 at the midpoint, driven by improvements in each of our businesses. On the next page, we have the balance of our guidance for 2026 and Q1. For 2026, our adjusted EPS is expected to be between $13 and $13.50, $13.25 at the midpoint, and up 10% from 2025. For cash flow, our guidance is $3.9 billion to $4.3 billion, up 14% at the midpoint. As previously communicated, we do not plan to buy back shares in 2026, due to the pending Boyd deal. So we expect share counts to remain relatively flat to the prior year. We also provided guidance on this page for Q1, including organic growth of 5% to 7% and operating margins of 22.2% to 20.6%. As we scale capacity in our largest business, we're incurring higher than typical ramp-up costs to start the year, with improvement anticipated in each quarter. We have great confidence in the acceleration in both revenue and margins from this starting point. The healthy end markets, combined with our record backlog, provide tremendous visibility for our forecast for the year. We have the best-positioned portfolio enabling us to be laser-focused on execution in 2026. I will close with a quick summary on page 20. We had a strong quarter where we delivered on adjusted EPS commitment. It also included record revenue, record segment profit, and a Q4 record for segment margins. The demand we are seeing is unprecedented and is reflected in the continued order acceleration and growing backlogs. Our strategy to lead, invest, and execute for growth is positioning us to capture generational demand and deliver lasting value for our shareholders. We are leaning into higher growth, higher margin businesses, for better earnings consistency. We see this as an inflection point for a new growth story. Bottom line, as we head into 2026 and beyond, we are moving forward with strong demand momentum, and we have exceptional confidence in the setup and our capabilities for sustainable growth. We see an exciting runway in front of us with our strongest days still ahead. With that, I'm happy to take your questions. Yan Jin: Hey, thanks, Paulo. For the Q&A today, please limit your opportunity just to one question and a follow-up. Thanks for your cooperation. With that, I will turn it over to the operator to give you guys the instruction. Operator: Thank you. Once again, if you'd like to ask a question, please press 11. Our first question comes from Andrew Obin with Bank of America. Your line is open. Andrew Obin: Yes, good morning. Can you hear me? Paulo Ruiz Sternadt: Yes. Good morning, Andrew. Andrew Obin: Morning. Good morning. And, Olivier, thank you for all the help over the years. Olivier Leonetti: Thanks so much. Andrew Obin: My first question would be just, you know, to give, you know, obviously, very strong order numbers, but maybe give us more context as to what gives you confidence in double-digit growth in data center markets in '26 and beyond. Paulo Ruiz Sternadt: Yeah. Thanks, Andrew. I think this is top of mind for everyone. So let me elaborate on this. I will start with the market because that's what drives our optimism here. We are extremely confident when we look at the indicators from the market. Announcements on the industry were up over 200% year over year in 2025. Similar rate, almost, you know, the backlog is also over 200% up, and it equates to eleven years of what was built in 2025. So although the industry continues to find ways to build data centers faster, the backlog keeps growing. So it still represents eleven years, which is incredible. The kickoff, so the project starts were also up almost 100% year over year. So the market is very, very strong. You probably noticed on recent news from the hyperscalers that they reconfirmed their CapEx plans for 2026. This is also great news that supports these projects. Multitenant and new cloud players, they've they are so active. Never seen them so active as they are today. If I'm to summarize the market picture here, lots of strength, and these projects will take years to complete. So that gives us the optimism in the future. Then I would like to turn to Eaton Corporation plc a little bit because you saw in our order numbers, we are winning. As I mentioned to you before, I consider Eaton Corporation plc to have the broadest portfolio in power management solutions today already in data centers. As you think about what's happening with AI, our solutions start with the white space products centered around the chip. Into the gray space where we traditionally won with our core power distribution power quality products, moving all the way up in front of the meter with our utility grid products. So as you know, we offer hardware, we offer services in software and hardware. So we are very well positioned already. But we didn't stop there as a team. We decided to invest both organically and inorganically in this very growing market. Examples of organic investments are our capacity plans to ramp up our factories, as we're gonna discuss shortly later as well. We also invest in front-end resources and innovative technologies. Those are the investments we have. We also have deployed capital, as you know, and we deployed capital to grow inorganically as well. So resilient power accelerates our future towards this direct current technology. The acquisition of FiberBond has been very successful with models built out for the data centers. The announced acquisition of Boyd, which is, man, it's even faster growing part of the market, which is the liquid cooling. So with all that in mind, and using the Q4 data as a proof point, our Electrical Americas orders grew 200%, and our orders in Europe grew almost 80% year over year. So that proves that not only, Andrew, the market is strong, but our strategy is working. The value proposition we have is resonating with customers and also indicates that we're gonna be ready for the future of this industry to lead the future as a company. So we are very bullish about the data center market. Andrew Obin: And maybe a follow-up question. As you alluded to, there has been a lot of chatter on liquid cooling and technology trends over the last few months. Paulo, what do you think about recent market developments? Paulo Ruiz Sternadt: Thanks, Andrew. I will say this to everyone. I think news on cooling will be out every month. We just need to get used to it. Right? People talk about new technology developments, new wings, and it's a fast-growing market, which is rather fascinating, so that justifies the excitement. I will only get started by pointing out I just talked about how important the data center market is for us in the industry. And remind that the liquid cooling portion of this market is growing at an even faster pace than the average of the business, which is already fascinating. I also said last quarter to everyone that with AI loads increasing, the white space becomes much, much more interesting for Eaton Corporation plc. Not only with our traditional solutions in terms of power protection and power quality, but also if you look at cooling, which is also very important. We believe in the synergies, commercial and technical synergies, of these two technologies in the white space. So this is an exciting development. I'm gonna make a short reminder to everyone why we chose Boyd to be, you know, the acquisition in this field. I consider they have a very similar approach as Eaton Corporation plc. They lead with technology. Lead with innovation. They are market leaders in their space with a global footprint. And the best engineering team. So whatever happens in this market, when you have a group of engineers that are 500 of them and 500 of the best in the industry, you can figure out ways to win today in the future. To give you a sense of the development of this market for us, I said before that with AI loads, our dollars per megawatt of accessible market are growing. So today, we are already at $2.9 million per megawatt with our current portfolio. After the Boyd acquisition, when the Boyd acquisition is completed, this accessible market will be increased to $3.4 million per megawatt. So it's really exciting to see that development. Now, your question specifically on what to expect from the latest NVIDIA announcement as a good example for cooling. I'll try to help everyone here to visualize the system in simple terms. So try to think about two types of loops, two types of circuits of fluid circuits. The first one, the main one, I call the inner loop, which is close to the white space. It is designed to protect the revenue-making assets and the secondary loops. So the outer loop, which is used to connect the white space to the utilities area of the data center, is supported by the chillers. So if you think about the inner loops, where we decided to play, they're closer to the white space, and they are there to protect and keep all the revenue makers operating, all the assets. Think about GPUs, but also think about TPUs, think about CPUs, think about power supplies, network switches, etcetera. They all require cooling. This is the portion of the cooling market that Eaton Corporation plc decided to play in. Here, just a summary of what is offered in this inner loop. Think about the cold plates. Think about the CDUs, so the coolant distribution units. Then you have piping, manifolds, controls unit, etcetera. Basically, what happens is that the CDU, the coolant distribution unit, pumps cool liquid into the loads. Again, the chips, the power supplies, etcetera. This cool liquid absorbs heat by the cold plates, and the warmer liquid returns to the CDU. The CDU today has capability, has a heat exchanger, can take care of part of the heat dissipation, but it also communicates with the outer loop with the chillers. This outer loop separates the circuit from the inner loop, is where the CDU sends hot water to the chillers and gets refrigerated water back. This is how the system works today in a very, very, very simplistic way. As I said before, we don't participate in the chillers market directly. We consider it a best option for Eaton Corporation plc to collaborate and partner with the specialized market leaders on chillers. This announcement for NVIDIA, just to conclude the point here, implies that their chips, the next generation chips, can run hotter, meaning that supposedly, the data center operators will not need as many and or as powerful chillers as today. But this still needs to be proven. I would like to say that there is no negative impact on the inner loop, the part of the cooling that we decided to play. I would say it's quite the opposite because those systems, those new systems, will require even more sophisticated elements. It's true for cold plates and also true for CDUs. So all in all, I'm very confident and comfortable with Boyd's position. As they have, as I said before, early technical engagement, effectively participating commercially in all the chip platforms, the hyperscale plans, etcetera, covering the future. So we feel good about their future position. We confirm that optimism through the diligence process by checking the incredible breadth of solutions that are about to be launched today and in the years to come. For the shorter term, which I think is also important, after a very solid finish to 2025 and a very strong January, we remain confident in Boyd's strong position to meet or exceed the 2026 revenues of $1.7 billion. I hope that helps, Andrew. Andrew Obin: Oh, that was certainly an extensive answer. Really appreciate it. Good luck. Operator: Thank you. Our next question comes from Chris Snyder with Morgan Stanley. Chris Snyder: Thank you. I wanted to ask about the quarterly cadence of the '26 EPS guide. At the midpoint, Q1 is calling maybe just low single-digit year-on-year growth. But the full year is at 10%. So obviously calling for a pretty big pickup post-Q1. Could you just provide some color on that trajectory as we get past Q1? Thank you. Paulo Ruiz Sternadt: Great. Great, Chris. I think it's another top-of-mind question for everyone, so thanks for asking that. Let me start with how we see the guidance for the full year. We believe 2026 guidance represents strong organic growth and is supported by record backlog. So we feel really good about it. In terms of margins, we continue to expand segment margin while we absorb all these ramp-up costs, and we continue to deliver what I consider industry-leading margins. As you saw, we keep winning orders, and we are preparing ourselves for the next wave of this differentiated growth and margin expansion cycle. If you compare our guidance with our models that I saw from most of you, I think above the line, we are pretty much on dot in terms of segment margin and top line. Below the line, I see some differences with most of the models. I'll outline. I see high interest expense year over year. This is due to the acquisition of Ultra PCS and the finance of FiberBond. The second item is that we plan to keep our share count flat. As we decided to temporarily suspend the share buyback as we invest in our business. So those are the two differences for the full year. In terms of the splits to the core of your question, first and second half split, we expect roughly 44% of the EPS coming in the first half and around 56% in the second half. When I look at the historical averages of the business for the last ten years, the first half has been 47%, and the second half, 53. So these three points difference can be easily explained by two main reasons. Tax rate takes care of two of the three points. We see a higher tax rate in the first half of 20 to 21%. Versus 16 to 17% tax in the second half. So that's the biggest difference here. Then the Electrical Americas ramp is the explanation for the other point. Given the extensive headcount additions and depreciation costs we're gonna have in the first half, especially in Q1. So the way to think about it, our guidance fully absorbs these ramp-up costs, and I believe we have a high degree of confidence, I want to say, in our focus for the year. The way to think about it is that we set realistic expectations, which we aim to beat. Chris Snyder: Thank you, Paulo. I really appreciate that. If I could follow up on some of the capacity expansion plans in The Americas. So obviously, a pretty massive undertaking. Since this is something that the company really hasn't had to do for a long period of time, I would be interested, have there been any challenges that have come through related to the capacity expansion? Do you have a line of sight to that capacity coming online? Just trying to figure out when you think this capacity expansion turns from a headwind for the company to a tailwind for the company. Thank you. Paulo Ruiz Sternadt: Another top-of-mind question. I would say this is a great challenge to have, Chris. We are not in a position to turn our back on the opportunities we see in the market here. We have strong markets, strong backlogs, record levels of backlogs. We are winning a higher share of orders as well. I believe that those investments you are making are also giving our customers the confidence to place their business with us. This is really important that we keep in mind. If you think about accelerating ramp-up, our second-half orders last year were 41% higher than 2024, 41%. So we announced those plans to expand capacity. When you start looking at this market and getting those orders, you need to accelerate. So we accelerate in our ramp, and this is what caused some pressure for Q4 last year and especially Q1 this year as well. So it's based on the order successes that we're accelerating our ramp. Overall, I would say the capacity expansion, the construction goes on plan. It's a multiyear program, as you know, and we are not entirely surprised with the temporary short-term headwinds we have. Because we have far too many sizable projects. The company has never done this before. At the same time, if you look at the Electrical Americas business, in the past four years, they grew double digits in the last four years straight. So it was about time for us to invest in that business. Actually, the average growth was 15%, so it's incredible growth that the business experienced. So we needed to invest. To cope with the success we are having, and we are very confident in the short, medium, and long term of this business. In simple terms, if you think about the capacity ads, when you add manufacturing costs like headcount, depreciation, and you do this ahead of your sales ramp, you naturally incur margin headwinds. This is what happens. Right? We are fully absorbing those ramp-up costs, and I would say we continue to deliver industry-leading margins of roughly 30%. So just think about the potential of this business. You put all this pressure on cost on this business, and it keeps running and delivering around 30% margin. So the potential is there for when those ramp-ups are over. Specifically, on the cadence of these investments, the $1.5 billion we invested around two dozen projects, so think about 24 projects, by mid of last year, we finalized the construction of half of them. So half of the projects were over. We started the ramp in the second half, specifically more into Q4. We continue to ramp those plans in 2026. For the other half of the projects that are remaining, construction investment half of this will be largely done by the first half. The construction. The ramp will start at the end of the first half. The last quarter of projects will continue through 2026. With production ramp in '27. What gave us confidence here is that half of the projects were already online last year, and we continue to ramp them. We are adding additional projects with ramp-up expected in the first half of this year. So we have high confidence in our plan for the year. The simple way to think about cadence, because that's probably the spirit of your question, is to think about Q1 as being our guidance for the business. Expect progress in Q2, I would say expect momentum into Q3. Then a stronger pace of backlog liquidation in Q4 and moving to 2027. That's the way to model how the Americas business will behave. I would just like to conclude. I know it's a lot of information, but possibly the most important discussion point of the whole call. I believe our long-term growth is supported by strong markets, and we're making investments to win. We have a strong portfolio position, so no problem here. It can only get better after these investments. In the short term, in the near term, our growth is in the bag. So it's in our backlog. We are strong operators, and that's the time to execute and get it done. So I think that's the message. Olivier Leonetti: And, Chris, an additional color on your question on the impact. Quantifying it. We have said that all along. The impact on ESA margin due to those ramps, and Paulo went through those, was about 100 basis points last year. We believe this year is going to be a bit higher, difficult to quantify with precision, but we see an impact of about 130 basis points in the full costs would be front-end loaded. 2026. Those higher. As a reminder, despite those, impact the ESA margin is still clocking at about 30%. Chris Snyder: Thank you both. Really appreciate that. Operator: Thank you. Our next question comes from Nigel Coe with Wolfe Research. Your line is open. Nigel Coe: Thanks. Good morning. Very detailed question so far, Paulo. Hi, guys. Just maybe just following up on that last answer. Your Q1, it'd be great to just put in some of the gaps on the Q1 guide. In particular, what you're dialing for the Electrical Americas organic versus a tougher comp, but more importantly, it sounds like the headwind from investment spending could be maybe 200 basis points in The Americas. Just wondering where you see the margin starting off in that segment. Paulo Ruiz Sternadt: So the way, as I said before, Olivier correctly stated the yearly impact of the ramp for the Electrical Americas business around 130 basis points is not equally distributed across quarters. So as first-half loaded, so we're gonna get most of the impact in Q1 and Q2 from those, you know, ex costs. So that's the way to think about it. Overall, as I said before, the business continues to win large orders. We didn't need to change our plans in terms of what we wanted to build or the capacity plans we wanted to add. What we needed to do and we did was to accelerate the ramp in terms of bringing people and bringing the resources earlier in the process so we can respond to this incredible order intake we are having as a team. Once again, I believe the team is doing a fantastic job in terms of balancing that with still, you know, industry-leading margins. We are confident that when this is behind us, we're gonna see those inefficiencies go away, and we can get a print even higher. Margins in the business. So we remain committed to the 32% margin corridor through the long-term plan that we stated last year. As you look at this business, right, 15% organic growth in Q4. You look at the total growth around 20%. The way to think about the business is we are adding, you know, integrating companies, like FiberBond, etcetera, and we continue to deliver 30% margins as a business. So it is a fantastic business opportunity for us. We're gonna stay very close to this team as we did with aerospace, as we did with electrical global, to help this team execute on this large ramp. Nigel Coe: Great. I've got a follow-up question on the portfolio and your longer-term growth outlook, but I'm just wondering maybe Olivier, perhaps, you could just clarify, if Electrical Americas margins are kicking off the year with, I don't know, a 28 handle on the margin, are we exiting with a 31 type handle? Just wanna make sure that that cadence is what you're communicating. But Paulo, back to you on the organic kind of, like, you know, the six to 9% framework. Just subtracting the lowest growth business from that framework, you're adding a business that you see very strong double digits. How are you thinking about how the framework sort of recasts for the portfolio change you're making? And then, of course, FiberBond, etcetera, into that mix. Paulo Ruiz Sternadt: Yeah. So think you're alluding to the commitments we made in March for the long-term plan, I suppose. Correct? Nigel Coe: Yes. Correct. Paulo Ruiz Sternadt: Okay. Let me comment on that. So, of course, every move we are making is to make the situation better. It needs to get very clear from the get-go. But let me refresh the targets we committed to the whole group here. We committed last March in our six-year plan, long-term plan. We committed to a growth between 6-9% top-line growth for the period. Segment margins of 28% in 2030, and we also committed to EPS growth on average of 12% or higher over the period. So what happened since then, since March? Several things happened. To confirm our optimism in these 2030 targets, I would say this, Nigel and everyone, we are committed to overachieving as a team. There is upside. I'll be honest. There is upside to the plan. At the same time as a group, we wanna be conservative, so we wanna beat and raise over time on the expectations. I would like to give you now a balanced view of where we stand now versus the commitments we made. So first, I'll look at the upside. You look at the upside on this business, the first big upside is not necessarily on the portfolio per se, but it's that I baked only half of the data center forecast growth from the industry into my original plan. So back then, the industry forecasts were around 33% growth. Data center for the period, I included only 17% in our numbers. So this is by far the biggest positive we have. If you look at how we performed in 2025, we are growing at a much faster pace than that. So we grew at 44% the business, being 49% in Americas and 36% in global. So not only are we ahead of the 33% market growth, but we are much ahead of the '17 I consider. So this is one very positive upside to keep in mind. The second one is the one that you mentioned. Is around the portfolio because the long-term plan we shared with you, transparently, said did not include any inorganic benefits. So since then, we closed the acquisition of Resilient Power, FiberBond, Ultra PCS, and soon will close Boyd. We also announced, last week, the spin-off of mobility. I would say there's none of those measures were part of this long-term plan, and all those moves, no exception, are accretive to top-line growth rates and margins. So again, another big, big upside to the long-term plan. Now I'm gonna allude to the other side, which is to be more cautious and prudent. Right? It's a six-year plan. We just concluded one year. So, I believe we need to be cautious and prudent as a team. I am observing, still observing, the short-cycle businesses. We believe they have bottomed out right now. Which is good. Some green shoots here. That includes Resi, Machine OEM, and even mobility markets, hopefully. It's also true that our exposure to those markets, as a share of the total company, is decreasing over time. But we need to watch these markets closely. So momentary improvement is encouraging. But no clear positive trend yet. We also mastered other things that were not in the plan, just think about tariffs in 2025. Was not part of the plan. We mastered that pretty well. So all in all, I would say this, there is clear upside to the plan. We are prudent. We think it's too early to provide new targets for 2030. We plan to refresh those targets as soon as most of these portfolio moves are concluded. I'll tell you, we don't plan to have an Investor Day in 2026 because we wanna focus on executing on this large ramp. On strong backlog we have, and we also wanna make progress on our acquisitions and the spin-off. So that's a balanced view of the future positive. On for sure. But cautious because of a six-year plan. Nigel Coe: Thanks, Paulo. Cheers. Operator: Thank you. Our next question comes from Nicole DeBlase with Deutsche Bank. Your line is open. Nicole DeBlase: Yes, thanks. Good morning, guys. Paulo Ruiz Sternadt: Hi, Nicole. Nicole DeBlase: Hello. Just wanted to circle back on margins. Sorry. There's been a lot of questions on this already. But there's a pretty big sequential step down embedded in the first quarter. Versus what you did in 4Q. I think normally, margins are down more like 60 bps sequentially. You obviously have a lot more than that in the guide. Is that all attributable to what's happening with Electrical America's capacity ramp? Just confirm that the investments and the inefficiencies are stepping up that much sequentially relative to 4Q. Paulo Ruiz Sternadt: Yeah. So you are in the ballpark, right, Nicole? So it is mostly related to the Electrical Americas ramp. For sure. As we said before, it's not equally across the year. So we're taking most of that hit in Q4 last year. Q1 2026, and starts to ease up in other quarters. Towards the end of the year. So that's a good way to model the sequence here. Nicole DeBlase: Okay. Understood. Then just going back to the Electrical Americas order trends, you gave the 200% growth for data centers. Can you just talk through a little bit of what you saw in the non-data center verticals this quarter? Paulo Ruiz Sternadt: Absolutely. We talk extensively about utilities as well. We believe in this long-term potential for this business. Given everything that's happening with, you know, electrification, data center build-out, and also resilience and grid hardening. So this is a good business. We saw, you know, for orders, we had momentum in this utility business. On a twelve-month basis, our Electrical Americas order was up low teens. So also very strong orders. For utilities. Electrical global orders were up mid-single digits as well on a twelve-month basis. Sales were up in the Electrical Americas in the year, mid-single digits, and Electrical Global up 10%. So good performance here. We talk extensively about data centers. I'm not gonna repeat. The data here is a fantastic story. Not only in Electrical Americas but also in Global. But then, I'd like to talk about aerospace as well because I rarely get a question in aerospace. I'm really proud of this team. You know, not only did they land tremendous wins for programs in 2024 and '25, but at the same time, they're improving execution. So you see, you know, their top line accelerating to 12% in the year and margins improving 90 basis points. So it really looks good. We had a good surprise in 2025, which was the aftermarket. Pickup was really good. We might get that surprise again in 2026. But the market is good as well. My last comment is just, you know, we can deep dive into any of those segments you guys feel like. But just a short comment on short cycle again. I said we are encouraged by the latest view. We consider this to be green shoots on the market. It's reflecting positively in global, and we expect this is gonna inflect positively as well in America. Including for res in the future. We're just cautious here. Right? As we move into the year, with the guidance, can beat and raise. Nicole DeBlase: Thanks, Paulo. I'll pass it on. Operator: Thank you. Our next question comes from Deane Dray with RBC Capital Markets. Your line is open. Deane Dray: Thank you. Good morning, everyone. Wanted to circle back on the data center order mix. You can either give it for 4Q or for the year. Just be interested in directionally how much is hyperscale as a percent of your orders versus colo and enterprise? Are you being asked to do more of these five-year supply agreements as your backlog extends? Paulo Ruiz Sternadt: Okay. Great question. I would say this. I'm very, very happy and proud that the team managed to create an environment where we have multiple customers in data centers that are important to us. Some years ago, we had a couple of hyperscalers that carried most of the weight. Today, we are very well positioned with all hyperscalers and the key multitenant, so a much more balanced approach. That's also part of the secret sauce why we are winning larger orders versus other companies because we are exposed. We are servicing them well, and we are investing capacity. So I don't wanna give you a breakdown there because we make this very much a much more balanced mix of customers, which I love. The other part of your question, if I'm getting this correctly, I can give a data point. In the past, most of our orders and revenues came from cloud versus AI. What we saw in 2025 in terms of our orders to give you some sense of the transition here, we already saw the orders in 2025 were fifty-fifty. So 50% of our orders were cloud-based data center growth. The other half were AI. Which actually helps us. If you remember what I said ten, fifteen minutes ago, our dollar per megawatt content increases with AI load, so we welcome that change and that shift. Looking at revenues, for 2025, it's still most of the revenues were cloud-based. So 70% were cloud, 30% were AI. But AI is growing, you can see in the order mix. Which is great for Eaton Corporation plc. Deane Dray: That's really helpful. Just to clarify, there had been a discussion a year ago about Eaton Corporation plc being asked to do more five-year supply agreements with these hyperscale players, and these are very profitable supply links. But just where does that stand if you have been signing any more of those? Then just my follow-up question was, where does the stand on the 800-volt DC transition? Paulo Ruiz Sternadt: Okay. So on the multiyear part, we don't see that dynamic any longer, to be very transparent with you. This happened some years ago where customers are buying on a panic to guarantee capacity. We've been investing in capacity. So the orders we are getting now are to be delivered in between twelve and eighteen months. That's it. That's the way to think about it. So no one is pre-booking or preordering capacity there they see for the future. Deane Dray: And the 800 volt? Paulo Ruiz Sternadt: 800 volt, we are leading the technology here with resilient power. We are working with authorities to create codes so we can commercialize the technology. We have a seat at the table to define those codes. Together with the industry leaders. But we are ready. We are ready to make that shift. We want to partner not only with the chip manufacturers but also with the hyperscalers, and we are partnering with them to design their new setups. Yan Jin: Thank you. Hey. Good. Hey. Thanks, guys. We have reached the end of our call. We do appreciate the questions. As always, the IR team will be available to address your follow-up questions. Thanks for joining us, and have a great day. Operator: Thank you for your participation. You may now disconnect.
Operator: Thank you for standing by. Welcome to CorVel Corporation Quarterly Earnings Release Webcast. During the course of this webcast, CorVel Corporation will make projections or other forward-looking statements regarding future events or future financial performances of the company. CorVel wishes to caution you that these statements are only predictions and that actual events or results may differ materially. CorVel refers you to the documents in the company's files from time to time with the Securities and Exchange Commission, specifically the company's last Form 10-Ks and 10-Q filed for the most recent fiscal year-end quarter. These documents contain and identify factors that could cause actual results to differ materially from those contained in our projections and forward-looking statements. I would now like to turn the call over to Michael Combs, President and Chief Executive Officer. Michael, you may proceed. Thank you. Michael Combs: Good morning, and thank you for joining us to review CorVel's December results. I am very pleased to have Brian Nichols, CorVel's Chief Financial Officer, on the call today. Thank you, Michael. Good morning, everyone. A pleasure to join the call this morning. Today, we are going to review operational performance, including 2025 highlights, a deeper dive into the value AI is bringing to our business model, key growth drivers, and the market trends that are shaping our business. Brian, let's start with an overview of the quarter's financial results. Absolutely, Michael. CorVel's revenue for the nine months ending 12/31/2025, was $710 million, a 7% increase from $664 million at the same period of the previous fiscal year. Fiscal year-to-date earnings per share were $1.53, up 16% compared to $1.32 during the nine months ending 12/31/2024. The December 2025 quarter ended with revenues at $236 million, 3% above the $228 million achieved in December. Earnings per share for the December 2025 quarter were $0.47, an increase of 2% over the same quarter of the prior year's EPS at $0.46. I would like to remind our listeners that the earnings per share results from the quarter in annual comparisons have been adjusted to account for the three-for-one stock split reported in December 2024. In comparing the 2024 and 2025 December quarters, the allocation of general and administrative expenses decreased from 9.7% to 9.6%. And margin had a commensurate improvement of 23.2% to 23.3%. However, an increase to the effective tax rate did temper earnings results. Overall, CorVel's operations netted an income of $24.1 million in December, which was an increase from $23.8 million in December 2024. Throughout the fiscal year, products highlighting the growth among network solutions and patient management services were independent medical evaluations, serious ancillary care solutions, medical bill review, and claims management. In addition to financial results, I would also like to discuss noteworthy trends in the workers' compensation market. These trends include lower volume of work-related injuries, increasing injury severity, rising medical costs, and shifts within the labor market. The US Department of Labor recently reported a small decline in total work-related injuries from 2023 to 2024. While this report reflects results from more than a year ago, the trend is consistent with what has been occurring over the past decade and was magnified at the onset of the global pandemic in 2020. It is no secret that a reduction in work-related injuries equates to a lower volume of workers' compensation claims. CorVel certainly recognizes this trend. However, we also recognize that past declining volume of work-related injuries alone may not gauge the viability and value of the managed workers' compensation market. And other changes throughout the industry may be pointing toward growth opportunities. While work-related injuries have been moving in a decreasing pattern, the inverse response is occurring for injury severity and medical cost per claim. According to the National Council on Compensation Insurance, average medical and lost time claim severity increased by a percent in 2024, resulting in elevated medical costs and extended duration to injury claims. Further, the report indicated five consecutive years with an increase. The cost of medical compensation claims is also being impacted by medical inflation. The Workers' Compensation Research Institute noted rising medical costs within a range of 5% to 12% among multiple states. The inflationary change can be attributed to increased billed charges for medical providers and allowance of higher payments among multiple states' medical fee schedules. Labor market shifts, such as increasing job openings among occupations requiring moderate to heavy levels of physical demand, also be important to consider when valuing the managed workers' compensation industry. According to the US Bureau of Labor Statistics, new job openings are expected to maintain or exceed current growth averages among several physically demanding occupations, including transportation, construction, maintenance, food service, childcare, recreation, hospitality, and healthcare. These occupations are likely to be more susceptible to work-related injuries than those with sedentary or less physically demanding job functions. Collectively, the trends I have shared support the argument that the workers' compensation market is a growing industry for organizations equipped to address its challenges. CorVel's focus on product innovation, savings through clinical outcomes, and effective management allow us to not only adapt to these industry shifts but also leverage them for continued market share gains. And with that overview of our financial performance, I'll now turn the call over to our CEO, Michael Combs, to discuss operational progress and strategic priorities. Thank you, Brian. December results were modest relative to expectations, primarily reflecting short-term operational factors rather than a change in fundamentals, including, as Brian mentioned, the normalization of our effective tax rate after an extended period of lower-than-average levels. I want to transition to highlights from 2025. The net revenue retention for business was 100%. We had a 44% close rate on new business opportunities, and we experienced strong incremental growth with existing partners. On the AI front, increased traction with our AI initiatives and following our thematically, the areas of focus. Augmenting the development process, increasing operational efficiency, elevating the work of our team members, and enhancing outcomes achieved for our partners. In addition, there was a technology-centric acquisition that we closed in June. While relatively small, we are realizing meaningful increases in efficiency and effectiveness in the health payment integrity services for the commercial health segment through the integration of related logic and functionality through the acquisition. The realized ROI and impact are consistent with optimistic expectations. Continuing on AI and how we are harnessing AI and automation opportunities across our business, this is a little more detail in specific projects. As lower-value activities are increasingly automated, we expect meaningful reduction in service delivery costs while simultaneously improving client outcomes. Although pricing pressure is likely over time, we expect cost efficiencies to more than offset any associated fee adjustments. The near-term implications of AI on our business are becoming clearer in focus. They are broad, spanning our products, services, and software development processes. Following are a few specific examples. In the commercial health business, we routinely receive claim volumes that surpass processing capacity. While some claims present limited savings potential, others offer significantly higher value for our partners. Because each claim we select includes a cost regardless of its ultimate savings, disciplined selection is critical. We are increasingly leveraging technology to prioritize those claims where we can deliver the greatest impact while also generating the strongest return on investment for CorVel. In claims management, transitions and adjuster assignments often create inefficiencies as new adjusters take on large portfolios of open claims. With roughly 125 active cases, achieving timely visibility into risk, complexity, and required actions for assigned claims can be challenging. We are deploying technology to augment adjuster decision-making, providing rapid understanding of claim nuances and clear prioritization of those tasks requiring immediate attention. Also in claims management, there are many stakeholders, partners, healthcare providers, clinical team members, all requiring information. We are leveraging technology to provide a seamless interface that allows stakeholders to self-service, obtaining real-time information for many even complex inquiries. In case management, AI is enhancing the efficiency and scalability of our team's operations. Using AI to automate documentation, data synthesis, and routine workflows will allow clinicians to manage higher caseloads and focus on complex high-impact interventions. Financially, this supports margin expansion through productivity gains while maintaining an outcome-driven service model. Strategically, AI strengthens our platform by embedding decision support into workflows that are difficult to replicate without CorVel's data, clinical expertise, and regulatory experience. And finally, AI is transforming the software development process from ideation to deployment, enabling us to accomplish more, more quickly. We have a very compelling software development roadmap for 2026. This is certainly not a comprehensive list, but a few representative examples of areas of focus. In the property and casualty business, by intentionally applying technology across our claims and case management systems, introducing intelligence earlier in the process, reducing administrative friction, modernizing data exchange, and leveraging automation and AI, we deliver a fundamentally simpler, more efficient, and more accurate experience. As buyers prioritize efficiency, transparency, outcomes, and cost, CorVel is well-positioned to generate differentiated results while scaling in 2026 and beyond. On the healthcare payment integrity front, this is our CERES division. The market continues to evolve as medical costs rise while reimbursement rates remain flat, intensifying pressure on payers to control costs. In response, health plans are increasingly turning to technology, particularly AI and automation, to improve accuracy, identifying errors earlier in the claims life cycle, and strengthening financial performance. At the same time, ongoing vendor consolidation is prompting payers to reevaluate their partnerships. With a growing preference for proven scalable vendors that can consistently deliver measurable results, operational stability, and long-term value, CERES combines deeper clinical expertise and efficient proven workflows to identify issues before claims are paid. We continue to advance the use of AI, machine learning, and predictive analytics to deliver solutions that are more accurate, scalable, and impactful, driving increased business and value for our partners. This momentum is reflected in the operating results. We have strengthened our market position, created opportunities to expand across additional products and lines of business, and seen heightened interest in CERES from large industry players seeking differentiated data-driven capabilities. We also accelerated our technology roadmap through the strategic acquisition mentioned earlier on the call. Integration is progressing ahead of plan, and we are already seeing the benefits from faster innovation and enhanced capabilities. Of note, the US Department of Justice recently released its False Claims Act enforcement statistics, which reported that settlements and judgments reached record levels in 2025, with recoveries exceeding $6.8 billion. Of that, $5.7 billion in total recoveries were in the healthcare sector. CERES's payment integrity and fraud, waste, and abuse services help partners address this risk by utilizing prepaid services to prevent improper payments before they occur and identifying aberrant billing patterns early, while postpaid services can recoup dollars due to the same issues. These capabilities reduce exposure to false claims and deliver measurable financial impact through avoided or reclaimed overpayments and lower medical cost trends. Taken together, these dynamics underscore the growing importance of proactive technology-enabled payment integrity solutions. CERES is well-positioned to meet this need by combining advanced analytics, clinical rigor, and scalable operations to help partners reduce risk, improve compliance, and make meaningful impact to medical costs. As regulatory scrutiny intensifies and financial pressure on payers continues, our ability to prevent improper payments before they occur while efficiently recovering dollars post-payment creates sustained value for our partners. With strong operational momentum, an accelerated technology roadmap, and increasing interest from larger industry participants, CERES remains focused on expanding its role as a trusted, differentiated partner in an increasingly complex healthcare landscape. Brian, would you provide the additional financial metrics for the quarter? During the quarter, CorVel repurchased 185,559 shares at a cost of $13.4 million. From inception to date, the company has repurchased 114.9 million shares for an aggregated total of $868 million. Through this program, the company has now repurchased 69% of the total shares outstanding at an average price of $7.55 per share. The repurchasing of shares continues to be funded from the company's strong operating cash flow. CorVel's days sales outstanding was 39 days in the December 2025 quarter, which is an improvement of three days compared to the same period a year ago. The quarter-ending cash balance was $230 million. Fiscal year-to-date free cash flow is $90 million, with $36 million having been used for capital expenditures. In the same period of the previous fiscal year, capital expenditures were $24 million to $27 million. This change in CapEx is a result of increased spending on our proprietary software development and software licenses. CorVel's financial strategy will remain committed to responsible management of financial risk. Conversely, many competing organizations throughout the market spaces in which we operate are faced with the costs and challenges of considerable debt obligations and consequently may lack the financial agility needed for service integration and innovation. We believe that our strong and debt-free balance sheet uniquely positions CorVel for continued strategic product expansion, technological advancement, and acquisition opportunities. Thank you for your time this morning. I will now invite the operator to open this session for questions. Operator: Thank you. On the web platform and click enter to submit. We will pause for a brief moment to see if any come in. We do have a web question from Adam. Can you provide more detail on the deceleration of year-over-year revenue growth? Brandon O'Brien: For each segment. There has been a long track record of quarter-over-quarter revenue growth that ended this quarter. What drove that? Michael Combs: And we are live. Yes? Yeah. I would say we look at the fundamentals on which the organization was structured. And revenue growth over our history, certainly, if you look at the ten years, it is not a straight line necessarily. So we believe that the focus we have with the investment in technology, our reputation in the business, and the trajectory, the momentum we have indicates that the historical pattern will continue. So we are not looking at a small cycle change, if you will, as an indication of future results. Brandon O'Brien: Have an online firm Jesse, can you please provide more context around segment quarter three? Michael Combs: CorVel operates within a single segment. And the services that we provide within that segment are patient management and network solutions. As a policy, we do not break up the various products and report those separately. Rather, our entire company and all of our products operate through one single segment. Operator: There are no further questions at this time. I would like to hand the conference back over to management for closing remarks. Michael Combs: Thank you for joining the call today. Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
Operator: Good morning. Thank you for standing by, and welcome to the Madison Square Garden Entertainment Corp. Fiscal 2026 Second Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Ari Danes, Senior Vice President, Investor Relations and Treasury. Please go ahead. Ari Danes: Thank you. Good morning, and welcome to MSG Entertainment's Fiscal 2026 Second Quarter Earnings Conference Call. On today's call, David Collins, our EVP and Chief Financial Officer, will provide an update on the company's operations and review our financial results for the period. After our prepared remarks, we will open up the call for questions. If you do not have a copy of today's earnings release, it is available in the Investors section of our corporate website. Please take note of the following. Today's discussion may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Please refer to the company's filings with the SEC for a discussion of risks and uncertainties. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call. On Pages 5 and 6 of today's earnings release, we provide consolidated statements of operations and a reconciliation of operating income to adjusted operating income, or AOI, a non-GAAP financial measure. And with that, I'll now turn the call over to David. David Collins: Thank you, Ari, and good morning, everyone. For the company's fiscal second quarter, we reported revenues of $460 million and adjusted operating income of $190 million, both representing double-digit percentage increases year-over-year. These results were led by another record-setting year for the Christmas Spectacular in its 92nd holiday season run. This quarter's results also reflected growth across virtually every other aspect of our business. That included bookings, sponsorship and suites, as well as the various revenue streams related to the Knicks and Rangers. So with the successful first half of the year behind us, we're confident that we are well on our way to delivering robust growth in revenue and adjusted operating income this fiscal year. Let's now review some second quarter operational highlights. During the quarter, our venues welcomed approximately 2.9 million guests at over 475 events which was led by this year's Christmas Spectacular production. Across its entire holiday season run, which ended in January, we had 215 paid performances of the Christmas Spectacular, an increase compared to the 200 shows we ran last year. In light of the demand we saw, we added several shows to this year's run and across 8.5 weeks of performances, we sold over 1.2 million tickets. This reflected growth in both individual and group tickets and was the production's highest attendance in 25 years. We also saw a year-over-year increase in average ticket yields as we remain focused on strategically managing marketing and pricing our ticketing inventory. In addition, the enthusiasm from guests for this holiday tradition helped drive record level per caps on food, beverage and merchandise. As a result of these positive factors, per show revenue increased by a mid-single-digit percentage as compared to fiscal '25 and the Christmas Spectacular generated approximately $195 million in total revenue this season. The 2025 season also marked the introduction at Radio City Music Hall of new groundbreaking audio technology called Sphere Immersive Sound. This system is now in use for all concerts at the venue following its debut last week with the New York Phil Harmonic. Turning to bookings. During the fiscal second quarter, we saw an increase in the number of events year-over-year across our venues. This was primarily driven by growth in concerts at the company's theaters, family shows and marquee sporting events. However, the number of concerts at the Garden was down as compared to the prior year quarter due to the timing of events within the fiscal year. On the family show front, Cirque du Soleil's Twas the Night Before, completed a 63 show run across the Chicago Theater and the Theater at Madison Square Garden in December. Helping to drive improved financial results in this category on a year-over-year basis. In Marquee sports, we welcome back UFC, WWE, and professional tennis to the Garden during the quarter, while our robust schedule of college sports also got underway. From a demand standpoint, the majority of concerts across our portfolio of venues were again sold out during the second quarter. In terms of in-venue spending, merchandise per caps concerts were up in the quarter, while food and beverage per caps were down, both of which we primarily attribute to the mix of events. Looking ahead, we have continued to add a wide array of events to our calendar. That includes concerts across our venues, marquee sporting events at the Garden and special events like the Tony Awards, which will return to Radio City in June. We also recently announced a 30-night Harry Styles residency at the Garden. This run will begin in August, setting us up for continued momentum in the first half of the next fiscal year. With regards to the Knicks and Rangers, the teams began their '25, '26 seasons at the Garden in October. So far, we have seen higher per game revenues across our various revenue and profit sharing arrangements with the teams as compared to the prior year. Turning to our marketing partnerships business. Fiscal 2026 has been highlighted by a number of sponsorship announcements so far. For example, we recently reached a multiyear renewal with Anheuser-Busch, as well as an expanded multiyear partnership with Infosys. That includes making Infosys the official naming rights partner of the theater at Madison Square Garden, which is now called the Infosys Theater at Madison Square Garden. These marketing partnerships demonstrate the headway we are making with our sponsorship sales effort back in-house. In terms of premium hospitality, we continue to see strong new sales and renewal activity for suites at the Garden, including for a number of Lexus level suites that were recently renovated. Our progress in these businesses puts us on track for growth across both marketing partnerships and premium hospitality in fiscal '26. Now let's turn to our financial results. For the fiscal '26 second quarter, we reported revenues of $459.9 million, an increase of 13% versus the prior year quarter. This reflected increases in revenues from entertainment offerings, arena license fees and other leasing revenues, as well as food, beverage and merchandise revenues. The increase in revenues from entertainment offerings primarily reflected growth in the Christmas Spectacular production, mainly due to higher ticket-related revenues. This reflected 14 additional performances and higher per show revenues, both as compared to the prior year quarter. In addition, revenues from other live entertainment and sporting events increased year-over-year due to higher per event revenues and to a lesser extent, an increase in the number of events held at the Garden. Revenues subject to sharing of economics with MSG Sports pursuant to the arena license agreements and revenues from venue-related sponsorships, signage and suite license fees also grew year-over-year. I would also note that as a result of this year's schedule, the Knicks and Rangers played a combined four more home games during the fiscal second quarter as compared to the prior year quarter. This timing impact will reverse over the balance of the fiscal year. These increases were slightly offset by a decrease in revenues from concerts due to a decrease in the number of concerts at the Garden, which was mostly offset by higher per concert revenues and an increase in the number of concerts at the company's theaters. The increase in food, beverage and merchandise revenues mainly reflected higher F&B sales at Knicks and Ranger Games, the Christmas Spectacular production and other live entertainment and sporting events. These increases were partially offset by lower F&B sales at concerts, primarily due to a decrease in the number of concerts at the Garden. Second quarter adjusted operating income of $190.4 million increased 16% as compared to the prior year quarter. This primarily reflects the increase in revenues partially offset by higher direct operating SG&A expenses. Turning to our balance sheet. As of December 31, we had $157 million of unrestricted cash up from $30 million as of September 30, reflecting our strong cash flow generation during our seasonally busiest time of the year. In addition, our debt balances at quarter end was $594 million. This reflects the paydown of the full $20 million revolver balance during the quarter. As a reminder, we have repurchased approximately 623,000 shares of our Class A common stock for $25 million fiscal year-to-date. We have approximately $45 million remaining under our current buyback authorization. And going forward, we will continue to explore ways to opportunistically return capital to shareholders. So in summary, with the continued momentum in our business, we are confident we are on a clear path to delivering a robust fiscal '26 and believe we remain well positioned to drive long-term value for our shareholders. I will now turn the call back over to Ari. Ari Danes: Thank you, David. Operator, can we now open up the call for questions? Operator: [Operator Instructions] Your first question comes from the line of Stephen Laszczyk from Goldman Sachs. Stephen Laszczyk: David, on the Christmas Spectacular nice performance this year. I was just curious if you could maybe talk a little bit more about the pricing sell-through and audience demographic trends that played out throughout the 2025 holiday season and how those might have compared to prior years for the Spectacular. And then, looking ahead, I would also be curious to your thinking on the opportunity to grow the Spectacular from here? How much more headroom do you feel like still exists in things like show count and pricing as you look ahead into next year's run? David Collins: Great, Stephen. Thanks for the question. Yes, obviously, we had a great run this year. In this year's run, we saw a number of positive signs across ticket demand and pricing. And we continue to optimize our schedule, our pricing and our marketing for the production. And we believe we are set up for success in the future years. On an overall basis, this year, per show revenue increased by a mid-single-digit percentage in that, and that reflected a number of positive factors, including growth in per show ticketing revenue, as well as record high food, beverage and merchandise per caps. The growth in per show ticketing revenue was driven by increased per show sell-through and as well as an improvement in average ticket prices. So if we take a look at the sell-through demand, demand was broad-based across the production with growth in both individuals and groups. We also saw growth across every geographic category that we track with the one exception of international tourism, which was down versus last year. I'd add that the decline in international ticket sales is consistent with lower international tourism to New York this past holiday season. So while I think it may be a little premature to give specifics, based on the demand we saw this year, we believe there is room to again increase the Christmas show count for next holiday season. We're also able to increase our average ticket yield by managing marketing and pricing our ticket inventory effectively. The Christmas Spectacular continues to be a premium entertainment product and it's still priced well below average ticket prices for comparable entertainment options. And going forward, we continue to believe that there are opportunities to improve our yields. So overall, with that said, we're optimistic that there is continued ticket pricing upside along with the potential to increase our show count as we look ahead to next year and beyond. Operator: Your next question comes from the line of Cameron Mansson-Perrone from Morgan Stanley. Cameron Mansson-Perrone: Focusing in on the concert business, I'm wondering if you could give us an update on bookings trends more generally at the Garden and across the portfolio. How are those trending through the remainder of fiscal '26 and acknowledging it's early right now, any indication on pacing for early 27? David Collins: Sure. If we take a look at concert bookings for the rest of fiscal '26, first, let me reiterate that we had a successful first half of the year in our bookings business. We saw an increase in the total number of bookings in the fiscal first half, including for concerts with robust growth in our financial results year-to-date. In terms of the rest of the fiscal year in our concerts business at our theaters, similar to what we had said on our last call, we do continue to pace behind for the March and June quarters. However, given that the typical booking windows for our theaters is 3 to 6 months, we are still actively booking concerts for the remainder of the fiscal year. And if we take a look at the Garden, we are currently pacing up strongly for both the fiscal third and fourth quarters. And in fact, we have now exceeded our concert bookings goal for the year at the Garden and that puts us on track for robust growth in the number of concerts at the arena this fiscal year. As far as -- I think the second part of your question was how our concert bookings looking for the first half of 2027, I would say it's a bit early to discuss pacing for our theaters, given the short booking window that's typical there. However, with the Garden, we typically book 6 to 9 months out. So at this stage, we do have strong visibility into the September '26 quarter and increasing visibility into December '26 quarter. In short, I would say that we are off to a really strong start at the arena. We are pacing well ahead in the first half of fiscal '27 as compared to the first half of fiscal '26. And that, of course, includes the impact of the recently announced Harry Styles residency, as well as a number of other notable acts, including multi-night runs from Bon Jovi and Rush as well as first-time headliners such as Olivia Dean, Alex Warren and Louis Tomlinson. So Also, as you probably remember, the September 2025 quarter was a record for the number of concerts in any quarter at -- the Garden, and we are now on pace to shatter that record in the upcoming September quarter. So we are encouraged by the early indicators for next year and believe that the Garden is likely headed towards another year of really strong concert growth in fiscal '27. Operator: Your next question comes from the line of Brandon Ross from LightShed Partners. Brandon Ross: Just wanted to follow up on Cameron's question. We're in the second half of this question about fiscal a lot of residency activity there with 30 nights at Harry Styles and 9 nights of Bon Jovi, and who knows what else. Investors are trying to understand exactly how incremental this is going to be versus fiscal '26, both, I guess, in terms of the amount of nights filled and then the associated revenue. So any color you could provide to help us get there, including if this is a promoted run or rental on the Harry Styles? David Collins: Okay. Sure. Brandon, thank you. Thanks for the question. Well, first, let me say we are pleased to welcome back Harry Styles to the Garden for this record-breaking run. These 30 nights will start in late August and conclude in October, which is within our fiscal '27 first and second quarters. And the shows will take place every Wednesday, Friday and Saturday night of the Garden for 10 straight weeks during that period, and we are already seeing strong momentum in presales. I don't know if you saw, but Ticketmaster reported $11.5 million registrations making this presell the largest ever presale for a single artist in the New York market. As it relates to our outlook for fiscal '27, while we don't think all 30 nights will be incremental, we do expect this to be a meaningful contributor to a concert growth at the Garden next year by taking place three nights per week. It still leaves a lot of available inventory in August and September, which is a time when the Knicks and Rangers seasons are not quite yet underway. I would also say that New York is a unique market, and the Garden is a unique venue. And we have a good track record of booking and selling out shows that no matter what day of the week it may be, we can sell them. And we are already seeing positive signs outside of this residency with a number of other notable headlines announced, including several multi-night runs. So as I mentioned earlier, we are pacing well ahead for fiscal '27. So once again, we believe that Garden is likely headed towards another year of strong concert growth. And I think your last question was whether this was a co-promote or rental. This will be a rental deal. Brandon Ross: Okay. And then first of all, there are more preregistrations for Harry Styles and people live in New York, pretty impressive. David Collins: Yes. Brandon Ross: Okay. And then, first of all, the more preregistrations for Harry Styles and people live in New York City, pretty impressive. Yes. Then thinking about future years, should we expect these longer residencies to become an annual thing? Or is this really just a one-off year in fiscal '27? David Collins: Yes, sure. Yes. I mean let me say a few things. First, obviously, let me reiterate that we're off to a strong start in terms of bookings for '27. And now, of course, include the Harry Style residency for 30 nights. And we also have, as I mentioned before, Bon Jovi for a 9-show residency at the Garden this summer in -- in fact, we are in discussions for another potential residency at one of our theaters also in fiscal '27. So you can see that we believe there's a great value in bringing residencies to our venues as it -- we view it as building more of a recurring base of business and it also increases our visibility into the forward calendar, which is really important to us as well. So this remains an important area for our booking business. And I think while it's a little too early to discuss fiscal 2028 and beyond, we are continuing to have discussions with other artists about future residencies at all of our venues, including the Garden and we look forward to keeping you updated on that progress. Operator: Your next question comes from the line of Peter Henderson from Bank of America. Peter Henderson: Can you just talk about what you're seeing for consumer demand trends across the portfolio, both from an attendance and per cap perspective and just how they're tracking versus last quarter and maybe last year? And then also just looking forward what you're seeing in terms of on sale activity. And then on capital returns, maybe can you talk about how you decide to lean in and how you size what you're going to return and what the key inputs are that you weigh, whether it be valuation or visibility into free cash flow or leverage comfort? David Collins: Sure. Thanks, Peter. Sure. Let's start with the consumer demand question. I mean, we certainly keep a close eye on the macro environment, but I have to say we continue to see strong consumer demand. There are a number of factors that support our view. I mean, first, of all, as we've discussed, we saw exceptional demand for the Christmas Spectacular's 2025 holiday run. We had another year of record revenues there. We had our highest attendance in 25 years and we had record high food, beverage and merchandise per caps. In terms of bookings, the majority of our concerts at our venues were again sold out this past quarter and -- and year-to-date, we have seen concerts perform better than we initially expected, and a number of upcoming acts across our venues have added additional shows due to strong cement -- I'm sorry, strong demand. As we look at the next 2 quarters, the sell-through rate for concerts is currently pacing ahead of where it was the same time last year. And I guess the last thing I would say is, as I mentioned earlier, the Ticketmaster reporting of 11.5 million registrations during the Harry Styles presale the largest ever presales or a single artist in New York, I would say, given all this, we continue to see strong demand from consumers for sure. As far as your question about capital, as we've discussed before, here at MSG, we have three key priorities in terms of our capital allocation and that first one being ensuring that we have a strong balance sheet and at the quarter end, we had net debt of approximately $437 million, and we expect the business should naturally delever as it grows over time. Second is to ensure we have appropriate flexibility to pursue compelling opportunities that come along and if -- and when they arise. In terms of capital projects, right now, there aren't any major ones to flag as we look out at the rest of the fiscal year. And I would say our third priority remains to opportunistically return capital to our shareholders. And as you all know, we repurchased $25 million of stock during the fiscal first quarter of this year, and we still have $45 million remaining under our current buyback authorization. And what I would say is going forward, we will continue to explore ways to return capital to our shareholders. Operator: Your next question comes from the line of David Karnovsky from JPMorgan. David Karnovsky: I wanted to see if there were any updates on the Penn Station process and whether that original May timeline is intact for a master developer selection and on a related basis, assuming there was some involvement for the theater at MSG, like how should investors think about the current contribution of that venue to the current company's financials? And could shows like, sir, which you called out, get rerouted to like another one of your venues like the Beacon or Radio City in the event it needed to be? David Collins: Sure, David. Thanks for the question. As far as the plans on redevelopment, as you know, the U.S. Department of Transportation and Amtrak continue to reiterate their intended project schedule. As early as in January, they completed an initial step to select a short list of developers to participate in the RFP process. And -- and as far as we know, based on that RFP process, they are expected to select a massive developer by May 2026. And I would say, as invested members of our community, we remain committed to improving Penn Station in the surrounding area. And as redevelopment of the area continues, we are committed to collaborating closely with all stakeholders that -- and I would say that's all -- we have to report at this time, but things seem to be still on target for that May 2026. In terms of the theater at MSG, first, I'd remind you that the significant majority of our company's economics are driven first and foremost by the Garden and second, by the Christmas Spectacular with the theaters in aggregate following that. Also, the theater in MSG is one of four theaters in our portfolio and one of three in New York varying capacities and if needed, we believe that we have the ability to shift some events from the Infosys theater at MSG to our other theaters in New York. Ari Danes: Thanks, David. Operator, we have time for one last caller. Operator: Your final question comes from the line of Peter Supino from Wolf Research. John Stid: Jack Stid on for Peter. Two questions for you, if I may. First, SG&A was elevated year-on-year. Could you unpack that for us? And how should we think about SG&A for the balance of the fiscal year? David Collins: Sure. Thanks, Jack. First, yes, let me say that SG&A expense results were a bit noisy this quarter and included a couple of nonrecurring items. The largest one, which we called out in the earnings release was $4 million in executive management transition costs. We had also reported executive management transition costs in the year ago quarter. Additionally, the quarter included a onetime expense true-up of $2 million, which related to prior year periods. With that being said, even if we exclude the nonrecurring items, SG&A expense growth this quarter was elevated and above what I would expect our long-term expense growth to be. The growth reflects higher employee compensation, which is consistent with what we've said in the past about higher labor costs for this fiscal year. And as we look to fiscal '26 for the rest of -- I'm sorry, rest of fiscal '26, we similarly expect the March quarter reflects higher labor costs on a year-over-year basis. In addition, I would note that we recently implemented a voluntary exit program at the company. This program is meant to support our goals around streamlining processes and supporting a more efficient and nimble organization. As a result, we do expect to incur approximately $8 million in severance expense related to the program, primarily in the March quarter, and we expect that SG&A will start to normalize by our June quarter. John Stid: Got you. That's very helpful. And then secondly, you called out lower F&B per cap due to mix this quarter. Could you impact as well? David Collins: Sure. Let me just say both F&B and merchandise per cap can fluctuate quarter-to-quarter based on the mix of artists and genres. For example, Rock A typically generate higher F&B spend but lower merchandise spend, while Pop acts tend to show the opposite, primarily due to differences in audience demographics. So using the Garden as an example, which obviously is our largest and most economically significant venue, last year in the second quarter, the Garden was more heavily weighted towards rock, while this year, the Garden featured a broader genre mix, including Pop acts. So as a result, this quarter at the Garden, F&B per caps were down, but merchandise per caps were up year-over-year, partly due to this mix that I'm talking about. However, if you look at it on a combined basis at the Garden, food, beverage and merchandise per caps were up overall in the fiscal second quarter. So the shift to merchandise sales more than offset the decrease in food and beverage at the arena. I would also note that for the artists that played the garden in both periods, we saw growth in their food, beverage and merchandise per cap. So overall, we continue to see strong consumer demand in this part of our business. Operator: And that concludes our question-and-answer session. I will now turn the call back over to Ari Danes for closing remarks. Ari Danes: Thanks. We look forward to speaking with you on our May earnings call. Have a good day. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning, and thank you for joining us for RPC, Inc.'s Fourth Quarter 2025 Earnings Conference Call. Today's call will be hosted by Ben Palmer, President and CEO; and Mike Schmit, Chief Financial Officer. [Operator Instructions] I will now turn the call over to Mr. Schmit. Michael Schmit: Thank you, and good morning. Before we begin, I want to remind you that some of the statements that will be made on this call could be forward-looking in nature and reflect a number of known and unknown risks. Please refer to our press release issued today, along with our 10-K and other public filings that outline those risks, all of which can be found on RPC's website at www.rpc.net. In today's earnings release and conference call, we'll be referring to several non-GAAP measures of operating performance and liquidity. We believe these non-GAAP measures allow us to compare performance consistently over various periods. Our press release and our website contain reconciliations of these non-GAAP measures to the most directly comparable GAAP measures. I'll now turn the call over to our President and CEO, Ben Palmer. Ben Palmer: Thanks, Mike, and thank you for joining our call this morning. Today, we'll talk about our fourth quarter results and provide you with a few operational highlights. Fourth quarter results reflect a sequential revenue decline across the majority of our service lines, while October and November were consistent with third quarter monthly activity, we saw weakness in December, particularly later in the month. During the quarter, service lines other than pressure pumping represented 70% of total revenues and saw a 4% sequential decrease compared to the third quarter of 2025. Although we did see revenues increase at Spinnaker's cementing business, Patterson Tubular Services storage and inspection business and Cudd Pressure Control, snubbing and well control businesses. Within Technical Services, Thru Tubing Solutions downhole tools revenues decreased 9% sequentially. We saw growth in our Southeast and Northeast regions, our largest region, the Western Mid-Con, which includes Elk City and Odessa locations was flat sequentially. Weakness was experienced in the international and the Rocky Mountain regions. Thru Tubing Solutions is a market leader in downhole completion tools and includes a portfolio of products and advanced technologies. We have seen success building since our late 2024 rollout of the A-10 downhole motor. The new motor is positioned in the completions market to specifically address today's longer laterals and higher flow rates. We believe this tool technology provides customers with unmatched performance and has resulted in incremental share gains. Thru Tubing Solutions continues to expand the rollout of its new metal-on-metal power section component called Metal Max. The product allows for a shorter motor design, higher torque output, reduced downtime and improved performance in demanding downhole environments. This improved technology allows us to expand into new markets due to these advantages. We initially prototyped the Metal Max motor in a few key geographic areas and have recently expanded into other regions. Thru Tubing Solutions continues to actively market and develop its UnPlug technology. This innovative product reduces and sometimes eliminate the need for bridge plugs during the completion of a well and delivers faster drill-out times while achieving highly effective stage isolation. While the product is early in its life cycle, adoption has steadily increased. Also within Technical Services, Cudd Pressure Controls revenues were up 1% sequentially, led by increases in well control activity and snubbing, which was up 13% as this equipment was well utilized during the quarter. Cudd Pressure Control snubbing business expects to take delivery of a big bore snubbing unit in 2026 that is specifically designed for cavern gas storage work. This unit was built to support a long-term customer of their storage well maintenance schedule over the next several years. This work is regulatory driven and is part of our effort to continue diversifying into other markets. Coiled tubing, our largest service line within Cudd Pressure Control, was down 2% sequentially after a really strong third quarter. Our new 2 7/8-inch unit continued to be well utilized. We are upgrading an existing coil unit to handle the larger 2 7/8-inch tubing and is expected to be in service by the middle of 2026. Pintail Completions, the largest wireline provider in the Permian Basin, experienced a decline in revenues of 3% during the quarter. Given our market position, we expect 2026 to trend closely with large Permian operator activity. Cudd Energy Services pressure pumping business saw a 6% sequential decrease. This decline largely related to holiday shutdowns and a fleet we idled in October. We do not expect to reactivate any fleets until returns improve. Many of our businesses have been impacted by recent winter storms early in the first quarter. While activity is expected to continue as conditions improve, these lost operating days are not fully recoverable and the associated costs incurred will impact near-term profitability. RPC's focus remains on leveraging our strong balance sheet and maximizing long-term shareholder returns. We continue to strategically grow our less capital-intensive service lines, both organically and through acquisitions. With that, Mike will now discuss the quarter's financial results. Michael Schmit: Thanks, Ben. Our fourth quarter financial results with sequential comparisons to the third quarter of 2025 are as follows: revenues decreased 5% to $426 million compared to Q3. Breaking down our operating segments: Technical Services, which represented 95% of our total fourth quarter revenues was down 4%. Support Services, which represented 5% of our revenues, was down 18%. The following is a breakdown of the fourth quarter revenues for our largest service lines. Pressure pumping, 27.6%; wireline, 24.1%; downhole tools, 22.4%; coiled tubing, 9.7%; cementing, 5.9%; rental tools, 3.4%. Together, these service lines accounted for 93% of our total revenues. As disclosed in this morning's press release, we made the decision to expense wireline cables that were previously being capitalized beginning in the fourth quarter. This was due to a change in our useful lives because of increased activity and change in work type. The impact is seen primarily through an increase in cost of revenues and a reduction in capital expenditures, but also a modest decrease in depreciation and amortization. Cost of revenues, excluding depreciation and amortization, was $337 million compared to $335 million in the previous quarter. This increase was primarily related to expensing wireline cables and other materials and supplies expenses related to job mix. SG&A expenses were $48 million, up slightly from $45 million. As a percent of revenue, SG&A increased 120 basis points to 11.2%, primarily due to employee incentives and higher other related employment costs. The effective tax rate was unusually high during the quarter. The higher rate was primarily due to the liquidation of our company-owned life insurance policies that were part of the previously announced dissolution of the company's nonqualified supplemental retirement income plan, coupled with the nondeductible portion of acquisition-related employment costs. Adjusted diluted EPS was $0.04 in the fourth quarter. Adjustments totaled $0.06 and related to expenses of wireline cables purchased and capitalized from previous quarters, acquisition-related employment costs and a significant increase in tax expense related to taxable gains on the sale of the company-owned life insurance policies and other investments related to the liquidation of the company's nonqualified supplemental retirement income plan. Adjusted EBITDA was $55.1 million, down from $67.8 million due to the broad-based declines across the majority of the businesses. Adjusted EBITDA margin decreased 230 basis points sequentially to 12.9%. The adjustments made to EBITDA were made to make future periods more comparable. Operating cash flow to date was $201.3 million and after CapEx of $148.4 million, free cash flow was $52.9 million. The change to expensing wireline cables reduced both operating cash flow and CapEx, but resulted in no change to free cash flow. At quarter end, we had approximately $210 million in cash, a $50 million seller finance note payable and no borrowings from our $100 million revolving credit facility. Payment of dividends totaled $35.1 million year-to-date through Q4 '25. During the quarter, we paid $8.8 million in dividends. Full year 2025 capital expenditures were $148 million, primarily related to maintenance CapEx and inclusive of opportunistic asset purchases as well as our ERP and other IT system upgrades. Capital expenditures were $12 million lower due to wireline cables being expensed rather than capitalized in the fourth quarter. Additionally, we saw approximately $15 million in anticipated capital expenditures delayed into 2026. Due to this delay, we expect 2026 capital expenditures in the range of $150 million to $180 million. We'll adjust our spend based on activity levels. I'll now turn it back over to Ben for some closing remarks. Ben Palmer: Thank you, Mike. 2025 was a challenging year with year-end oil prices reaching its lowest level since COVID. While we have seen recent improvement in oil and gas -- natural gas prices, we need further increases to spur significant customer activity levels. Our management teams have experienced many cycles over the years, and we will continue to focus on costs, returns and maintaining financial flexibility. This flexibility allows us to take advantage of opportunities that arise and to pursue growth opportunities through selective investment for organic growth, investment in new technologies and M&A within our existing markets and the broader energy sector. I want to thank all of our employees who put in tremendous work to drive high levels of service and value to our customers. Thank you for joining us this morning. And at this time, we're happy to address any questions you might have. Operator: [Operator Instructions] And your first question comes from the line of Don Crist with Johnson Rice. Donald Crist: My first question, and Ben, I don't want to pin you down to any kind of guidance for the first quarter. But given the weather impacts for the first, call it, 2 weeks of the year, do you think it kind of shakes out similar to the fourth quarter directionally? And again, I'm not looking for specific numbers here. Ben Palmer: To be honest with you, Don, it's a great question. We're still trying to analyze the impact. We do have -- we're quite geographically diversified, but we are concentrated in the Permian and in the Mid-Con, Oklahoma, and both of those areas were hit pretty hard. So reasonable question. I understand why you're asking, but we don't know yet. But certainly, it's not insignificant, put it that way. Donald Crist: Right. I understand it's hard to quantify given we still got a lot of winter left. So my second question would be, we've seen a lot of your competitors have challenges in outside of pressure pumping and the other business lines that you all operate in. And a lot of that equipment start to move overseas to the Middle East and other places for unconventional type development. Are you seeing that other business lines, Thru Tubing and coil and wireline start to normalize or some of your competitors go away and have a little bit less competition there as that equipment moves overseas? Ben Palmer: Maybe a little bit of that. I don't know that it's a tremendous amount yet. But certainly, every little bit can help. There have been -- we've heard of some competitors and some of those other service lines that are obviously reorganizing or being sold, absorbed by other competitors. So perhaps that is an indication that the market stress is getting to some of the less well-capitalized companies. And hopefully, that will inert our benefit as we move forward. Donald Crist: Okay. And just one last question for me. Obviously, you've been very prudent with the balance sheet over the years and selectively done M&A, but you've got a pretty large cash hoard right now. Any indication that we could see some stock buybacks? Or are you going to just keep that for M&A in the near term? Ben Palmer: We're always evaluating the various uses of our capital and buybacks are certainly one of those choices. And we'll just have to see again, reasonable question. I wouldn't see us necessarily in the near term doing anything dramatically different, but that's in the tool chest, and we're looking at it. Operator: Your next question comes from the line of John Daniel with Daniel Energy Partners. John Daniel: Today you mentioned that the -- it was idled in -- Is there anything -- Can you hear me okay? Ben Palmer: John, a little bit difficult. Michael Schmit: Yes, cut out. John Daniel: How about now? Ben Palmer: Yes, much better. John Daniel: Sorry, just driving the Midland. My question is, with the fleet that was idled in October, I think you said October at least in the fourth quarter, is there anything today which would suggest that you think that fleet comes back this year? And with the reactivation, is it a function of price? Or would it be a function of if you had a sufficient amount of work even at current pricing? Just how do you think about that? Ben Palmer: It's a good question. I would have to -- I mean, we're always looking and evaluating opportunities where -- I would say the probability is we would need to be really comfortable that it's incrementally better pricing. We're not looking for the same pricing at the prior activity levels, right? And as we've always talked over the years, some of it -- given -- I mean, we do have some customers that we do have nice steady programs with. So it's always a combination of our confidence in how steady the activity can be at a certain pricing and so forth. So I think we're not in a panic to try to put that fleet back to work. We want to make sure we're comfortable that it's going to be generating probably better cash flow than we've recently been experiencing, not just in that fleet. But just overall, we would want to present a pretty high probability that we would have an incremental benefit from bringing it back into service. John Daniel: Okay. Fair enough. The second question goes -- is about M&A. Obviously, you guys have the balance sheet to prosecute deals should you wish to. When you think -- step back and think about just the market, you've got some of your peers that are chasing power, others will be more focused on international. It would seem that the universe of realistic buyers of traditional land equipment is kind of diminishing. I don't know if that's think that's a reasonably fair statement. Is that -- would you agree with that? And does it argue you take -- be very careful. I mean, you just take your time. There's no rush to do deals if there's limited buyers. Just if you could kind of bloviate on that. Ben Palmer: I think that's a good way to set it up. Yes, there -- I'm not knowledgeable of the entire market. But yes, I don't think there's a whole lot of competition out there for people seeking to buy traditional oil field services companies, but there are some good companies out there that could be ones that would either add to some of our existing service lines. It could be a really good strategic fit, but all of it depending on, of course, trajectory of their business and the price and all of those sorts of things. So yes, we're not in panic. We traditionally don't lean into highly competitive bidding situations. And to the entire point, there's probably not going to be situations where there's multiple bidders aggressively going after a particular target. So I think that's a nice position to be in that we can be patient. We do have the balance sheet, not only the capital capacity, but the cash gives us a lot of flexibility. And so OFS is something we're looking at. But we too want to be -- we want to open up the aperture of what's the possible. We've been doing some things that are on the edges of other parts of energy like some of the gas storage work. We don't have any debt that's of a significant amount, but we like that diversification. And so we're opening up that to look at even more broadly than we may have in the past. Operator: [Operator Instructions] And your next question comes from the line of Derek Podhaizer with Piper Sandler. Derek Podhaizer: Maybe we could just start with some just some additional insight and maybe some history into the updated wireline accounting treatment. Maybe just why now and not when the deal occurred last year. I think you mentioned a change in work type with the wireline. I'm just trying to understand better really what happened that caused this change? Michael Schmit: Sure. Derek, thanks for the question. Previously, they had an audit and previously, they were capitalizing wireline, but the business has started changing about the time that we had the acquisition. It's more simul-frac, [ tunnel ] frac and just working more. So it's something we kept our eyes on and that we wanted to make sure we were comfortable with by the end of the year. We were only depreciating them over 18 months previously, which was kind of where they historically have been. But we knew that the type of work was changing. And so we were just monitoring over the last couple of quarters, how much spend we were having on wireline cables. And we were more comfortable that it's closer to under a year. And so rather than letting it build over time and being aggressive, we thought the right thing to do was within our purchase accounting window. We had enough evidence at this point before year-end to go ahead and make the switch. And we focus a lot on free cash flow here, and it doesn't have a ton of -- it has 0 free cash flow impact. So for us, we just thought it was the correct accounting treatment as we looked at kind of how quickly we were using up the cables, which has really changed and started changing as the work changed. Ben Palmer: Derek, as you know, too, I mean, we and the pumping industry went through this with fluid issues a number of years ago. So it's not dissimilar in that regard. So I appreciate the question. Derek Podhaizer: Right. Yes. No, that was very helpful. I appreciate the color. And yes, it did remind me of the fluid issue years ago. I guess maybe a question on Thru Tubing Solutions. You talked about international regions and your footprint there. Maybe just can you expand on that, maybe to educate us on the location and the type of technology you're deploying there and how you really see that business growing over the next couple of years? Ben Palmer: Yes. Well, with respect to the color on international, we have pared back significantly our international business from where we were a number of years ago. Thru Tubing Solutions has the largest presence internationally of our service lines. The Middle East is where we have the most activity, and that's the area that experienced the weakness that we were referring to. Michael Schmit: In Canada, area where we've done some work historically and have center work up in Canada consistently. Derek Podhaizer: Got it. Is there any renewed focus as far as the Middle East and the build-out of unconventionals and Thru Tubing being a potential growth trajectory for you, maybe reigniting just given the unconventional buildout of the Middle East? Or is that not the correct read-through? Ben Palmer: It's possible. We kind of several years ago, kind of changed our business model there. So we have less of a "physical presence." We're making the tools and the technology available. So yes, I mean, I think our tools certainly can perform very well in those environments like they do here in the states. So I would expect and hope that we would have some improvement there. But like I said, we're not directly there ourselves. So we're working through other groups and making our tools available to them. So we'll have to see. Hopefully, if they can be successful and we can increase the revenues there. So it's not anything that we're counting on in any of our current forecast, but we hope it does come to fruition. Derek Podhaizer: Got it. Okay. That's helpful. And then maybe just a third question, a quick state of the union on the current spot market in pressure pumping. How is the competition? It's always been oversupplied, but you stack the fleet, and I'm sure some of your competitors have stacked fleet. I'm not sure if any of the smaller mom-and-pop privates have gone away, just given where pricing and activity has gone to. Obviously, we have accelerating attrition as well. So maybe could you help us further understand the state of the market today? Do you see competition reducing? Any sort of secular fundamental improvement that we could potentially see in the spot market as we work through the year? Ben Palmer: We're not seeing anything dramatic yet at this point. Of course, there's some of the consolidation that was occurring over the last couple of years has resulted in us selling off some of the properties and things like that, and that brings in some of the customers that are more spotty looking, if you will. So it could create some opportunities, but it's really more of the same. I think discipline. We're trying to be disciplined again with our pricing. Again, one of the reasons we idle the fleet, we trim a little bit of headcount. So we're trying to do what we can to make the best of the situation. We are certainly continuing to maintain the business, but the returns just -- they need to improve, and we're hopeful that competitors. There are some mom-and-pops out there that are difficult to compete with. But we continue to support pressure pumping, but we're focused on some of the other service lines that are less capital intensive, and we'll see where all that takes us. Operator: Your next question comes from the line of Chuck Minervino with Susquehanna. Charles Minervino: I was just wondering if you could talk a little bit about that 2026 CapEx. It sounds like you had some deferred spend from 2025. But then also, I guess, the wireline cable now comes out of the CapEx. Maybe they were offsetting each other. But if they are, you still going to have CapEx up in 2026. So I was just curious if you can kind of touch on that a little bit and if there's maybe room for that to come down if you're looking to generate a little bit more free cash flow during the year? Ben Palmer: Well, I think we put out there, I think it's a conservative number and that it's maybe larger, we could have said something smaller, but we're trying to be realistic with respect to our near-term and longer-term plans. I mean we've always -- certainly, if things move dramatically in one way or the other. CapEx, there's oftentimes long lead times on that. So sometimes you can't immediately cut it off. But we scrutinize our CapEx very, very carefully. Certainly, there's opportunities to reduce it if conditions warrant the way we run the business, our management teams, they look at their plans, they come up with their CapEx plans, but they know that in terms of unapproved or undelivered equipment, it's always subject to us together with them making the decision that we're not going to spend that money. So it's not committed if it's in the budget. That doesn't mean it can be spent. So we scrutinize it very carefully. So there is an opportunity for that number to come down. Likewise, there could be opportunities for it go up slightly, right, if an opportunity comes along that we can pursue. We've got the balance sheet to be able to do that. So -- but yes, we -- everybody understands that at the end of the day, the free cash flow is where the rubber meets the road and everybody buys into that and understands and trying to do what's prudent to be able to support our businesses and selectively grow them, but obviously be very, very mindful and particular and selective about the CapEx investments. We'll continue to do that. Charles Minervino: Got it. And then just one other. In Support Services, I know not a huge piece of the overall revenue pie, but the rental tool revenue down pretty sharply, it sounds like late in the year. I know there's always seasonality late in the year. Was that particularly kind of sharper than you've seen historically? And I was just kind of curious if there was any reason for it or any more color you can provide? Ben Palmer: Yes. It is -- it was more acute. That business, a nice little business that's been really, really steady. So I don't say it was a surprise. I mean this kind of thing can always happen in the fourth quarter. It's kind of -- you can have 1 or 2 customers that slow down for whatever reason. And I think it too was impacted in the Rockies, similar to Thru Tubing Solutions that we talked about. So it's kind of 1 or 2 customer-specific that impacted that. So it's really just -- some of it was not permanent delays. I mean it's just -- obviously, they're a rental tool company and drilling. So this was some delays on drilling some wells. But we believe it's only delays. It was just delaying it slightly. So it's not a lost opportunity or anything like that. It was just a delay. Michael Schmit: The other call out on that is they have a really great third quarter. So I mean, they had a pretty tough comparable. Operator: There are no further questions at this time. I will now turn the call back over to Ben Palmer for closing remarks. Ben Palmer: Thank you very much, operator. We appreciate everybody calling in and listening and look forward to talking to some of you perhaps later today, and hope you have a good rest of the day. Take care. Operator: Today's call will be available for replay on www.rpc.net within 2 hours following the completion of the call. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Greetings and welcome to the W.W. Grainger, Inc. Fourth Quarter 2025 Earnings Conference Call and Webcast. At this time, 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. Now my pleasure to introduce your host, Kyle Bland, Vice President, Investor Relations. Kyle, please go ahead. Kyle: Good morning. Welcome to Grainger's Fourth Quarter and Full Year 2025 Earnings Call. With me are Donald G. Macpherson, Chairman and CEO, and Deidra Cheeks Merriwether, Senior Vice President and CFO. As a reminder, some of our comments today may include forward-looking statements that are subject to various risks and uncertainties. Additional information regarding factors that could cause actual results to differ materially is included in the company's most recent Form 8-Ks and other periodic reports filed with the SEC. This morning's call includes non-GAAP financial measures, which reflect certain adjustments in previous periods as noted in the presentation. There were no adjusting items in the fourth quarter 2025 period. We have also included organic revenue adjustments in the presentation, normalized sales growth reflect our exit from the U.K. Market, including the Cromwell divestiture, and the closure of Zoro UK. Definitions and full reconciliations of our non-GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of this presentation and in our earnings release, both of which are available on our IR website. We will also share results related to MonotaRO. Remember that MonotaRO is a public company and follows Japanese GAAP, which differs from U.S. GAAP, and is reported in our results one month in arrears. As a result, the numbers discussed will differ from MonotaRO's public statements. Now, I'll turn it over to DG. Donald G. Macpherson: Thanks, Kyle. Good morning, everyone, and thank you for joining. Despite the macroeconomic uncertainty and challenging environment in 2025, the Grainger team continued to execute against our strategy, delivering exceptional service and a best-in-class experience for our customers. During 2025, we made strong progress. We leveraged our technology capabilities and MRO know-how to strengthen our competitive advantage in each segment. We streamlined our portfolio by exiting the U.K. Market, invested in new supply chain capacity to extend our service leadership. We did the greater edge each day to foster a workplace environment where team members can build a rewarding career. And we delivered on our financial commitments for the year. Overall, this progress positions us well as we move into 2026. Before I dive into these 2025 accomplishments in more detail, I thought it would be helpful to reiterate our go-to-market strategy and how each of our operating models addresses the needs of MRO customers. Providing a flawless experience and delivering tangible value. This context is important as it drives most of the incremental investment we are making across the business and prioritizes the work our team does every day. Over the last several years, we have invested heavily to build market-leading data and technology capabilities. This includes core product and customer information assets, which have taken on even greater importance as AI accelerates and creates new opportunities to unlock additional value. These data assets underpin our five strategic growth engines and fuel our ability to gain share within our high-touch solutions segment. In 2025, we made great progress across these five areas. In merchandising, we have consistently gained share through this important initiative by building a highly curated product assortment. This includes continued work across our category review process and expanded use of the Grainger brand name within our private label offer. Our category reviews focus on improving product search, organization, and content, and have more recently had an increasing emphasis on new product introductions, including expansion into new categories. Recent examples include efforts to build out a relevant offer to support data center customers, as well as an expanded breadth of factory automation products such as sensors, machine controls, and actuators. In total, our merchandising efforts in 2025 resulted in net assortment growth of over 85,000 SKUs, our largest net SKU growth for the high-touch segment in nearly a decade. In marketing, the team remains focused on delivering strong returns while also finding ways to improve program effectiveness to deliver better outcomes for the dollars we are spending. During 2025, we found new and creative ways to further leverage our advantaged information assets to increase personalization and improve our marketing investment strategy. On the latter, we are leveraging our know-how and machine learning to optimize investment at the SKU level based on our knowledge of relative pricing, product availability, and customer lifetime value. The success we continue to see across this space supports further incremental investment in 2026 and beyond. Moving to our seller coverage initiative, we continue to leverage our improved customer data to expand our force with a focus on underserved business locations. After slowing our pace and adjusting our approach with this initiative in 2023 and 2024, we added around 110 new sellers across two geographies in 2025. This brings our total program expansion to over 300 sellers across six geographies since 2022, more than a 10% increase in our U.S.-based sales team. The collective performance to date of these geographies has been in line with expectations, and we plan to address two more regions in 2026. Our sellers are crucial to providing value for our customers and generating demand, and we remain committed to investing in tools and resources to increase their effectiveness. In 2025, we saw strong usage of our new SellerInsights platform. As you may recall, this platform integrates with existing Grainger data sources to provide sellers with a one-stop-shop customer insights. In 2026, we will leverage AI in this platform to deliver actionable insights, identify new customer contacts, and strengthen leader coaching opportunities. We are just scratching the surface of our potential in this area, and we are excited about the path ahead. Lastly, we continue to see increased demand for value-added services as labor scarcity and cost savings initiatives become customer imperatives. In KeepStock specifically, this has resulted in new customer installations and product category expansions, driving further embeddedness and deeper share of wallet. Additionally, the KeepStock team made progress over the past year further developing customer-facing tools, and we anticipate a broader rollout of these new capabilities to begin in 2026. These tools provide customers access to enhanced data and insights, aimed at improving their user experience and driving procurement cost savings. While it is already a critical part of our offer, we expect KeepStock to become even more valuable going forward. We are excited about the progress we have made across these five strategic growth engines and remain confident in our ability to drive share gain as we execute against these important initiatives. Now, given the critical role that technology is playing in our space, I thought it would be helpful to provide a few use cases of how we are leveraging AI and machine learning across the business. While the ramp curves differ by initiatives, as these efforts mature, they can help increase productivity, enhance service, and create revenue opportunities over time. We have broad experience deploying AI and machine learning, and when underpinned by our differentiated data assets, we can create tremendous value. I have already touched on how machine learning is optimizing our marketing investment strategy and how AI is helping us improve seller effectiveness. On the slide, you can see several other areas of the business where these new technologies are fueling advancements. The point here is to show how prevalent these powerful tools have become and to highlight how we can leverage our data assets to create solutions that add real value to our customers and to our bottom line. We have learned a great deal in the past two years about AI and feel well-positioned to accelerate these efforts moving forward. Moving to the Endless Assortment segment, we made great progress propelling both businesses forward in 2025. At Zoro, the team has regained its growth momentum, focusing on driving improved repeat purchase rates through an enhanced customer experience. Our progress during the year included optimizing the assortment to improve delivery times, launching Zoro-branded private label products, improving the quality of customer acquisitions to enable better repeat rates, enhancing direct marketing capabilities through better analytics, and improving the customer experience through more accurate delivery communication. These actions helped reaccelerate sales growth back into the high teens for the full year. At MonotaRO, the team continues to execute well, driving strong results, including 25% growth of enterprise customers. They continue to improve and expand the distribution capabilities by extending the reach of same-day shipping regions beyond Tokyo and Osaka, while also planning for the future with the groundbreaking of the new Mito DC, outside Tokyo. Similar to High Touch, we have also progressed our AI and ML capabilities across both EA businesses. It is still early innings, but we are using these technologies to drive productivity and accelerate our momentum across the flywheel, and we have included a few examples on this slide. All told, we delivered great results across the endless assortment segment in 2025 and are positioned well to continue this momentum into the new year. Turning to Slide nine, I am very pleased with the continued progress we are making across our distribution network as we stay focused on extending our industry-leading ability to deliver next-day complete orders to customers across both segments. Notably, we made meaningful progress on three new facilities across the U.S. and Japan. The Northwest DC, which is located outside of Portland, is set to start full outbound operations later this year. This building will improve our service and reduce transportation costs throughout the Northwest. We also continue to make great progress with our Houston distribution center and expect inbound operations to begin in 2027, with outbound following a few quarters later. In Japan, MonotaRO is making great progress on their new highly automated DC in Mido, scheduled to open in 2028. This facility, when complete, will nearly double the shipping capacity that MonotaRO has in the country. Outside of new capacity investments, the supply chain team has also worked hard to leverage inventory and transportation solutions to improve service in certain markets, including Florida and Canada. Overall, we continue to invest across our supply chain to ensure that we maintain and extend our leading position in customer fulfillment. The heart of our organization remains our people, who work hard every day to fulfill our purpose to keep the world working. As you can see on Slide 10, our culture was again recognized externally during 2025. We were recertified as a great place to work in the U.S., Canada, and Mexico, affirming our commitment to being an employer of choice and a place where every team member feels valued and empowered. We were honored for the first time as one of the world's most ethical companies, named once again as one of Fortune's most admired companies, and recognized by Glassdoor as the best place to work. These recognitions are a testament to the culture we have built over almost a century in this industry. Grainger will always be a place where every team member can have a fulfilling and meaningful career if they are willing to work hard and serve our customers. Now turning to our full-year financials. 2025 certainly had its share of challenges between shifting tariff dynamics, soft MRO market demand, and the government shutdown. Despite these challenging macro headwinds, we still delivered total company sales growth of 4.5% on a reported basis and 4.9% on a daily organic constant currency basis, with total sales finishing the year at $79.9 billion. Growth for the year included continued share gain from our High Touch Solutions U.S. Business, which finished the year with roughly 250 basis points of outgrowth on a volume basis. The endless assortment segment showed significant top-line improvement with daily organic constant currency sales up 15.6%. Both Zoro and MonotaRO continue to win with their core B2B customer base and drive improved repeat purchase rates, positioning them well for the future. Alongside the solid top line, the team also did a nice job managing strong margins despite LIFO headwinds, with operating margin finishing at 15% for the year. We delivered adjusted EPS growth of 1.3% to $39.48 per share, ROIC finished at 39.1%, and operating cash flow was $2 billion, which allowed us to return $1.5 billion to Grainger shareholders through dividends and share repurchases. Overall, I am proud of what we accomplished in 2025. We continue to focus on improving in core areas of the business to perform well over the long term. With that, I will turn it over to Dee to review our fourth-quarter results. Deidra Cheeks Merriwether: Thanks, DG. I want to echo DG's sentiment on our 2025 performance. Not only did we make progress on a number of strategic initiatives, but the team was also able to drive top and bottom-line results within the original 2025 outlook we provided a year ago. A strong outcome despite the challenging macro environment we faced. Now turning to our fourth-quarter results. We had another solid quarter to finish the year with results roughly in line with expectations. For the total company, daily sales grew 4.5% or 4.6% on a daily organic constant currency basis, which included growth in both segments. Sales were healthy in the period despite softness during the start of the quarter from the government shutdown and the lapping of a prior-year hurricane-related sales benefit. If you were to normalize these events, sales for the total company would have been up approximately 6.5% for the quarter on a daily organic constant currency basis. Total company gross margins for the quarter were strong, ending at 39.5%, down about 10 basis points over the prior-year period, driven by segment mix headwinds from faster-growing endless assortment. Operating margins were down 70 basis points year over year due to increased SG&A expense, which came in higher than expected in the period due to unforeseen healthcare costs above our normal run rate and a softer top line in the high-tech solutions segment. Overall, we delivered diluted EPS for the quarter of $9.44, which was down 2.8% versus 2024, but above the midpoint of our implied fourth-quarter guide. Moving to segment level results. The High Touch Solutions segment delivered sales growth of 2.2% on a reported basis or 2.1% on a daily constant currency basis. Results included nearly three points of price inflation for this segment, showing meaningful sequential improvement as tariff costs continue to be passed. From an end-market perspective, our indicators suggest the MRO market gained momentum sequentially but remained muted in the period. For Grainger specifically, we saw strong performance with contract and manufacturing customers, which helped to offset slower growth in other areas of the business, including year-over-year softness in the government end market. If you were to normalize government sales for the impact of the shutdown and the prior-year hurricane-related sales benefit, sales for the high-touch segment would have been up roughly 4.5% for the quarter on a daily constant currency basis. On profitability, gross margin finished the quarter at 42.3%, flat versus the prior year. We continue to see tariff-related inflation, which caused further LIFO inventory valuation headwinds, although the magnitude of these charges came in favorable to our expectations. These charges were offset by positive mix and a number of other smaller tailwinds. Price cost on a LIFO basis remains negative but improved in the quarter as our pricing actions took hold. Similar to last quarter, if we excluded the LIFO headwind and we wanted to compare ourselves to our peer set, which report on LIFO, our implied FIFO gross margin rate would have increased year over year with price cost roughly neutral on this basis. On SG&A, margins delivered in the period as payroll and higher-than-expected healthcare costs, along with continued marketing investment, were only partially offset by productivity. We also saw a softer top line in the period due to the impact of the government shutdown, which further weighed on margins. Taking all this together, operating margin for the segment finished at 15.8%, down 120 basis points versus the prior-year quarter. Before moving on, I want to share a brief update on where we are with tariffs. In the fourth quarter, we remained engaged in active dialogue with our supplier partners and took modest price increases in November to help offset continued cost pressure. These actions were on top of the price increases in May and September when we began to pass through tariff-related costs. In January, we passed further price in response to previously delayed tariff inflation and to offset annually negotiated cost increases with our suppliers, which were largely in effect as of February 1. These actions are net of a partial rollback on certain Chinese tariffs announced at the end of last year. As we look ahead, we have passed the majority of known tariff-related costs to date, but the situation still remains fluid. Importantly, our team is staying agile, and we remain confident in our ability to adhere to our core tenets to reach price cost neutrality over time while maintaining competitive pricing. Donald G. Macpherson: Turning to Slide 16. U.S. Business. We wanted to share an update on our volume outgrowth for the High Touch Solutions segment. When we last spoke about outgrowth in detail, it was during the first quarter of 2025 as we observed a meaningful inflection in the underlying single-factor benchmark that we use to measure MRO market volume. This inflection was misaligned with what we were seeing on the ground with our MRO customers and likely caused by shifting macroeconomic dynamics and bifurcation across industries. These dynamics are driving where tariffs are impacting demand in some industries while others are experiencing a tailwind, notably those tied to aircraft manufacturing and data center build-out. As we have been discussing over the past few years, we built a separate market model back in late 2023 after a sustained period of dislocation between what we were hearing from customers and what the single-factor model was implying about market volume growth. This multifactor model was developed after testing over 1,000 publicly available economic indicators to find the best combination of explanatory factors with a high correlation to underlying U.S. Economic census data for MRO products. Specifically, the model pulls in several different supply and demand factors, including net core capital goods shipments, import-export dynamics, and end-user activity to formulate a comprehensive view of the MRO landscape. When comparing the two model inputs side by side, while neither model mirrors the exact weight of Grainger's customer end markets, the multifactor model does capture a broader base of end-market activities outside of manufacturing while also eliminating non-MRO product categories. Further, the multifactor model captures a more dynamic view of the economy, relevant trade flows, and shows a stronger correlation to underlying MRO product consumption data. And while the inner workings of the multifactor model are less accessible externally, and no model is perfect, the comprehensive nature of the model would suggest it more accurately reflects the performance of our market, specifically in periods of economic disruption or change. With this context in mind, if you turn to Slide 17, we have charted the historical results for both models, starting with the point at which economic inputs were first published for the multifactor model. As you can see, the two models are highly correlated, and over this twenty-plus year period, the average annual growth rate is nearly identical. However, the models do experience disconnects during periods of macroeconomic shifts. Typically, when the multifactor model trails a single-factor model or vice versa, it eventually catches up, but the duration of these dislocations is unpredictable. As you see, we have experienced a prolonged period of dislocation since the pandemic, including each model moving in opposite directions after new tariffs were enacted in early 2025. It is unclear to us how long this diversion will last. With this, given its comprehensive nature and the fact that we have studied each model exhaustively over the last couple of years, we are more confident in the demand signals from the multifactor model. And we will use it to measure our outgrowth progress going forward. On this basis, turning to Slide 18 and using our multifactor MRO model, we estimate that Grainger finished full year 2025 with roughly 250 basis points of outgrowth on a volume basis as our High-tech Solutions U.S. Business grew volume by 1.4% compared to our multifactor MRO model, which was down between 1.5% and 0.5% for the year. Albeit short of our 400 to 500 basis points long-term target, we are continuing to take healthy share. Marketing and merchandising remain our largest contributors to outgrowth, and on a go-forward basis, we are anticipating a more consistent impact from seller coverage and seller effectiveness as new geographies ramp and seller tools mature. Overall, we remain confident in our strategic growth engines and their ability to drive share over the long term and continue to target 400 to 500 basis points of average annual outgrowth over time. Now focusing on the endless assortment segment. Sales increased 14.3% on a reported basis or 15.7% on a daily organic constant currency basis, which normalizes for the FX headwinds realized in the period and the closure of our Zoro UK business. Zoro U.S. was up 16%, while MonotaRO achieved 18.4% growth in local days and local constant currency. At a business level, Zoro continues its momentum, driving strong growth from its core B2B customers along with improving customer retention rates. At MonotaRO, sales remained strong with continued growth from enterprise customers, coupled with solid acquisition and repeat purchase rates with small and midsized businesses. Additionally, MonotaRO experienced increased web traffic stemming from a competitor's cyber outage, which provided a tailwind to sales in the period. On profitability, operating margins increased by 200 basis points to 10.6% with favorability across the segment. MonotaRO margins remained strong at 13.6%, up 100 basis points, and Zoro margin improved to 6.3%, up 260 basis points, with both businesses benefiting from gross margin flow-through and healthy top-line leverage. Overall, we are proud of the exceptional performance throughout 2025 within the endless assortment segment and look to continue the momentum this year. Moving into our outlook for 2026. At the total company level, we expect revenue to be between $18.7 billion and $19.1 billion, driven by growth in both segments. This translates to daily organic constant currency sales between 6.5% and 9%, which is 230 basis points higher than reported sales growth at the midpoint, after adjusting for FX headwinds and the impact of our exit from the U.K. Market. Within our High Touch Solutions segment, we expect daily constant currency sales growth between 5% and 7.5%. In the U.S., we anticipate continued demand pressure as tariff-related price increases weigh on market volumes. And while we expect industry-specific tailwinds in certain areas of the economy will persist, many of these green shoots are outside of core MRO product categories. With this, while we acknowledge falling interest rates and other macro factors could reverse the multiyear volume contraction in our industry, we are conservatively modeling the market to be down 1.5% to flat. On share gain, we are assuming outgrowth improves through the year as we ramp investment and gain traction with our growth drivers. We expect this will deliver outgrowth at or below our long-term target range in 2026. Lastly, we expect meaningful price contribution to revenue, which includes the wrap of 2025 actions and incremental price this year to fully catch up on the costs we are seeing from suppliers. This price contribution factors into the partial rollback on certain Chinese tariffs announced in November, which excludes any impact from future unknown tariffs or rollbacks that may or may not occur in 2026. In the endless assortment segment, we anticipate daily organic constant currency sales to grow between 12.5% and 15%, in the range of their long-term framework. This segment-level growth will be roughly 230 basis points lower on a reported basis when you normalize for the expected foreign currency exchange headwinds and the closure of our Zoro UK business. At the business unit level, Zoro is anticipated to grow in the low teens as they continue their momentum in driving higher repeat rates, consistent service, and improved mid-funnel marketing. MonotaRO is also expected to grow in the low teens in local days and local currency, which normalizes for one less Japanese selling day in 2026 and expected FX headwinds from the yen. This strong performance is fueled by growth with new and enterprise customers, strong repeat rates with core B2B customers, and a carryover benefit from the competitor cyber outage. Moving to our margin expectations. We expect total company operating margins to range between 15.4% and 15.9%, up 40 to 90 basis points compared to 2025. This reflects improvements in both segments as well as a 45 basis points tailwind from our exit of the U.K. Market, split roughly evenly between gross margin and SG&A leverage. In the High Touch Solutions segment, we expect operating margins between 16.9% and 17.4%, up 35 basis points at the midpoint. Gross margin will improve as price cost normalizes and LIFO inventory valuation headwinds subside in the back half of the year. This favorability is partially offset by a modest headwind from our private label portfolio, where tariff dynamics have changed competitiveness on certain SKUs. We expect SG&A leverage to improve as the accelerating top line and our productivity efforts offset ramping investment across our demand generators. In endless assortment, we anticipate operating margin will continue to ramp between 10% to 10.5%, up 20 to 70 basis points versus 2025. Gross margins are expected to be down slightly at the midpoint, and we expect continued healthy operating leverage improvement in both businesses. Our closure of Zoro UK is also positively contributing to segment-level operating margin. Turning now to capital allocation. Our business is positioned to generate strong cash flow in 2026, with expected operating cash of approximately $2.1 billion to $2.3 billion, reflecting conversion of around 100%. Our capital allocation priorities remain consistent and largely unchanged from prior years. We will continue to invest in the business with CapEx in the range of $550 million to $650 million, supporting supply chain initiatives, construction of new facilities in the U.S. and Japan, and ongoing technology and data investments. We will pursue selective inorganic opportunities while maintaining strategic and price discipline, and beyond investment, we expect to return excess cash to shareholders through dividends and share repurchases. We will formally set the 2026 dividend in the second quarter but again anticipate high single to low double-digit annual increases. Share repurchases related to Grainger common stock are expected to be around $1 billion for the year. Overall, our return-focused philosophy gives us flexibility to invest efficiently while delivering strong returns for our shareholders over the long term. In summary, at the total company level, we plan to grow the top line by 4.2% to 6.7% on a reported basis or 6.5% to 9% on a daily organic constant currency basis, which normalizes for FX headwinds and our exit of the U.K. market. You can see margin improvement through the P&L, which reflects the previously mentioned tailwinds from the U.K. exit, gross margin recovery, and healthy leverage in both segments. These margin benefits will be partially offset by continued segment mix headwinds as endless assortment grows faster than high touch. We are expecting the effective tax rate in 2026 to be roughly 25%, about 130 basis points unfavorable versus the prior year adjusted rate, mainly due to the impact of recent federal tax law changes and the lack of one-time tax planning initiatives that will not recur in 2026. Taking all this together, including our share repurchase outlook, we expect EPS of $42.25 to $44.75 per share, up over 10% at the midpoint. From a seasonality perspective, we expect year-over-year sales growth to be relatively consistent as we move throughout the year on a daily organic constant currency basis. Gross margin will deviate from its normal seasonality given LIFO and price cost dynamics as we comp over tariff headwinds in the prior year and reflect the impact of this year's annual Grainger Show meeting. With this, first-half gross margins will be at or slightly below our annual guide before rebounding in the back half of the year as the tariff-related impacts subside. Operating margin will follow a similar trajectory, where the first half is at or below our full-year guide before rebounding in the back half of the year. The first quarter is off to a strong start with preliminary January sales of over 10% on a daily organic constant currency basis. This start supports our expectation for the first quarter sales of around $4.5 billion to $4.6 billion, up north of 7.5% on a daily organic constant currency basis or roughly 200 basis points lower on a reported basis. First-quarter gross margins will remain healthy but decline sequentially versus 2025. This differs from our normal seasonal pattern as we continue to face tariff-related pressures and reflect the impact from the Grainger sales meeting, which flips to a gross margin headwind in 2026. This gross margin pressure will be offset by sequential leverage improvement, and we anticipate first-quarter operating margins will be just north of 15% for the total company. Lastly, as I have consistently done at the end of the past few years, I have included our long-term earnings framework for reference. The only change from the last time I shared this framework is a modest change to our go-forward tax rate assumption to reflect new federal legislation. Importantly, all the core operating tenets of this framework remain intact. We are well-positioned to deliver great results for our shareholders for years to come. With that, I'll turn it back to DG for some closing remarks. Donald G. Macpherson: Thanks, Dee. Before I open it up for questions, I want to acknowledge our nearly 25,000 Grainger team members who consistently demonstrate our principles and drive strong performance for Grainger. Every day they show up, start with a customer, and compete with urgency to deliver on our purpose and create an exceptional experience. Looking ahead, I'm excited about how 2026 is shaping up and confident in our ability to extend our advantage for the long term. Regardless of the environment, we will continue to provide a best-in-class MRO offer while investing in the core of our business, an industry-leading distribution network, and innovative technology capabilities. By staying focused on what matters most to our customers and creating a great workplace for our team members, we are poised to deliver continued growth, share gain, and strong returns for our stakeholders. With that, I will open it up for Q&A. Operator: Thank you. We will now be conducting a question and answer session. Our first question today is coming from David Manthey from Baird. Your line is now live. David Manthey: Hey, good morning, everyone. My first question is a statement really, 10% growth daily organic constant currency in January looks pretty good. As we're looking at Slide 21 and thinking about your guidance for the high-touch business, it looks like share gain similar to 2025. Pricing is a key delta there at up about 300 basis points. But you also have market growth at minus 1.5% to flat, which is the same backdrop you had in 2025. And given other industry participants and what you're seeing in January, could you just talk about what drives your cautiousness for the year overall? Donald G. Macpherson: Yeah. So thanks for the question. So, you know, as we plan, we always start planning relatively conservatively. There's no advantage in planning for growth that we haven't seen yet. What I would say about January, certainly, it was strong across the board. We did get a bit of a tailwind from the competitive outage in Japan that adds a little bit to that total as well. As Dee described, we're pretty confident in sort of that 7.5 number for the year. So we feel like maybe a little bit better start than we expected, and we may be wrong on the market, but that's always a variable that we have. David Manthey: Yes, sounds good. And then I wonder if you could give us an update on digital channels. A few years ago, you told us KeepStock was 16%, Website 30%, and 25% of order origination. Don't know if you have those offhand or we could take one. Donald G. Macpherson: Yeah. Sure. So, what I would say is everything direct connection to customers has become more of our share. So, actually, eDiePRO is the biggest share we have at this point. Closer to 40 at this point. GCOM is still a big part of that, and then KeepStocks growing a little bit as well as a percentage of the total. So the vast majority of our contract customers now have a combination of ePro and KeepStock on-site. And so that's a big part of what we do in terms of creating stickiness and creating value for our customers. David Manthey: Alright. Thanks, DG. Operator: Thank you. The next question today is coming from Jacob Levinson from Melius Research. Your line is now live. Jacob Levinson: Hi, good morning everyone. Deidra Cheeks Merriwether: Good morning. Jacob Levinson: Maybe just thinking about David's question a little bit of a different way, DG, if you talk to your customers, your large customers, can you just give us a sense of what the tone of those conversations have been like? Because it certainly feels like we've seen some sort of cyclical inflection this quarter. Obviously, ISM, for example, I'm just trying to get a sense of when you talk to the CEOs, your peers, what the tone of those conversations are like, particularly if we're talking, you know, more of the rate-sensitive end markets, not necessarily aerospace or data center. Donald G. Macpherson: Yeah. I think the tone hasn't changed too much. There's no I'd say there's no panic, but there's not really enormous tailwinds that people are seeing from a volume perspective. I think everybody is seeing price, which obviously helps with the revenue numbers. But generally, you know, it's very, very industry-specific at this point. So you can run the gamut from very, very high optimism to fairly strong pessimism as well. Overall, I think the mood is okay, but not expecting huge, huge market growth. Jacob Levinson: Okay. That's helpful. And on the medium customer front, it seems like there's been quite an acceleration there the last couple of quarters, and I'm not sure if that's a structural change in how you're approaching those customers or maybe there's some price in there, but maybe you could speak to what's really driving that? Donald G. Macpherson: Yeah. I mean, it's a little bit of acceleration. There were some comps that we had that make it look a little bit favorable. We certainly are focused on growing with midsized customers, and a lot of things we do in merchandising help those efforts. So, it's good to see a little bit of traction, but it's not a huge inflection point, although we expect to continue to grow midsize faster than the rest. Jacob Levinson: Fair enough. Thank you, DG. I'll pass it on. Operator: Thank you. Next question is coming from Ryan Merkel from William Blair. Your line is now live. Ryan Merkel: Hey, everyone. Thanks for the question. I wanted to start with gross margins. I guess a two-part question. First, gross margins in 4Q were a little bit better than we were thinking. Where did the upside come from there? And then you put a finer point on first-quarter gross margins? I think you said down sequentially just what was the reason? Thank you. Deidra Cheeks Merriwether: Yes. Hi. The main headwind that we received in the quarter was really related to LIFO. So we had kind of laid out, you know, that LIFO would be a little bit more negative than what it actually came in, you know, still increase what softer than that. So that helped us out from a gross margin perspective. And then as we continue to talk about, we did continue to take price. So price helped offset that a little bit in the quarter. So those were the two largest things that impacted Q4 from a gross margin perspective. Ryan Merkel: And then in Q1, we do expect some of those LIFO costs to shift into Q1 as well. Deidra Cheeks Merriwether: Correct. Ryan Merkel: Okay. So it's really LIFO, which is why gross margins are down sequentially into 1Q? Deidra Cheeks Merriwether: Yes. Yes. Okay. Alright. Yes. The other piece in the first quarter is related to it. You heard in prepared remarks we discussed the Grainger sales meeting. And so anytime we have customers attend the Grainger sales meeting, which is every other year, then our supplier rebates due to our accounting methodologies allow us to offset a portion of those rebates in SG&A. So therefore, it becomes a headwind on GM. And so that's gonna happen in 2026 as well. Donald G. Macpherson: So it's a headwind to GP and a positive to SG&A again. Deidra Cheeks Merriwether: Net net neutral operating margin. Ryan Merkel: Okay. That's great. Thanks for that. And then for the '26 margin guide, it doesn't look like there's a lot of organic margin lift ex Cromwell. For example, at the bottom end of the guide, I think margins are flat. So what are some of the key factors in the margin guide? And think you said gross margins for the year are going to be flat to down. Deidra Cheeks Merriwether: Yes. If you look at it year over year, 25% to 26 don't forget, EA is going to continue to grow faster than high touch, and that's a headwind for us. Of about 10 basis points. You as you noted, The UK market exit is gonna be a tailwind for us. And then when you look at high touch, there's a lot of puts and takes there. We talked a little bit about, you know, Grainger sales meeting, price cost, and the LIFO tailwind that we will get mostly in the second half. Gonna contribute about 20 basis points. So when you add all that together, that's a 30 basis point difference between where we ended in 2025 to where we believe we will end in 2026. Operator: Thank you. Our next question is coming from Christopher Glynn from Oppenheimer. Your line is now live. Christopher Glynn: Thanks. Good morning, everyone. Just in terms of the continued outgrowth for HTS, obviously, it's been resilient in some very varied macro environments. But I'm just curious what you think is really behind the differential in the current trend line versus the long-term expectation? Donald G. Macpherson: Yeah. I think that, you know, I would point you to a couple of things. Certainly, some factors were out of our control. We have more exposure to government. The government shutdown hurt the share gain in this year. But we also, if you remember, paused some more seller ads a couple of years ago when they weren't we weren't seeing the performance we needed to see and adjusted, and now we are seeing the performance, so we've reaccelerated that. But that's had an impact over the last couple of years as well. I would say that we're seeing good things in that front. Seeing good things at seller effectiveness. We're seeing good things in on-site performance with KeepStock. We also, along with marketing and merchandising, we're pretty bullish around net contracts that we've been seeing recently. So that's a positive force as well. So we think all that's gonna get us, get that improvement that we wanna see. Christopher Glynn: Great. And then on the comment on seeing improved endless assortment, repeat rates. Just wondering if you could double click on that. Donald G. Macpherson: Yes. I mean, the business has been super focused on getting consistent purchases from core business customers. They've changed a lot. I won't go into the details of some of that's probably not worth sharing other than to say, the way we're acquiring customers, what we're doing with marketing, the way we're talking about service and communicating service delivery, promise to customers. All that has helped, and they've seen significant increases in repeat rates over the last eighteen months. So it's good to see. Christopher Glynn: Great. And just a quick cleaning. Dee, could you remind me what the January or the January guidance for organic ADS was? Deidra Cheeks Merriwether: Seven point seven point five yes. Christopher Glynn: Great. Thank you. Operator: Next question today is coming from Tommy Moll from Stephens. Your line is now live. Tommy Moll: Good morning and thank you for taking my questions. Deidra Cheeks Merriwether: Good morning. Tommy Moll: DG, I wanted to follow-up on your comment a second ago about the trend below your target for long-term outgrowth in recent years? Point taken, on the pause that you've communicated previously on the seller ads. But if we just look high level here, you had outperformance versus your target pretty meaningfully during the years 'twenty two and 'twenty three. So I would I'd characterize what those had in common as an external stress on the supply chain, just globally, where you had scale, your competitors lack scale, that that nets to your benefit. If we think about a lot of the other years, there's a more normalized environment where you're performing below that 400 to 500 target. Is the simplest answer here, not just that 400 to 500 is an average, but you're really gonna punch above that in times of stress in the market. And in a, quote, unquote, more normalized environment, you're probably gonna be a bit below the target. Donald G. Macpherson: I think that, certainly, we handled that supply stress well. I would definitely agree with that. It was a smaller portion of we had 875 basis points of outgrowth two years in a row. It was a small portion of that total. So I do think that may be a general statement to make that could be true, but I don't think I do think we've averaged 540 basis points through the last five years of outgrowth, and we expect to be able to get to that 400 to 500 mark again. So I think that, you know, some of that is just our own execution and some of its external factors, as I mentioned before. Tommy Moll: Okay. On that execution point, you mentioned for seller coverage, you're going to add I think you added two markets last year, add two more this year. If you look across the folks you're hiring, these roles, in an increasingly digital environment. Are you targeting different types of sellers than you have historically? And if you think about the average tenure of the folks you're hiring in these new geos, does it skew perhaps below the average tenure of the rest of your sales force? Donald G. Macpherson: I'd say that the process we usually add sellers hasn't changed all that much. We're looking for general selling skills and some sort of interest in the types of product we sell and the environments we sell in. And that hasn't changed much. I think there's a broader trend here that has been an important one from our customers, which is generally a lack of mechanical talent, I'd say. It's I'm not sure that's the right word, but I'm sort of say that. There are fewer people who are mechanically inclined. And it's actually been good for us in many ways as customers have asked to do more on-site. And so that's a trend that we do see. But in terms of who we're hiring, we're still looking for a lot of the same skills we've performed in the past. Tommy Moll: Thank you. I appreciate the insight. We'll turn it back. Operator: Thank you. Next question is coming from Chris Dankert from Loop Capital Markets. Your line is now live. Chris Dankert: Good morning. Thanks for taking the question. I guess like you said, we've seen some nice market share gains and some optimization of what's within Grainger's control here the past couple of years. But just looking back at the market share numbers, it looks like we're guiding for a fifth consecutive year of contraction in the market. Maybe just does it imply we're in an impaired or shrinking market? Does that imply that reshoring is a bit of a mirage? I just maybe, DG, what do you see when you see that contraction five years running? What is where do you pulling out of that? Donald G. Macpherson: I think if you look over a thirty-year history, the reality is that manufacturing activity has been pretty stable in the U.S. It hasn't been increasing much, and employment has gone down. I think that sort of gives you a sense that long term, from a volume basis, our market has never been a fast-growing market. So that's why we have the earnings algorithm we have gain share consistently, a little bit of price, and then managing and get SG&A. That's what we have to do. I think in all industrial markets, you would see something similar, to be honest. And when you studied industrial markets in the past, it's not most of them are not fast growth markets. Chris Dankert: Fair. Fair. I guess just shifting gears a bit to the digital investment. I know a lot of your peers look at clicks to success. Maybe just is that a metric you guys track any kind of color you can give us on improvement there? Is there a different KPI that you measure with the digital investment and the AI investment? Just any thoughts there? Donald G. Macpherson: Well, so, are you asking about, like, online? How we measure success online? Chris Dankert: Yeah. Just how quickly customers can kinda get to what they need digitally online. Yeah. Donald G. Macpherson: Oh, yeah. Yeah. Yeah. So we look at a whole bunch of metrics. We track the process sort of soup to nuts as we look at it. And, certainly, conversion rate, which is, I think, what you're talking about is a big metric that we do look at. For sure. And we also do a lot of surveys to understand competitiveness, and how we do competitively on a bunch of digital sort of factors. And so I'd say we're super well measured in that space. Chris Dankert: Got it. Thanks so much. Operator: Thank you. Next question is coming from Stephen Volkmann from Jefferies. Your line is now live. Stephen Volkmann: Hi, good morning. Most of mine has been answered, but I wanted to go back, Dee, to your slide around tariffs, which is helpful. But is the message that you've now priced for all the tariff increases that you've seen? Deidra Cheeks Merriwether: So, yes. We have essentially passed through all known tariffs and are working in this quarter to also correct for some of the Chinese tariffs that were rolled back in November. So based upon our annual cost negotiations that the team went through in the back half of 2025, we feel like we're fairly caught up in passing, you know, cost onto customers at this point in time. Now anything in the future that is unknown, whether, you know, for additional tariffs or further rollbacks, we have not included any estimates of that nature in our outlook. Stephen Volkmann: Okay. Great. And it seems like, in some of the businesses that we follow, some producers have been pretty slow to pass these price increases through. Do you think your suppliers are kind of where they need to be? Or do you think there's a good chance that we'll see additional sort of pass-throughs as the year progresses? Donald G. Macpherson: So what I would say is suppliers had choices to make, and their choice was usually do I pass dollar amount or do I pass percentage? And so I think overall, we're somewhere between dollar and percent is what I would say. What we've seen from our suppliers. That doesn't mean necessarily that they need to add any more price. I don't think that would drive that necessarily at this point. Stephen Volkmann: Okay. Great. Thank you, guys. Operator: Thank you. Next question today is coming from Guy Drummond Hardwick from Barclays. Your line is now live. Guy Drummond Hardwick: Hi, good morning. Deidra Cheeks Merriwether: Good morning. Guy Drummond Hardwick: I think last year, the growth in underlying operating expenses was 5%. It looks like the guidance for this year is better than that, like just on the 4%. Same particular reason for that. Was that just the benefit of the Cromwell operating expenses dropping away? And I think the OpEx ratios were worse for Cromwell than the overall group. But you also said in the prepared remarks, sorry, maybe I'll let just leave it at that and let you just mention that before I follow-up. Donald G. Macpherson: It's a lot of Cromwell is the answer. And then there's more leverage in EA and High Touch as well, but a lot of it is Cromwell. Guy Drummond Hardwick: Okay. And you also said in your prepared remarks that marketing and merchandising is a big driver to outgrowth. So given that you're guiding to a much greater outgrowth this year than last year, I mean, should we assume that your OpEx is factored in that higher merchandising and marketing expense for 2026? Donald G. Macpherson: Yes. Yes. That's right. That's right. Guy Drummond Hardwick: Okay. Got it. Thank you. Operator: Thank you. Our next question today is coming from Chris Schneider from Morgan Stanley. Your line is now live. Chris Schneider: Thank you. I hopped on a little late, so I apologize if this got discussed. But could you provide the level of price embedded in the '26 guide? And then specifically, how much is wrapped from the intra-year actions in '25? How much is new price? And has there been any growing pushback to price in the market from customers? Thank you. Deidra Cheeks Merriwether: Yes. So generally, we've noted in the prepared remarks that our price into 2026 is north of three. And then if you look at all the wrap and price that and run rate price that we've discussed previously, we believe that amounts to about two and a half to three of that. All in 2026, we're north of 3% for price. Donald G. Macpherson: And we haven't seen tremendous pushback from customers. The elasticity has been what we did generally expect at this point. Chris Schneider: Thank you. I appreciate that. And then if I could follow-up on the earlier point that gross margin would be down sequentially into Q1. Obviously, different than normal seasonality. I'm not sure it's ever been down sequentially into Q1. I guess, you just kind of maybe help unpack some of the moving parts there? Because it seems like the price cost improved as Q4 went on following the November price action. I would have just thought that you would have a continuation of that into Q1. And I would have also thought maybe Q1 would have, you know, the full realization of the benefit from Cromwell going away. That probably not fully reflected in the Q4 gross margin. So just any color on some of the moving parts there would be helpful. Thank you. Deidra Cheeks Merriwether: Sure. So, again, LIFO even in 2026, will continue to be a headwind because, of course, we are passing and have received new costs from customers. That does subside as the year goes on, but Q4 to Q1, that is a headwind. We talked about the Grainger sales meeting. I don't know if you were on for that. But that is a 20 basis points drag as well. This is the year where we have customers at the show, and supplier rebates that would normally remain up in gross margin go down to SG&A to offset some of the SG&A costs. So then that becomes a headwind this year, a tailwind in next year when we have no customers. And then you may have heard us talk, we haven't talked about it as much today, but our private label business with the tariff impacts and looking to remain competitive based upon where we actually manufacture those products and being able to pass on the tariff increases, mostly we have done that at rate like DG just noted. So that creates a headwind in gross margins for us. Specifically as customers are transitioning to a national brand. For some of those products. So that's also a drag. And then what you noted was, like, the normal seasonality recovery, price cost favorability, things like that. That is accounted for as a positive, but it's only about 10 basis points. So all those things together take us from 39.5 to 39.1 percent Q4 to Q3. Chris Schneider: Thank you. I appreciate that. Operator: Thank you. Our next question is coming from Connor Maniglia from Bernstein. Your line is now live. Connor Maniglia: Great. Thanks for having me this morning. Just a quick one. On Slide eight, you touched on the Zoro branded private label product. You talk a little bit about the progress you've seen so far maybe just some customer feedback, repeat rates, etcetera? Then can you speak to the margin impact on the business overall? Donald G. Macpherson: It's not material enough at this point to have any impact on the margins, but we have seen good early success in repeat rates and that core business customer that Zoro serves really likes the Zoro private brand that we've launched so far. Operator: Thank you. We have reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments. Donald G. Macpherson: Great. Thanks, everyone, for joining today. Really appreciate it and thanks for the questions. You'll have many opportunities with our IR team after the meeting if we didn't get to you. I just want to reiterate the fact that we feel really good about how things are set up moving forward. We are hearing positive things from our customers. We're providing great service. And we're getting some of the growth drivers accelerated again. So look forward to having a great year and look forward to seeing you out. Thanks so much. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
Operator: Welcome to the MPC Fourth Quarter 2025 Earnings Call. My name is Julie, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Kristina Kazarian. Kristina, you may begin. Kristina Kazarian: Welcome to Marathon Petroleum Corporation's Fourth Quarter 2025 Earnings Conference Call. The slides accompanying this call can be found on our website at marathonpetroleum.com under the Investors tab. Joining me on the call today are Maryann Mannen, CEO, Maria Currie, CFO, and other members of the executive team. We invite you to read the safe harbor statements on Slide 2. We will be making forward-looking statements today. Actual results may differ. Factors that could cause actual results to differ are included there as well as in our filings with the SEC. With that, I'll turn the call over to Maryann. Maryann Mannen: Good morning. And thank you for joining us. As Kristina shared, Maria Currie, our CFO, is joining us on this call. She has over 25 years of broad industry experience as a global finance business executive. Maria's background in operational excellence, cost competitiveness, financial planning, and risk management, as well as her global background, are complementary to our leadership team. Her experiences will add a unique set of perspectives. I look forward to Maria's contributions to further our commitment to delivering leading cash generation and capital returns. In 2025, Marathon Petroleum Corporation delivered results that demonstrate the strength of our business and the momentum ahead. Our team's disciplined planning, operational rigor, and commercial excellence translated into strong performance throughout the year. For the full year, we achieved margin capture of 105% and refining utilization of 94%, demonstrating the reliability and competitiveness of our fully integrated value chains. Our midstream segment grew adjusted EBITDA year over year, reaching a record of nearly $7 billion. We generated $8.3 billion in cash from operations, reinvested back into the business to enhance our competitiveness, and advanced high-return investment opportunities. We returned $4.5 billion through share repurchases and dividends. Our operational execution provided the foundation for our financial performance. We delivered our strongest company-wide process safety performance in the last four years. We achieved the lowest OSHA recordable injury rate as well and had our fewest designated environmental incidents this decade. These outcomes reflect our commitment to safe, reliable, and environmentally sound operations. As we look ahead, we remain constructive on refined product demand. Over the past year, global consumption trends have been steady. Gasoline and distillates each grew by roughly 1%, and jet fuel demand increased nearly 4%. Based on current global consumption indicators, we expect these patterns to continue into 2026. The global refining system is expected to remain tight, with limited new capacity coming online in 2026. Regional closures, such as the Pierce facility in California this spring, only further tightened the US markets. We expect refined product demand growth to outpace the net effect of capacity additions and rationalization through the end of the decade. Nearly 50% of our crude usage is sour crude. Our refining system is exceptionally well tooled to source and process incremental barrels across sour grades as they come to market. Today, prices for Canadian barrels have been the most compelling. However, we have the ability to quickly pivot to Venezuelan crude at our Garyville refinery, as well as other refineries across our system, should the economics warrant it. While we continue to see structural demand growth across refined products, our capital strategy remains disciplined. For 2026, we plan to invest roughly $700 million in refining value-enhancing capital, reflecting a nearly 20% reduction year over year. Our spend is focused on lowering operating costs and enhancing system reliability while improving our ability to convert lower-value inputs into the high-value products the market continues to demand. Roughly 85% of our planned refining spend is directed toward multiyear investments at our Galveston Bay, Garyville, Robinson, and El Paso refineries. These investments will further strengthen the long-term competitive position of these assets. Within marketing, we plan to invest $250 million to expand the reach and presence of our branded stations in targeted markets. These investments support long-term secured offtake, drive strong value capture, and enhance the performance of our fully integrated value chain. Our integration from crude supply through branded product placement remains a clear differentiator versus our competitors. This morning, we announced three new projects that underscore both the strength of our portfolio and our confidence in the long-term fundamentals of the refining sector. The first is at Garyville, where the intent is to optimize the refinery's feedstock slate. This should enhance margins by increasing crude throughput by 30,000 barrels per day and reducing our reliance on higher-cost intermediate purchases. We expect to spend about $110 million in 2026. This incremental crude capacity should be online by 2027. The second is another investment at Garyville, which builds on that optimization objective. It increases yield flexibility and enables us to produce an additional 10,000 barrels per day of export-grade premium gasoline, setting our commercial team up to meet strong international demand. Capital spend in 2026 is expected to be $50 million, with startup also targeted for year-end 2027. Third, at El Paso, we are advancing work that increases the refinery's ability to produce higher-value products for local markets. We will invest $30 million in 2026 and bring this capacity into service in the second quarter of this year. Progress continues at our two previously announced J. T. Yield maximization and DHT projects, anticipated to come online in 2026 and year-end 2027, respectively. Across all of these investments, we follow strict capital discipline. We put capital to work where it creates incremental value, and we consistently target returns of 25% or above. This capital deployment reflects our confidence in the long-term opportunities across the energy space and our commitment to delivering durable, high-quality returns for our shareholders. The long-term fundamentals for our midstream business remain strong. In the U.S., natural gas demand is anticipated to grow over 15% through 2030, driven by the rapid expansion of LNG export capacity and rising power needs, particularly from data centers. We are also seeing higher gas-to-oil ratios across key shale basins as aging wells produce more associated gas per barrel of oil. This trend is increasing supplies of NGL-rich gas and underscores the strategic importance of our infrastructure in the Permian. MPLX handles 10% of all the natural gas produced in the U.S., and over the past year, MPLX took meaningful steps to optimize its portfolio through divestitures of non-core assets, ensuring our future capital deployment is aligned with the strongest return opportunities as we build the infrastructure that will fuel tomorrow's energy needs. This morning, MPLX announced its plans to invest $2.4 billion of growth capital. 90% of MPLX's growth capital will be directed towards its natural gas and NGL services segment. These projects are concentrated in the Permian and Marcellus, two of the most prolific and competitive basins in North America, and are expected to generate mid-teens returns when they come into service. These investments reflect our confidence in the long-term fundamentals of the energy markets and in MPLX's ability to continue capturing value as these opportunities unfold, enabling sustained, meaningful return of capital. MPLX continues to target a distribution growth rate of 12.5% over the next two years, which implies expected future annual cash distributions to MPC of over $3.5 billion. With our competitive integrated value chain and increasing distributions from MPLX, we believe MPC is positioned to deliver industry-leading cash generation through all parts of the cycle. Now I'll hand it over to Maria to discuss our financial performance. Maria Currie: Thanks, Maryann. Moving to the fourth quarter and full-year highlights, Slide 7 provides a summary of our financial results. This morning, we reported adjusted earnings per share of $4.70 for the fourth quarter and $10.70 for the full year. Adjusted EBITDA was approximately $3.5 billion for the quarter and $12 billion for the year. Refining and Marketing segment adjusted EBITDA per barrel was $7.15 for the quarter and $5.63 for the year. Cash flow from operations, excluding working capital changes, was $2.7 billion for the quarter and $8.7 billion for the year. In 2025, we returned $4.5 billion to shareholders, inclusive of a 6.5% reduction to our shares outstanding. Slide 8 shows the year-over-year change in adjusted EBITDA from the fourth quarter of 2024 to the fourth quarter of 2025 and the reconciliation between net income and adjusted EBITDA for the quarter. Adjusted EBITDA was higher year-over-year by approximately $1.4 billion, primarily driven by our Refining and Marketing segment. Moving to our segment results, in Slide 9, we provide an overview of our Refining and Marketing segment. Our R&M fourth-quarter adjusted EBITDA was $2 billion. Our refineries ran at 95% utilization, with total throughput just over 3 million barrels per day. We achieved monthly crude throughput records at our Garyville and Robinson refineries in the quarter. Regionally, our utilization was 98% in the Gulf Coast, 93% in the Mid-Con, and 91% in the West Coast. We capitalized on a strong refining margin environment while executing planned turnarounds safely and on time. Turning to Slide 10, fourth-quarter capture was 114%. Solid commercial execution contributed towards our strongest capture in 2025. Our fully integrated approach is underpinned by planning, commercial, and operational excellence, in addition to our differentiated logistics footprint. This quarter, we delivered a clean product yield of 86% and profitable product placement through our sales channels, resulting in material market uplift. Typical seasonal tailwinds associated with secondary products, such as butane blending, also contributed towards our strong capture results. Slide 11 shows our midstream segment performance for the quarter. Year-over-year, fourth-quarter results declined primarily due to the divestiture of non-core gathering and processing assets. Our full-year midstream segment adjusted EBITDA has grown at a three-year compound annual growth rate of 5%. MPLX continues to execute its growth strategy and remains a source of durable cash flow for MPC. Slide 12 shows our renewable segment performance for the quarter. Results reflect 94% utilization and a one-time benefit from the sale of credits by the Martinez joint venture in the fourth quarter, which were offset by a weaker margin environment compared to the prior year fourth quarter. We will continue to optimize our renewable facilities, leveraging logistics and pretreatment capabilities. With a first-quarter planned turnaround at Martinez, we anticipate utilization of approximately 70%. Slide 13 presents the elements of change in our consolidated cash position for the fourth quarter. Operating cash flow, excluding changes in working capital, was $2.7 billion, our strongest quarter result in the past two years. During the quarter, we returned $1.3 billion of capital to shareholders, executing on our capital allocation priorities. At the end of the year, MPC had approximately $3.7 billion of consolidated cash, including MPC's cash of approximately $1.5 billion and MPLX's cash of approximately $2.1 billion. Turning to guidance, on Slide 14, we provide our first-quarter outlook. Additionally, for the full year, turnaround expenses are expected to be lower compared to last year at $1.35 billion, and we plan for continued reduction in both 2027 and 2028. Our capital allocation framework is unchanged. Our net debt-to-capital ratio remains in our range of 25% to 30%, and we continue to target an annual cash balance of $1 billion. Distributions received from MPLX are expected to fund MPC's dividends and standalone capital spending in 2026, allowing us to return all excess free cash flow after the needs of the business to shareholders in 2026. With that, let me pass it back to Maryann. Maryann Mannen: Our commitments are unwavering. Safe, reliable operations are the foundation of our company. Operational excellence is ingrained in how we run the business every day. Combined with planning and commercial execution, these capabilities position us to deliver leading through-cycle cash generation. In refining and marketing, disciplined investments will further strengthen our competitiveness. In midstream, capital deployment is aligned with the fastest-growing regions in the country as we build the infrastructure that will fuel tomorrow's energy needs. MPLX is strategic to MPC. The growth of MPLX's distribution over the next two years translates into more than $3.5 billion in expected future cash distributions to MPC, central to the value proposition we deliver to our shareholders. Our team is committed to creating exceptional value for our shareholders. With integrated value chains and a geographically diverse asset base, MPC is well-positioned to lead in capital return. With that, I'll turn the call back to Kristina. Kristina Kazarian: Thanks, Maryann. As we open the call for your questions, as a courtesy to all participants, we ask that you limit yourself to one question and a follow-up. If time permits, we will re-prompt for additional questions. Operator, please open the line for questions. Operator: Thank you. We will now begin the question and answer session. You may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please. Our first question comes from Neil Mehta with Goldman Sachs. Your line is open. Neil Mehta: Yes. Good morning, Maryann and team. Last quarter, we spent a lot of time talking about capture rate, and it came in a little bit softer. This quarter, capture rate was very strong at 114%. And I am wondering if you can kind of build on what you saw there and anything that might have positively surprised, recognizing there's some seasonality here. But even then, it beat our expectations. Maryann Mannen: Good morning, Neil. Thank you. As it relates to capture, first and foremost, I think you've heard me say it. You've heard Rick say it and others on the team. It is clearly a strategy for us when we think about planning and commercial execution to continue to deliver optimization through our commercial team. We are trying to leverage the scale of our integrated system. We think that's an advantage. And again, really trying to increase the capabilities of the commercial team to deliver sustained results across all three of our regions. Mentioned it 105 for 2025. And if you go back and look over the last few years, while we do not necessarily control every quarter because there are headwinds and things we cannot control, you go back and look over the last few years, over the last three years, we've improved capture each of those years. So there were some things in the third quarter that were not sustained. And you see those reverse in the fourth quarter as well. But we are trying to control the things that can throughout the year and plan to do so. I'm going to pass it to Rick and let him give you some of the specifics in the fourth quarter, Neil. For the question. Rick Hessling: Yes. Hi, Neil. I think what I would add is when you look at our structural improvements that we've made within the commercial organization and the value chain optimization organization, we believe these are sustainable. And simply said, we're not done, Neil. Our commercial team's goal every single day they come into work is to expand the crack, and you're seeing this follow through with our results. So more to come there. Specific to maybe answering your question, a couple of items that I'd call out, Neil, One is the diesel to jet spread specifically when you look on the West Coast. In 3Q, it was a headwind. In 4Q, it was a tailwind, and we're continuing to see pretty good signals as we enter the first part of the first quarter. And I'll leave you with on the jet side, we are the largest producer of jet fuel in The United States. And then within all of our complexes, when you look at our Los Angeles refinery, it is the largest jet fuel producer within our system. And it resides in one of the three largest demand hubs in The United States. Which is certainly going to continue to be a differentiator for us out there on the West Coast. And then maybe lastly, what I'd give you a little color around, Neil, is within the Mid Con and the West Coast specifically, we had strong utilization. We ran really well, and we had really strong margin capture because of our strong utilization and because of the connectivity that we've spoken on many times from a products to feedstocks perspective that that weaves in and out between our Mid Con refineries and optimizes 800,000 barrels a day like no other player in that market can do so. So that's a Mid Con reference specifically. But in the West Coast, have similar optionality when you look at the West Coast, and it's tied to our Pacific Northwest. So both of those regions specifically, I wanted to call out to your attention, Neil. Neil Mehta: Thank you so much. And just follow-up is on return of capital. Last year, you guys put up $4.5 billion between the buyback and the dividend. And Maryann, I do not know if you can comment on this, but as you look at consensus numbers and forward cracks do you think that you can match or beat that number as you go into next year? Maryann Mannen: Yes. Thanks, Neil. So first and foremost, one of our key strategic commitments is to ensure that we're delivering the strongest through cash cycle sorry, strongest cash flow through cycle, excuse me. And that was clearly 2025. As you look at that consensus, assuming current market cracks that would be indicative of us being able to repeat a similar pattern that we did in 2025. So, yes, I think that is clearly within our ability to deliver in 2026. Neil Mehta: Great. Operator: Thank you. Our next question comes from Manav Gupta with UBS. Your line is open. Manav Gupta: Hey, good morning, Maryann and team. Congrats. Look, I mean, we did not see a $4 EPS. So you definitely surprised us to the upside. So congratulations on that. Maryann, I wanted to talk to you about this, especially because I know you saw you with the president also. Looks like Venezuelan crude production will ramp, and we want you briefly mentioned, you know, Garyville just trying to how much more incremental Venezuelan barrels you could absorb in your system. And then if Rick can also talk about, you know, if these barrels do show up on the Gulf Coast, that also mean that WCS differentials could widen so your mid con capture could also go up? If you could talk a few you know, around that topic. Maryann Mannen: Yeah. Thanks, Manav. Thanks for the question. I'd say this first. Overall, you know, we view the access to more Venezuelan crude as positive for US energy and even specifically for MPC as well. You know, if you look at our system capabilities, you look at our assets, you mentioned Garyville, specifically, we have the most crude optionality optimization, sophistication, and the ability to address complex refining opportunities. And Garyville is an outstanding example of that. You look at our sour basket, right, we're running approximately 50% sour crude diet across the system. Look. I think that's probably 10% stronger than our closest peer. So if you think about that, if there were to be a dollar movement in sour differentials, on an annual basis, that's a $500 million benefit to MPC. Just from a dollar a dollar movement. I think you know this. You know, we import more barrels, the Canadian, and Venezuelan combined. Than really all of our peers. And we've got a deep sour basket, WCS, ANS, and Maya. So I think overall, certainly positive for MPC as well. I'm going to pass it to Rick and have him give you a little more color as it relates to the specificity around the diffs. Rick Hessling: Yes. Hi, Manav. Your question is quite insightful. Because when I step back and look at what's happened here over the next over the last thirty days ish, I would say it's a differential story. And when you look at the VENS barrels coming into The US Gulf Coast, they're incremental barrels, so they're putting pressure on the entire complex. And so if you zoom out and say, okay, what does that mean from an MPC perspective? I think you are well aware we have incredible flexibility. As an example, we have the ability and have some years run over 100 different flavors of crude oil, and that's due to our optionality and connectivity via pipeline barrels and waterborne barrels. And I will say and say this strongly, we will not be the largest buyer of Venn's crudes because we have more advantageous options. Especially as Maryann mentioned, especially as the sweet sour basket widens, which we've certainly seen. No one has more upside than MPC. And I will tell you, we have purchased two parcels of Venn's crude. Actually, Friday of last week, we purchased two two cargoes, but those were the first two cargoes of many, many, many offers that we saw on the screen, Manav, that were in the money. So as you know, we're only gonna purchase what is economically avail anything that is economically advantaged for us. So that's just a good example of we have better options, Manav. That's a short way of saying it. And specifically, when you look at the softening of sour crudes post the Venezuela announcement and even the Venezuelan announcement. If you look at WCS specifically, it's widened anywhere from $1 to $2 a barrel. And ironically, I would tell you when you look at the prompt month, I actually think as you look at the forward curve, it is showing that it's gonna widen out even a bit more because many of these Venezuelan barrels have not reached the market yet and have not been run yet. So hopefully that gives you some good color, Manav. One, as to our position, two, the impact of VENS barrels and what we feel is a significant advantage for us. Manav Gupta: Perfect. I'm gonna stick to Garyville. We get a little more color on these two projects? And what I'm specifically trying to understand is let's say MPLX was pursuing these projects, you know, they would probably be like a five build multiple and 445,000,000 investment, you could probably even make 90,000,000 in EBITDA I'm just trying to understand. I understand it's not MPLX. It's MPC pursuing them. But should we think about the returns in in a similar way, mid teen unlevered IRR, you could talk a little bit about the two projects and and what returns can we expect from these projects? Rick Hessling: Sure, Manav. We can answer that. A few things on the Garyville projects. First of all, want to say that's one of our top performing facilities, we'll continue to invest in it. The first project is our feedstock optimization at Garyville, basically to improve margin. This will increase crude rates somewhere around 30,000 barrels while we're displacing higher cost intermediate purchases. The capital spend in 2026 is right at about 110,000,000 with additional $185,000,000 in 2027, and we have full intentions to have it online year end 'twenty seven. Second project at Garyville is our product export flexibility. So basically, we're export premium gasoline production at lower cost. This investment will increase our flexibility to produce export premium gas by about 10,000 barrels and includes equipment upgrades to help our reliability mainly around compression. Capital spend in 2026 is right at about 50,000,000 with an additional $100,000,000 in 2027, we plan to be wrapped up with that at year end 2027 as well. Maryann Mannen: And Manav, let me add a little bit more. Mike did a nice job of giving you some of the specifics on those two projects. I think one of the questions that you also asked is sort of what are the returns that we should expect And when we're putting capital to work on the refining side, again, through the lens of strict capital discipline, we're looking forward 25% returns here on these projects. So that's consistent. And as you know, when we're focused on that, we're looking for reliability, we're looking for upgrading that will deliver incremental margin per barrel. That's the reason why we're doing it. Hope that answers your question, Manav. Manav Gupta: So it's even better return than midstream. So probably even a lower bin multiple than five Thank thank you so much. Thank you. Maryann Mannen: You're welcome, Manav. Operator: Our next question comes from Doug Leggate with Wolfe Research. Your line is open. Doug Leggate: Thanks. Good morning, everyone, and welcome, Maria. It's good to hear you on the call. I wonder, Maryann, this is probably a refining question, so I know if she wants to to tackle it. But I guess the the report in the third quarter was on the November 4. And you guided us towards 90% refinery utilization then diesel margin spikes and we didn't really see a huge blowout in heavy differentials, but you did swing towards a different slate than you guided towards. So I guess I'm trying to understand what is the sensitivity when you can deliver a 4% utilization a big swing towards heavy oil. What what should we consider that anytime we see blowout margins Marathon is gonna treat the knobs to basically run significantly better into that environment. I'm just trying to get a handle as to what changed versus the guidance. Maryann Mannen: Yes, thanks for the question, Doug. I'll say first and foremost, the answer to that is yes. That is really what we are trying to do every day. You hear Rick talk about expanding the craft. You hear about our planning capabilities. We are building them, each and every quarter, which gives us the ability to respond very rapidly to market conditions that we see. And therefore, given the, I'll say the capability of our assets, particularly when you look at yield conversion you mentioned diesel. I think that is one of the strengths that we have and the complexity and the optimization in our system. When you look at optimization, I think it's critically important for us to be able to continue to demonstrate that So that's what I would tell you, was the capability there in the quarter. Doug Leggate: I appreciate the answer. I realize it's not you know, there's some sensitivities around this, but I I'm grateful for that. My follow on is on CapEx. Obviously, you've got you've dropped CapEx a little bit this year. You're still covering your CapEx and your dividends with the MPLX distributions. And I guess, I'm really, you know, 2026 is great. I'm really trying to think about how do we think about marathon spending longer term is the cap on your because I'm sure you've got a bunch of projects that you can select, but is the cap to stay below that MPLX distribution threshold or should we expect CapEx to drop off at some point because obviously only done a little bit in 2025 at 2026. Maryann Mannen: Yeah. Thanks, Doug. So, you know, maybe just to reiterate, in 2026, we are looking at a 20% reduction in the refining spend off of 2025. And as you heard in our prepared remarks, we continue to expect that 2027 and 2028 capital on the refining slot side will come down. And so we think it's critically important. I talk about strategic relationship between MPC and MPLX. And as that distribution grows, we're covering the CapEx that we are putting to work to ensure that we remain competitive in every region where we operate and deliver, if you will, the utilization utilization that we just discussed, that's critically important to us. And also cover the MPC dividend And then we take that remaining cash as we said and we return that via share buyback. You can see that in 2025. Hopefully, it was responsive to Neil question as well that that should be a repeat in 2026. So that is what we are trying to do. We're only putting to work capital investments through that lens of strict capital discipline. We see it coming down again in '27 on the refining side. And in '28. Doug Leggate: You're welcome, Jim. Our next question comes from Paul Cheng with Scotiabank. Your line is open. Paul Cheng: Hey guys. Good morning. Good morning, Paul. Marion, two questions. First, on the stand alone basis, the CapEx for this year is about $1,500,000,000 and last year that you end up spending about 1.6, which is higher than what previously expected. On a going forward basis, is that the the tie off good reasonable baseline we should assume going forward. Or that this is a number of new projects that over the next two or three years that as they roll off that your spending is going to be lower. And secondly, that you guys is representing the industry to negotiate with the USW and they just reject the last offer, I think, Friday. So can you give us an update what's the deadline and what's the next step? And also that, what are the most sticky point between the industry and the union what's the biggest differences that in order to strike the deal? Thank you. Maryann Mannen: Yes. Thank you, Paul. So first and foremost, on refining spending. In 2025, to your first part of the question, we did spend slightly more than we had initially guided to. And one of those key spending areas was on the El Paso project, I spoke about it. Mike gave a little more color and we can certainly do that again if that would be helpful. We started that project in 2025 given the returns on that project and the benefit for the local region so that that project will actually complete in 2026 as you heard me say. Then for our '27 spend and our '28 spend for refining, we expect both of those years to be below 2026 spending. So again, a lens of strict capital discipline there. Reducing that spend. We've got, as you know, couple of projects that we were completing like the LAR project. We've got DHT that will complete and that's part of our capital spend this year. Taking high sulfur diesel and being able to convert it to ultra low sulfur diesel for broader market and margin opportunity. And so that's the story, if you will, on our commitment to lowering capital spend in the refining side and why we saw a little bit of a higher spend in 2025. I'm going to pass it to Mike who's at the tip of the spear there, if you will, on the negotiations, and I'll have him share with you the status of that Thanks Paul. Rick Hessling: Good morning, Paul. We continue to meet with steel workers at the international level, and we're continuing to negotiate at a pattern agreement for all of our facilities and the industry. You're correct, our contracts did expire in January 31, but we do have rolling twenty four hour extensions based on our previous contracts, which in my opinion is good thing. It's a positive sign that we're making progress. As you know, we're committed to bargaining in good faith, working together to mutually come up with a satisfied agreement for both us and USW. But the the discussions have went well. I'm not going to get into the sticky points at all, but I will say we're having open and good dialogue. Paul Cheng: Marianne, can I ask as a follow-up on 2027, 2028 should we assume the CapEx is going to be closer to $1,000,000,000 or that is still going to be somewhat higher, but less than one point five Maryann Mannen: Yes? Thanks, Paul. I think it's a little bit early for us to give guidance on 2027 and 2028, but you do have the commitment as we've said that '27 and '28 will be below the spending for 2026. And you can see the refining spend that we've outlined for 2026, which would help with that. We're still a little early for specific guidance on '27 and '28, but it will be lower. Paul Cheng: Thank you. Maryann Mannen: You're welcome, Paul. Thank you. Operator: Our next question comes from Theresa Chen with Barclays. Your line is open. Theresa Chen: Hello, thank you for taking my questions. I wanted to ask about your comments, Maryann, on global consumption patterns. And if you could walk us through your views of demand going forward across the key products and specifically, what underlies your view that demand supply for the year ahead and maybe beyond is indeed going to be positive for refining economics. Taking into account the significant capacity expansions we're seeing coming online in Asia. Maryann Mannen: Yes. Thank you, Theresa. I appreciate the questions. You know, I'd say first and foremost, you know, when we look at 2026, as we mentioned, we continue to believe that 2026 is going to be another year of strong refined product demand. When you look at the estimates out over the next five frankly, over the ten years really, and you look at demand expectations, you see that growth year on year one to 1.2. Growth over that time period. That's just not domestically, right? We look at it on global basis. Specifically to your question around '26, I think there is supply supply coming online. You've got an Indian refinery and an Asian refinery. I think that's probably somewhere in a range of about a million a day. But the lion's share of that capacity is really pointed toward the pet chem market. And I'd also say, you know, and we've seen this with some other additions, even when you look at Das Bocas or Dangote, the pace at which that capacity comes online is typically a bit slower than what we would otherwise have expected. So long term fundamentals, support stronger margins. Demand over the long term. This may be for 2026 we saw a little bit of this in 2025, maybe a little more back end loaded. Notwithstanding, you know, some of the macro volatility when we look at OPEC, when we look at Iran, we look at Venezuela, volatility. This could be a little more back end loaded in 2026. But they would be the reasons why we have a strong conviction in the macro and the refining outlook, not only for '26 obviously, but for a longer period of time? So our view really is unchanged. Theresa Chen: Thank you. And maybe going back, to some of Rick's comments about your jet production capabilities. And really on the heels of consistent commentary across the industry about structural jet demand tailwinds. To what extent can you augment your jet yield further over time to capture this benefit? Rick Hessling: Great question. Theresa. I will tell you that first of all, we're enhancing our customer base out in the LA region. We're actually seeing significant demand signals from our Department of Energy, Department of War and we are leaning into those as well. And as you look forward, we will continue to even lean into producing more jet. I won't give you specific volume increases, Theresa, just for competitive reasons, but it's safe to say we have very good upside there. Theresa Chen: Thank you. Rick Hessling: Thank you, Theresa. Thank you, Theresa. Operator: Our next question comes from Jason Gabelman with TD Cowen. Your line is open. Jason Gabelman: Yes. Hey, thanks for taking my question. I wanted to go back to the CapEx guide. And I guess two questions around it. One, the twenty twenty five total MPC CapEx came in above the initial expectations. And now that we're done with the year, I'm wondering what exactly drove that. It looked like some of the amount of the increase was on sustaining spend. So was there some work that needed to be done there, or was it around inflation and and workforce costs and have you seen that creep into the '26 budget at all? Maryann Mannen: Hey, Jason. Thanks for the question. So let's first talk about 2025. One of the projects that was not initially in our 2025 guide that we talked about today is our El Paso project. And we started spend in 2025 It'll complete in 2026. I think we talked about the benefits of that particularly when you look at regional benefits there. So that that project will come online in 2026. Also, I think it's reasonable to say you could have had a little bit of inflation creep. Obviously, LAR was a critical project, as you know, that we completed in 2026. And that should and came up online in the fourth quarter. As Mike has alluded to. When we give our guidance for 2026, we take those things into consideration. So to the extent that inflation estimates stay where we have anticipated, we don't necessarily see that there is inflation uptick in 2026. And again, when we look at that, refining is down twenty percent twenty six versus twenty five. And we continue to say that twenty seven and twenty eight will be below that as well. Jason Gabelman: Great. Thanks for that color. And my follow-up, Maria, welcome to the team. We we haven't, met yet, but I look forward to working together. But I'm one wondering if the team could talk about maybe elaborate a bit on some of the comments you made in your opening remarks about how her background is is is a nice fit and a nice add to the MPC c suite And then maybe you could touch a bit about the board process to find a new CFO because it did came it did come as a bit of a surprise for investors. Thank you. Maryann Mannen: Hey, Jason. Thanks. So look, first and foremost, I'd say we come from a position of strength. And it is my belief that when we are looking at ensuring we deliver our objectives both in the short term and the long term, that we have a set of complementary skills and capability and the absolute best leadership team to deliver those shareholder expectations that we continue to talk about. And first and foremost, that's the reason what any leadership team and certainly this leadership team would make a change. When I think about the things that we, MPs, have been trying to deliver, In fact I should say have delivered. When we think about cost competitiveness we never stop that. When you look at Maria's background, over the last twenty five years in her career, that lean mindset and the work she's done there is a really nice dovetail to what we try to ensure that we are the most competitive in every region where we operate. So her experience there is important. Strict capital discipline and capital deployment. I think, are another piece of Maria's background that fits so nicely into the things that are critically important for us to deliver shareholder value. When you make any change as think about our board, particularly on strategic decisions, is always a part of those decisions as well. I hope that answers your question, Jason. Jason Gabelman: Yep. Great. Thanks. Maryann Mannen: You're most welcome. Operator: Our next question comes from Phillip Jungwirth with BMO Capital Markets. Your line is open. Phillip Jungwirth: Yes, thanks. Good morning. The West Coast had a really heavy year as far as turnaround goes, representing about 40% of total spend. At least in 1Q, West Coast turnaround is minimal. But as we see additional closures in California, just wondering do you think the West Coast has set up the run pretty hard in '26 and and that you're past a lot of the downtime? And and and separately, just with the closures and outages more concentrated in NORCAL, do you see much divergence between NORCAL and SoCal product prices? And if so, can you take advantage of that? Rick Hessling: Sure, Phil. I'll take a shot at that. As we've talked about the new project we just put in place in the fourth quarter of last year really puts ourselves in a competitive position. One, we had Intertie project to actually decrease our energy costs And the second piece of that was we installed two new boilers and we we got rid of six old boilers I think we're in a really good position to run hard in LA. The FCC Alki outage completed. We did a of reliability work during that along with the new boilers from a steam system and the Intertie project also allows us to to utilize our cogen plant to feed both sides Wilmington and Carson. On the other side of your question, I'll turn you over to Rick for that. Rick Hessling: Yes, Phil. So we certainly see the closure as a significant tailwind for us. In fact, most most prognosis were that the closure of our competitor would not happen until March, April, and we're hearing now it's closing truly as we speak. So we're seeing this as a nice tailwind. And as you know, we continue to have a competitive advantage out there with our size, our scale, fully integrated logistics system, not only on the West Coast, but in the Pacific Northwest. And it's the Pacific Northwest maybe I wanna dive in a little bit because we have the ability your Nortel question to take products from our PNW system and take advantage of the Nortel dislocation should they So we're in a great position, and we look forward to being the primary supplier in in the LA region and in the Pacific Northwest. We see it as quite a competitive advantage versus the alternative, which is imports. We always used to say, Phil, that the region was short one refinery. Well, now it's short several refineries. So we view that as a significant positive tailwind. Hope that answers your question, Phil. Phillip Jungwirth: Yeah. No. That's helpful. And then on on midstream, there's there's some interesting ethane market dynamics occurring this year. I mean, Permian takeaways increasing significantly. You're a big part of that. You had a couple export facilities come on in second half. And through '26 plus a new cracker start up in the Gulf Coast this year. So the the question is more around, do you see these changes, or how do you see these changes influencing ethane prices? And then also, just impacting your NGL plant production and BANGL volumes? Maryann Mannen: Hey, Phil. Yes, let me try to take that for you. So on MPLX, you know, as you know, we've been talking for quite some time now about our wellhead to water strategy. You've seen some of the investments that we've made both organic and inorganic in particular when we talk about our U. S. Gulf Coast fractionation and export dock We believe strongly in the pool there, I should say the demand pool particularly when you look at the growth coming from LNG, our project fractionation one comes online 2028. Second 01/2029. Those fracs will be completely full. We just started our secretariat online brings 1.4 Bcf into the region. And then we announced 1.7 when that investment is complete. And then over the export dock, obviously, we see the demand for LPGs growing and you can look at those markets, So think all of that points to strength over the long term in our position. Even where we look at the amount of capital that we're putting to work into the NGL and nat gas space, We talked about some of those earlier today. So think that's all extremely positive, particularly when you look at demand pool there and a positive for MPC and MPLX MPLX doesn't take on any of that commodity risk and MPC will contract with MPLX and that commercial opportunity is important for MPC going forward as well. I hope that helps. Phillip Jungwirth: It does. Thank you. Maryann Mannen: You're welcome. Our next question comes from Matthew Blair with TPH and Co. Your line is open. Matthew Blair: Great. Thanks and good morning. If we could circle back to the Venezuela discussion, mentioned you're buying two cargoes in the first quarter here. It looks like your sour guide for Q1 is at 50% versus the 47% in Q4. So so the takeaway that your whole system is now moving heavier and that you're pushing out mostly lights with these, new Venezuelan barrels? Hi, Matthew. Yes. Rick Hessling: This is Rick. Yeah. That's the guidance. We are leaning into these differentials widening And as Maryann stated earlier, every day we're looking to opt optimize. And right now, the signals are pointing towards a heavy more sour slate, and so we're leaning into it significantly. Matthew Blair: Sounds good. And then, Maryann, I heard you mentioned DOS Focus. It looks like run rates have improved quite a bit recently at the refinery. Which is reducing Mexico's net product imports. Is this impacting MPC at all? Or are you having to find new markets for your product exports? And in general, could you talk about the trends, for MPC's product exports in twenty twenty five twenty twenty four? Thanks. Maryann Mannen: Yes. Thanks for the question. So as I mentioned, we run roughly and we just talked about roughly a 50% sour slate, WCS being one of them. We run the ASCI crudes and ANS as well. Maya for us, as you can see, is typically a very small portion of that sour basket. So it's an overall impact to us really not a concern for us. I think your assessment frankly, on DEF focus is accurate. I think as that reliability has improved, I think there is less Maya available as they are consuming obviously consuming that. I'm going to pass it to Rick because I'm sure Rick will want to add a little more color on some of the specifics for us Rick Hessling: So Matthew, what I would add from an export perspective so we are taking less to Mexico. However, we're seeing really good demand from other LatAm countries. Specifically Brazil. So we are not seeing a fall off in exports at all. In fact, we had a really strong fourth quarter and we're having a really good start to the first quarter. So while we are seeing less from Mexico per se, we're seeing others pick up the slack to more than offset that decline. Matthew Blair: Great. Thanks for your comments. Maryann Mannen: You're welcome. Thank you. Operator: Our final question comes from Conor Fitzpatrick with BofA. Your line is open. Conor Fitzpatrick: Hi, everybody. Thank you for taking the question. The Enbridge mainline pipeline, has seen some apportionment and pipe volume rationing, rising a bit lately. Are Canadian pipeline bottlenecks affecting Canadian crude pricing or realized crude costs? For the R and M segment at all? Rick Hessling: Yeah. Hi, Conor. It's Rick. Absolutely. They are. This is a tailwind for us. In fact, it's encouraging to see and hear people following the apportionment because it used to get followed a lot, and I think it's kind of fallen out of, common knowledge for people to track, but it's quite important. So I commend you for following it. I'll start there. I will tell you this. In January, even before the Venezuelan announcements and headlines, you started to see the heavy and the Canadian differential start to widen. And a couple of reasons they were widening. One production is pretty darn strong in Canada, but two, it's apportionment, your exact point. So when you think of apportionment, it backs in inventory into Canada, and forces barrels to clear to more expensive routes. So that in of itself puts pressure on the differential which we've certainly seen, as I said, before the VENS announcement and now even after. So significant tailwind and one that I would encourage you to keep watching. Thank you for the question. Okay. Conor Fitzpatrick: Okay. Thanks. That's all I had. Maryann Mannen: Thank you. Kristina Kazarian: All right. With that, should you thank you for joining our call today. And for your interest in Marathon Petroleum Corporation. Should you have more questions or want clarification on topics discussed this morning, please contact us and our team will be available to take your calls. Thank you. Operator: Thank you for your participation. Participants, you may disconnect at this time.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to NXP Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn your conference over to Jeff Palmer, Senior Vice President, Investor Relations. Please go ahead. Jeff Palmer: Thank you, Michelle, and good morning, everyone. Welcome to NXP Semiconductors earnings call today. With me on the call today is Rafael Sotomayor, NXP's President and CEO; and Bill Betz, our CFO. The call today is being recorded will be available for replay from our corporate website. The call will include forward-looking statements that involve risks and uncertainties that could cause NXP's results to differ materially from management's current expectations. These risks and uncertainties include, but are not limited to, statements regarding the macroeconomic impact on the specific end markets in which we operate, the sale of new and existing products and our expectations for the financial results for the first quarter of 2026. NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a full disclosure of forward-looking statements, please refer to our press release. Additionally, we will refer to certain non-GAAP financial measures, which are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core operating performance. Pursuant to Regulation G, NXP has provided reconciliations to the non-GAAP financial measures to the most directly comparable GAAP measures and our fourth quarter 2025 earnings press release, which will be furnished to the SEC on a Form 8-K and available from NXP's website in the Investor Relations section. Now I'd like to pass the call to Rafael. Rafael Sotomayor: Thank you, Jeff, and good morning. We appreciate you joining our call today. Our overall performance during the fourth quarter was solid, with all end markets performing either in line or better than expected. All regions were up on a year-on-year basis. Turning to the specifics. NXP delivered fourth quarter revenue of $3.34 billion, an increase of 7% year-on-year and up 5% sequentially. This was $35 million better than the midpoint of our guidance. Non-GAAP operating margin in the fourth quarter was about 35%, 40 basis points above the same period a year ago, and in line with the midpoint of our guidance. Taken together, we drove non-GAAP earnings per share of $3.35, $0.07 better than guidance. Distribution inventory will stay weak, consistent with our guidance. We remain disciplined on channel health, prioritizing sell-through of high-demand products rather than broad-based restocking. Now I would like to reflect on our performance in 2025. The year was a tale of 2 halves, with the first half of the year, exhibiting weaker demand trends, while in the second half of the year, demand began to accelerate in support of our long-term revenue growth model. Looking at the specifics. Automotive revenue was $7.1 billion, flat year-on-year due to slower inventory digestion at direct customers in the first half of 2025. With the inventory digestion behind us, the second half performance aligns with our group, our 8% to 12% long-term growth outlook, reflecting the underlying strength of our auto portfolio. A few examples which underpin our optimism includes our efforts in software-defined vehicles,where we have been -- where we have seen strong global adoption of NXP products. This includes design win rates for our S32 and family of 5-nanometer vehicle compute processors, the newly introduced S32K family of 60-nanometer [ Sono ] processors and continued adoption of automotive Ethernet products. These efforts are now material and global in nature with most auto OEMs undertaking SDV platform initiatives. Additionally, the early conversations with customers from the recently acquired technologies from TTTech Auto and Aviva Links are accelerating interest in NXP's SDV portfolio. The potential revenue contribution from these engagements should materialize beyond 2027. This multiyear SDV platforms deepen customer commitment and support mix improvement over time. Turning to the industrial and IoT end market. Revenue was $2.3 billion, flat year-on-year. The second half growth was materially above our 8% to 12% long-term growth outlook across both core industrial and consumer and IoT. Supporting our ambition to lead in intelligent systems at the edge, we continue to see strong customer engagements in the emerging market for physical AI. By combining the industry-leading i.MX family of industrial application processors with the recently acquired Kinara MPU, we can deliver complete and scalable AI platforms that accelerate deployment at the edge. A few examples of applications include medical imaging systems, camera-based workplace safety system in the industrial market, logistic automation systems and robotics. Customer interest has been exceptionally strong, and these engagements reinforce our vision of physical AI and the power of the NXP platform. These opportunities expand our addressable market, support sustainable growth and validate the unique competitive nature of our complete system portfolio. Looking at our mobile business, revenue in 2025 was solid at $1.6 billion, up 6% year-on-year. We saw stronger demand and content gains in the premium mobile market. Overall, NXP remains a specialty supplier in the mobile market with a unique and defensible franchise centered on secure mobile transactions. Finally, the revenue in the communications infrastructure market was $1.3 billion, down 24% year-on-year. As we have said in the past, we anticipate flat growth over the longer term as the digital networking and RF Power business decelerate, which will be offset by growth in our secure card business, which includes our UCODE RFID tagging solutions. Now I will turn to our expectations for the first quarter. Our forecast for the first quarter is better than we anticipated 90 days ago. We expect all regions and all end markets to be up year-on-year. We're guiding first quarter revenue to $3.15 billion, up 11% versus the year ago period and seasonally down 6% sequentially. Compared to 90 days ago, the improvements reflect steady inventory normalization in auto Tier 1s, broadening order strength across both core industrial and consumer and IoT and program ramps in the premium mobile market consistent with seasonal patterns. Our guide does not assume broad-based restocking. At the midpoint, we expect the following trends in our business during Q1. Automotive is expected to be up in the mid-single-digit versus Q1 2025 and down in the mid-single-digit percent range versus Q4 2025. I would like to highlight that our first quarter revenue guidance only includes about $25 million or 1-month of revenue contribution from the MEMS sensor business. Industrial and IoT is expected to be up in the low 20% range year-on-year and down in the mid-single-digit range versus Q4 2025. Mobile is expected to be up in the mid-teen percent range year-on-year and down in the 20% range on a sequential basis. And finally, Communication Infrastructure and Other is expected to be up in the mid-teen percent range versus Q1 2025 and up 10% versus Q4 2025. In summary, our first quarter outlook reflects early validation of the company-specific growth drivers we've been investing in, and we expect these trends to continue throughout 2026. We believe the NXP-specific secular drivers for our business are now outweighing the broader industry cyclical headwinds, which we have experienced over the last few years. Overall, we expect product mix and disciplined cost execution to continue to support our gross and operating margin framework. We're focused on disciplined investment and portfolio enhancements to drive profitable growth, while maintaining control over the factors we can influence. Our capital allocation framework is unchanged: invest for growth, pursue targeted M&A to strengthen the portfolio and return excess cash through dividends and buybacks within our long-term model. And now I would like to pass the call to Bill for a review of our financial performance. Bill Betz: Thank you, Rafael, and good morning to everyone on today's call. As Rafael has already covered the drivers of the revenue, I will move to the financial highlights. Overall, our results reflect the strength of our strategic priorities in our end markets, our disciplined investment in manufacturing and product leadership and our consistent commitment to generating long-term shareholder value. Q4 was solid with strong execution and results above the midpoint of guidance. Revenue, gross profit and operating profit were all back into our long-term financial model. We delivered non-GAAP earnings per share of $3.35 or $0.07 better than the midpoint of guidance. Non-GAAP gross profit was $1.91 billion with a 57.4% non-GAAP gross margin, a slight miss versus guidance, driven by stronger-than-expected mobile revenue. Non-GAAP operating expenses were $756 million or 22.7% of revenue. The primary increase sequentially is driven by our 2 new acquisitions, where we continue to make space for our strategic investments, offset by restructuring actions. Non-GAAP operating profit was $1.15 billion, and non-GAAP operating margin was 34.6%, up 80 basis points sequentially. Below the line, non-GAAP interest expense was $99 million, and taxes were $190 million. Noncontrolling interest was a $13 million expense and results from equity-accounted investees was a $1 million loss. Taken together, the below-the-line items were $4 million better than our guidance. While stock-based compensation, which is not in our non-GAAP earnings, was $100 million, $18 million lower than guidance, driven by the retirement of several executives. Turning to changes in cash, debt and capital returns. Our balance sheet remains strong, giving us the flexibility to invest in our strategic priorities and hybrid manufacturing plans. We ended Q4 with a $12.2 billion in total debt and $3.3 billion in cash, reflecting uses of cash for capital returns, acquisitions, joint venture investments and CapEx, offset by cash generation during the quarter. Net debt was $8.96 billion, and net debt to adjusted EBITDA was 1.9x, with adjusted EBITDA interest coverage ratio of 14.7x. In Q4, we returned $338 million through buybacks and $254 million in dividends. Over the last 10 years, we have returned over $23 billion to our shareholders or 95% of free cash flow and reduced our diluted share count by 27%. After Q4, we repurchased another $36 million under our 10b5-1 program. And on January 5, we redeemed the $500 million March 2026 notes with our cash on hand. Now turning to working capital metrics. Days of inventory was 154 days, which included 7 days of prebuild. Receivables were 29 days; payables were 60 days. Taken together, our cash conversion cycle was 123 days. As revenue growth accelerates, we expect working capital efficiency, particularly days of inventory, including prebuilds to meaningfully improve throughout the year. From a cash usage perspective, we continue to advance our long-term manufacturing strategy, including contributions to both VSMC and ESMC. This will lead to a long-term supply resiliency and strong gross margin expansion. Cash flow from operations was $891 million and net CapEx was $98 million, resulting in non-GAAP free cash flow of $793 million or 24% of revenue. We invested $195 million in long-term capacity access fees, made a $282 million equity payment to VSMC and a $44 million equity payment to ESMC. Taken together, we are about 50% through the investment cycle for both VSMC and ESMC, having invested about $1.7 billion of the $3.4 billion planned investments. We expect the majority of remaining investments will occur in 2026. Now turning to our expectations for Q1. We expect revenue of $3.15 billion, plus or minus $100 million, up 11% year-on-year and down 6% sequentially, which is better than our view 90 days ago. We expect non-GAAP gross margin of 57%, plus or minus 50 basis points. Operating expenses are expected to be $765 million, plus or minus $10 million, reflecting normal seasonal increases at the start of the year. We are committed to our long-term operating expense model of 23% of revenue, though there are seasonal variations with the first half of the year normally higher than the second half, resulting in non-GAAP operating margin of 32.7% at the midpoint. Below the line, we expect non-GAAP financial expense to be about $92 million and our non-GAAP tax rate to be 18%. Noncontrolling interest expense will be $11 million with our joint venture start-up losses of about $3 million. Stock-based compensation should be about $108 million, which is not included in our non-GAAP guidance. This implies Q1 non-GAAP earnings per share of $2.97 at the midpoint. Turning to the uses of cash in Q1. We expect capital expenditures to be approximately 3% of revenue, our capacity access fee payment of $190 million and an equity investment into VSMC of $210 million. Before turning to your questions, I have a few housekeeping items to highlight. After thoughtful consideration, we have decided that our RF Power business no longer aligns with our long-term strategic direction. Consequently, we will stop new product development and have taken an approximately $90 million restructuring charge, which is reflected in our fourth quarter GAAP results. We will direct our focus -- we will redirect and focus our R&D resources to accelerate and enhance our strategic priorities towards software-defined vehicles and physical AI. Yesterday, after the market closed, STMicroelectronics announced the closure of NXP's MEMS sensor business acquisition. This is a positive transaction for both parties. NXP received $900 million in gross proceeds with another $50 million to be received upon completion of certain closing conditions. We will recognize a onetime gain of approximately $630 million from the sale of the business, which is reflected in our first quarter's GAAP guidance. Next, we have made the decision to shift our geographic revenue reporting to headquarter-based region as opposed to a shift to basis. We believe reporting headquarter-based region better reflects how we manage the business internally and where customer engagements and design win awards occur. The 2025 change can be found in the posted IR presentation. And finally, based on the positive trends, including current order rates and business signals we track, we are confident NXP will operate within its long-term financial model for the full year of 2026. In closing, we are well positioned to benefit from the powerful secular trends in our 4 focused end markets. We are confident about the strategic priorities and investments we are making across our entire portfolio and manufacturing footprint. With a strong balance sheet and a disciplined capital return philosophy, we are exceptionally well positioned to drive long-term value for our shareholders. Now I would like to turn it back to the operator for your questions. Operator: [Operator Instructions] The first question will come from Tom O'Malley with Barclays. Thomas O'Malley: I wanted to ask about the channel restock. So it looks like you guys went from 9 to 10 weeks. In your guidance, you're saying no additional restock kind of baked in. Could you talk about where you are with the channel today? What you saw in the last quarter? And is it the decision to just not go to 11 weeks overall? Or is it just we're going to wait a little bit until we take it to the 11 weeks that we talked about previously? Rafael Sotomayor: Thank you, Tom. Let me take that one. This is Rafael. Clearly, I mean, I would say that our channel strategy has shifted from what before we consider tight control to ensure that we stage the right product, the right product to satisfy demand. We are moving to our long-term target of 11 weeks. And the reason we're doing that is because it is a reflection of an improving demand environment for us. We finished Q4 with about 10 weeks. We will move into our long-term plan and long-term target of 11 weeks into 2026. And that's how we are going to manage our business in a steady state. Thomas O'Malley: Got you. And then as a follow-up, just on the comms business. So you're deciding to move away from RF, but you had already kind of moved away from digital networking. You're guiding that business up 10%. Could you maybe walk through the moving pieces? Obviously, with digital networking coming down, you needed to see some really -- some strength from maybe the SIS business. Just walk through what's contributing to that Q1 strength. Rafael Sotomayor: Yes, indeed, we did guide C&I about 10% sequentially in Q1. And if you remember, C&I includes 3 distinct businesses, secure cards, digital networks and RF Power. And they -- all of these 3 businesses can move differently quarter-to-quarter. And C&I, I think, right now is benefiting from the fact that, one, there is normalization in the digital networking business. but there's growth coming from the secure card, and that strength really will benefit C&I throughout 2026. Operator: And the next question will come from Matthew Prisco with Cantor. Matthew Prisco: I guess starting with the cyclical side, can you maybe offer some more color on customer ordering trends over the past few months? And maybe what type of linearity you saw through the quarter and into 1Q? Jeff Palmer: Matt, are you asking about the kind of the trends that we track internally? Is that what you're asking? We couldn't quite hear your question. We apologize. Matthew Prisco: Yes, that's exactly it. The trends that you track internally when you look at just customer ordering trends over those past few months and then linearity through the quarter and into 1Q? Jeff Palmer: Yes. Linearity, we don't disclose, but I think Bill will take the -- some of the other metrics we track. Bill Betz: Yes. No, no. Obviously, over the quarter and the last 90 days ago, all our internal signals that we talked about in the past have improved. So think about our backlog, our distribution backlog, our customer escalations have increased. The short-term orders continue to increase as well, and we try to service as much as possible related to that. So across the board, we haven't seen anything like this in quite a while. And so we feel very confident about being in our long-term business model for 2026. Jeff Palmer: And maybe I'll just add one thing, Bill. If you kind of step back, Matt, look at kind of the trends in the second half of '25, they truly started to accelerate, and we're close to our growth rates that we presented at our Analyst Day. We believe that will continue as we progress through '26. So we're feeling pretty optimistic that we are off the trough of the business. Did you have a follow-up? Matthew Prisco: Yes, please. I guess on the auto side, I would love if you can offer some detail on the demand dynamics within your core auto business versus your accelerated growth drivers. And have you seen any impact to date from component price increases potentially pressuring unit demand there? Rafael Sotomayor: Yes. So we -- I think there are a few questions there on auto. If you look at what happened -- if you look at auto and the reason why we remain quite optimistic in auto in Q4, our business returned to growth year-on-year. And the guide that we provided continues year-on-year, the Q1 guide gives you growth as well year-on-year. And so -- and what we see is our thesis remains unchanged with respect to content gain. You asked me about pricing. Second question was on pricing. VPAs for the most part are done, right, with -- in the pricing that is already reflected in our Q1 guide. And we are modeling low single-digit price declines, and that's what we see not only in auto but across the business. Operator: And our next question will come from Ross Seymore with Deutsche Bank. Ross Seymore: Just sticking on the auto side of things, it's been pretty much flat for a couple of 2, 3 years in a row. And I know there's been a bunch of puts and takes on inventory and demand, et cetera. But I really wanted to dive into what you've seen over that period of time in your accelerated growth drivers. Is anything changing your thesis there? Are you more optimistic, less optimistic? Any sort of clarifications there, especially as we move forward, hopefully, the headwinds are done. And so I just want to judge the growth rate from those drivers going forward. Rafael Sotomayor: Yes. Thanks, Ross. So I think what I said on the prepared remarks, right, auto and our business in general in 2025 was a story of 2 halves in the first half was all about inventory digestion, and it really mask the true dynamics of our business. For the full year, the auto accelerated drivers were slightly below model. Remember, model, we said that we were going to grow 8% to 12%, but they were still growing in a year where auto was flat. And they were about 10%, and it was all led by our SDV efforts, our radar and our productivity. What you see right now in auto is that auto is shifting, our auto exposure is shifting to more and more structural and less cyclical. And it's driven by tying our road map towards secular trends and really transforming the architectures of auto. So we feel quite optimistic. We -- the answer to the question on the core drivers, the whole story, the thesis is completely intact, and we feel stronger than ever that our road map is really addressing the needs of the market. Ross Seymore: Great. And I guess you had the MEMS divestiture and now the exit of the RF side of things. Can you aggregate how much of a headwind those exits are going to be for this year? And I obviously know where the RF sits, but is the MEMS headwind in the auto side? Just want to kind of make sure to level set on that. Bill Betz: Sure. The way to think about -- this is Bill, Ross. The way to think about the sensor's divestment, it runs around $300 million per year. And Rafael shared, we recognized $25 million in the first quarter. And I think you guys can do the math of the impact that has from a year-over-year compare in our auto end market. Related to the RF business, the RF business is probably going to track similar to what DN did. If you recall, our digital networking business when we walked away from it, I don't know, 8 years ago, it lives quite long. And so what we're actually doing is stop investing next-generation products. So that will probably stay with us for at least the next 2 years is what we're projecting at the current rate. And I think, Jeff, if we had to break out 2025 as a percentage of comms infra pieces, I don't have that at my fingertips, so we can't really share that, but maybe you can share how the 3 businesses fared in 2025 to get the size of it. Jeff Palmer: Sure. Well, so the secure cards business was just over 50% and both the digital network and RF Power businesses were each about 25%. Operator: And our next question will come from Joe Moore with Morgan Stanley. Joseph Moore: Great. In the auto business, there's been a number of sort of the supply disruptions. We had Nexperia a few months ago causing issues. DDR4 now is causing some shortages. Is that impacting you guys in any way? Are you seeing either weaker demand because they're bottlenecked by those things? Or is there any desire for Tier 1s to start building inventory to react to any of those things? Rafael Sotomayor: Yes. I'm going to take that, Joe. So the Nexperia is not a conversation. It's not been a nonissue for NXP. The discussions on memory, there's always -- the chatter on memory is not just in auto, it's across our end markets. We have not seen memory impact the orders of our customers. But clearly, it's a conversation that our customers discuss with us as an area of concern for the second half of the year, but nothing has been reflected in orders. Joseph Moore: Great. And then in your auto business, any difference by region? I guess there's been some concern about China demand. Just anything you're seeing regionally in your auto business. Rafael Sotomayor: No. We don't see anything particular to comment on. I think the auto business, we believe it is going to be within model for 2026 for us. It's strong that the accelerated growth drivers are executing. So we expect our thesis to continue towards 2026. Operator: And our next question will come from Joshua Buchalter with TD Cowen. Joshua Buchalter: I apologize for a bit of a nitpicky semantic one, but it's one I've gotten a couple of times. So in your prepared remarks, you said for 2026, you expect to operate within your target model this year. I think you're -- given the -- where we ended 2025 to hit your 6% to 10% long-term CAGR, '26 and 2027 would have to be higher than that. Are you guys suggesting like this year is within the 6% to 10%? Or are you saying that you should track towards the 6% to 10% over a 3-year period in '26 and '27? Jeff Palmer: I think, Josh, what we're saying is the long-term model is intact. I think it not to be a nit piggyback that I think you know how to do math, and you can probably do the chains all on that. But we feel very strongly that after the inventory digestion in the first half of '25, things are starting to reaccelerate. So we'll leave it there. Did you have a follow-up? Joshua Buchalter: Yes. Can you maybe provide some more puts and takes on gross margin for the first quarter, in particular, how are you thinking about utilization rates as we sort of enter a better cyclical period? I know there were some die bank builds that boosted utilization rates at the end of the year. Are those done? How should we think about utilization rates from here? Bill Betz: Yes, let me take that one. So I would say gross margins are performing to our expectations into Q1. And this is primarily driven by our annual low single-digit price concessions that Rafael shared, and that is offset only partially from our normal operational efficiencies that we regained back throughout the year. And again, I think for modeling purposes, the best way to think about our gross margins, use that rule of thumb I've provided in the past for every $1 billion of revenue. We're entitled approximately 100 basis point expansion gain to our gross margin on a full year basis. And of course, that's the plus or minus normal mix changes that we share on a quarterly basis. Now as shared in the past, we will continue to work on mixing up our portfolio through our new product introductions. Also, we're focused on our go-to-market for that long tail, which tends to be a richer mix. We also have the ability to improve our internal front-end utilizations. The front-end utilizations in Q4 were in the high 70s. And in Q1, they will remain in the high 70s. Obviously, if we get any inflationary costs that we can't offset internally, we will protect our gross margins and pass those on to our customers. And as you know, we always do the normal blocking and tackling on improving our yields and test time reductions. Now longer term, we're quite excited on our hybrid manufacturing strategy, especially when VSMC is fully loaded in 2028, it is on track. And beyond, we expect our gross margins to be lifted by another 200 basis points at the company level. So I would say, in general, we are very committed to improving our gross margins over the long-term. Related to inventory question, again, our prebuilds were $7 million to think -- 7 days, sorry, at the end of the 2025. As you all know, our consolidation efforts in our manufacturing footprint are underway. I would expect the prebuild by the end of 2026 be about 15 to 20 days related to that. But including those prebuilds, we also expect to take our net inventory days down throughout the year as we continue to focus on what's in our control and do the right thing operationally to give you some more color on where we plan to take internal inventory. Operator: Our next question will come from Vivek Arya with Bank of America Securities. Vivek Arya: On the Industrial and IoT segment, Rafael, I was hoping you could help segment how much of that is industrial, how much of that is IoT? And off of easier compares, the growth rate is very high at the start of the year. But should we expect that this segment will also be in model for 2026? Just how are you looking at the potential growth scenarios for industrial and IoT this year? Rafael Sotomayor: Yes. Thank you, Vivek. So yes, very strong growth that we're seeing right now in industrial, right? And the growth, you saw the industrial begin recovering in Q3 and continue into Q4. I think Q4 was 20% year-on-year growth. The growth is fairly broad-based, and there's not a single segment that is driving the growth. Just to give you an answer on the question specific, we have about 60% of our business there is core industrial, 40% is in the consumer side. But the growth is broad-based. But we saw -- I mean, I would give you -- we have some notable traction on a few sockets in health care and smart glasses. We've seen strength in factory automation and energy storage. And so very, very strong design wins with very differentiated products that we have in industrial and IoT. And that strength, of course, in 2025 continues in 2026. I mean you see the Q1 guide was also growing year-on-year 20%. And we feel very good about 2026 for industrial and IoT. Vivek Arya: Got it. And for my follow-up, I would be remiss not to ask the seasonality question as we look at Q2 and Q3. And I ask that just because of all the kind of the exits and things that you're considering this year. So based on historical patterns and normalizing for all your business divestitures, what would you consider normal seasonal trends in Q2, Q3? And are there any other things this year that we should take into account as we model your quarterly cadence this year? Rafael Sotomayor: Vivek, we're not going to give you guidance beyond Q1. But one of the things that you should take away, things have gotten better since 90 days ago. And Bill referred to the order patterns that we have, visibility into Q1 improved as well. We have the conversations with our customers that we're having. It gives us optimism for the second half of the year. So we like the momentum. We like the strength that we closed in 2025. I mean Q4, the growth was broad-based. And we like that momentum we enter 2026 because that momentum is also carrying also broad-based. And so -- and the way you should think about it, both in auto and industrial, the strength is increasingly structural rather than purely cyclical. And we feel good about the trajectory we're carrying here towards the second half of the year. Operator: And our next question is going to come from Joe Quatrochi with Wells Fargo. Joseph Quatrochi: Yes. You talked about the acquisitions accelerating interest in your software-defined vehicle portfolio. Wondering if you could just kind of expand upon that or just what are the particulars that the customers are excited about? Rafael Sotomayor: Yes. So the 3 acquisitions there, [ Luc ], that we discussed. On the auto side, TTTech Auto has been really an injection of horsepower to accelerate our software-defined vehicle story. One of the deliverables that we have that are very important for us and for some of our customers is the deliverable of software-defined architecture will be delivering a system around Sonos towards the end of the year. And so TTTech Auto and the injection of the TTTech Auto is really accelerate our path into delivering a Sono architecture and Sonos systems by the end of the year. They also come in with a middleware and now we're a different middleware called MotionWise. And that engagement right now is on. We're taking -- I think the interest of our customers is quite high now that they move into SDVs. On the industrial and IoT, in my prepared remarks, we talked about the interest level that our customers are now showing for physical AI and the capabilities that we have in our NXP platform. And I just want to double down on that. The interest in the combination of the Kinara MPU and the i.MX family of products that we have is really, really strong. And the level of the conversations right now that we're having with our customers has changed significantly. The traction that we get has changed significantly. So we're excited right now in that engagement. And I think that it's going to result in strong design wins in 2026. Joseph Quatrochi: And then as a follow-up, on the automotive side, is there any color you can share just geographically on the demand you're seeing in the fourth quarter and then kind of what's embedded in 1Q? Rafael Sotomayor: Yes. On the auto side, I mean -- so I think this is an important question to just to give you a perspective. And let's look at the data closely in auto, right? The inventory correction, what we said is largely behind us. Q4, we returned year-on-year growth. Q4 auto finished within 1% of its prior peak in 2023. And we're guiding automotive to grow in Q1 year-over-year. And our guide in Q1 only includes 1-month of the sensor business. So the sequential decline, I think it would have been very close to normal seasonality. So regionally, not a whole lot of differences. Usually, in Q1, you have a normal seasonality because of -- because now the weight that China has in the market. But fundamentally, our thesis hasn't changed, right? The shift to SDVs, advanced ADAS, these are multiyear platform transitions, and they're going to drive constant growth. And this is what we, at NXP, are very strong portfolio. Operator: And our next question will come from Chris Caso with Wolfe Research. Christopher Caso: If I could follow-up on auto again and specifically the areas of accelerated growth drivers. What you said last year is that those accelerated growth drivers were a bit below plan. And it sounds like the message is that is now likely to improve as you go into this year. What's the reason for that? What was the reason you believe it was below plan last year? And I guess the question is because going forward, it doesn't sound like you're assuming that SAAR improves. So what's driving the change that get those accelerated growth drivers back on track? Rafael Sotomayor: So 2025, Chris, I mean, you remember, first half of the year was a tough year with a lot of inventory digestion. That period put a pause in some of the accelerated growth drivers because, for instance, some of the business-like radar got caught up into inventory digestion. Electrification got caught up into inventory digestion. It slowed down the ramp of new models that basically address some of the slow -- slightly less growth, I would say, in the SDV piece. But we saw that second half accelerate. Once the inventory digestion, all the -- our thesis became true, right? The accelerated growth drivers started to grow. By the way, the accelerated growth drivers still grew in 2025. It just didn't grow at target because of the challenges that we have in the first half of the year. And now that thesis continues in 2026. We see our accelerated growth drivers now being within model and/or even better. And so we see that traction being in 2026 taking hold. Christopher Caso: As a follow-up, if I could follow-up on operating margin expectations. And what you said for the year, returning to the long-term model, I assume that involves operating margins as well. I guess you've given some indication with regard to gross margins, but what does that mean for OpEx and operating leverage as you go forward through the year? Bill Betz: Yes, sure. As I mentioned in my prepared remarks related to OpEx, typically, as expense as a percentage of revenue for the first half are typically higher than the second half, driven by our seasonal revenue profile. The timing effect of our U.S. benefits at the start of the new year. That's why you see our guide up in Q1. Q2, I remind you; we have our Q2 annual merits and promotions. And then we also have, at the moment, that onetime IP license impact in Q2 that we previously shared that occurs every year. So we're typically out of model in the first half, but then we expect to get below that 23% model in the second half, leading to a full year of about 23% or below. Obviously, we'll always have leverage on the SG&A side of the house, but the investments that are required for SDVs and physical AI and where we want to take the company, we want to keep that at that 16% level, I would say, to make sure that we can capture that growth, that long-term growth that we're after. So for your modeling purposes, I gave you the gross margin. We gave you the revenue. Here's the OpEx I think you can get to the answer. Operator: And our next question will come from Gary Mobley with Loop Capital. Gary Mobley: I know I'm going to make Jeff cringe here, but I did want to ask a follow-up question with respect to your statement on long-term operating model. You laid out in November 2024 that long-term operating model, the base of which you were guiding from is 2024, obviously. And so that would indicate $15.8 billion of revenue in fiscal year '27 based on that 6% to 10% revenue growth rate minus the sale of the MEMS sensor business and whatever other adjustments since then. So for the fiscal year '26 commentary about being on target, is that with respect to 6% to 10% growth or that 2027 destination for revenue? Rafael Sotomayor: It's a model as we've laid out at the Analyst Day. I think, Gary, we both agree with you on the endpoint where we want to get to. We both know what we have to do to get there. We're going to leave it to you and the analyst community to figure out how that march is. But we feel very good that after coming out of the first half of '25 inventory digestion, we can accelerate through the next 2 years. I think that's the best we can do. Gary Mobley: I appreciate what you gave there, Jeff. As my follow-up, I wanted to ask about the impact on the expense side from the sale of the MEMS sensor business. We know the revenue impact of $300 million, but what's the impact to gross margin and OpEx? Bill Betz: Yes. This is Bill. I mean to think about with the sale was about 100 people. On gross margin, as we said, I think, or shared in the past, it was below our corporate margins. So I mean, not much, maybe 10, 20 basis points improvement related to that one can model. But it's -- those are the colors I can give you on it. Jeff Palmer: And remember, Gary, that we did go through some corporate restructuring along with this to make room for the new headcount from Aviva Links, TTTech and Kinara. So I'd still like to say we made room for the additional headcount. Bill Betz: Yes. And also remind you that the other reason for divesting this business is we did see headwinds as we know, the current acquirer, the buyer actually manufactures the front end. And so we saw this as a great opportunity to prevent headwinds to our gross margin in the future as well. Operator: And our next question will come from Jim Schneider with Goldman Sachs. James Schneider: Relative to everything you said about this year's cadence and being within model and obviously, kind of the inventory situation out there, is there any reason to believe that if you exclude the divestitures that automotive and industrial IoT would not be operating sort of at the upper end of your long-term target model for the year? Jeff Palmer: Jim, it's Jeff again. We're not going to guide 2026. Let me be very clear about that. We've given you guys as much as we're willing to do, but we're not guiding for '26. James Schneider: Okay. Fair enough. And then maybe just on the capital allocation side of things at this point. I mean you've made a decent amount of investments in the fab relationships, et cetera. I mean, do you think that you're going to get into a place where you could, or you see your way clear to sort of increasing the buyback component of that at some point this year? Bill Betz: Yes. I mean our capital allocation policy strategy has not changed one bit. We are very comfortable buying back the stock as long as we're below our net leverage ratio of 2x. And I think in Q4, we were at 1.9x. So there's lots of opportunity with our investments in the long-term of the business, along with buybacks. And I hope into the future, as we expand, we also increase our dividend as the company performs better. So again, we are doing multiple things. We're very flexible, and we've demonstrated that, and we're committed to returning 100% of our excess free cash flow back to our owners. Operator: And our next question comes from Tore Svanberg with Stifel. Tore Svanberg: Rafael, could you talk a little bit more about changing the way you report on geography, what some of the main reasons are behind that? I mean, I assume it's because things are changing so much as far as where your customers are taking design wins. But yes, if you could elaborate on that, that would be really great. Rafael Sotomayor: Yes. Let me start with that one. The question of why do it now, this new way of reporting really reflects how we manage the company internally, how we direct our resources, how we direct our sales organization. I mean, think about the way we report today, a major handset maker will receive products in Asia, in the U.S. But in reality, most of the decisions are being in one place and will be here in the U.S. And so -- and that gives you an example there that kind of gives you the ability to really think about how we internally were organizing our sales force, and our marketing is to go after design wins and address customers. So this is how we manage internally, and I think it's better to reflect our business that way. Tore Svanberg: Yes, that's very helpful. And as a follow-up for you, Bill. Bill, I think you mentioned you'll get to your $3.4 billion capacity expansion investment in 2026. Just curious between VSMC and ESMC, what's the split going to be when the year is complete? Bill Betz: Yes. I would say majority of the investments, VSMC is ahead of schedule, just purely timing, right? I think it's expected to start ramping in '27 and then be in full load in 2028. And so majority of our investments will be out in 2026. Now maybe a little bit into Q1 2027. I don't know. We'll see on the timing of that on the equity side, but I think majority will be out in '26. ESMC, since that ramp occurs later, think about some payments going out this year, but then there's still a string of payments that go out from '27 to '29, which is much smaller in the aggregate. But majority of most of the payments, hopefully, we will be done at the end of 2026. Operator: And our next question will come from Vijay Rakesh with Mizuho. Vijay Rakesh: Rafael, Bill, just a quick question on the auto side. Just wondering, as you look at the software-defined vehicles, and you mentioned a structural pick up there in autos. How are you looking at that Auto segment revenue growth versus LVP? Like should it grow like high single digit above LVP? Or how should we look at it? Jeff Palmer: Yes. Vijay, it's Jeff. I think for next year, the way our algorithm works is we assumed over a multiyear period that SAAR would grow in the low single digits. The long-term math for auto was 9% to 12% -- 8% to 12%, excuse me. And so if you were to say flattish SAAR, you can kind of back that out of that total rate and take you down. But we still see content per vehicle as the real accelerator of automotive growth. Vijay Rakesh: Got it. And then... Jeff Palmer: Vijay, and just -- maybe just kind of give you the one piece that we have. We use S&P as our kind of viable for SAAR. And they're looking at '26 at just a little almost 93 million, 92.6 million cars in '26, which is kind of flattish year-on-year from '25. But when you kind of peel that back, we still see good acceleration of EVs and good market share gains of the Chinese OEMs. So you kind of use that with the CPV content. Vijay Rakesh: Got it. And then as you look at 2025, I think you guys mentioned orders were $7 billion, $7.1 billion-ish. And I think you put out a long-term, I think, 2027, $9.5 billion. I know there's been a lot of puts and takes with acquisitions and divestitures. But just wondering, how you are looking at that $9.5 billion by '27 number for autos? Jeff Palmer: The only change -- yes. The only change that we would make to the model is in '24, to keep -- to be honest, you probably have to back out the $300 million in sale of sensors off that baseline in '24 and then apply the 8% to 12% growth rate off of that. Operator: And our next question will come from William Stein with Truist Securities. William Stein: First, I'd like to ask another one on automotive. A couple of other suppliers have discussed this EV incentive expiry in China as damaging their Q1 outlook somewhat. And I wonder if you're seeing that dynamic as well, and that's -- and your guidance is certainly net of any of those effects. But can you discuss whether that's influencing your outlook either in Q1 or for the rest of the year? And then I have a follow-up. Rafael Sotomayor: No. We don't see -- we don't have the same perspective. As a matter of fact, one of the changes, well, that we see in China, a couple of changes. You mentioned incentives, which tells the incentive towards more of the high end of the vehicles. The other change that China has made is that they increased certain regulations to improve the quality and resilience of the vehicles. And I think both attempts is to reduce the evolution in the market. I think we see both of those initiatives to be good for us. The resilient or quality requirements they're putting in place right now, I think it's really going to be a tailwind for us and design wins for 2026. So we see some of the changes actually good for us for NXP and our auto business. William Stein: Great. And as a follow-up, there's a rapid growth area in semis, we all know, not just endpoint physical AI, but data center AI. And I think historically, you haven't talked about any exposure there, but my best guess is that you have something in that market. Can you discuss any ongoing development or any exposure to that market? Rafael Sotomayor: Yes. Well. So today, our data center revenue sits within the Industrial segment. And our exposure is indeed, you mentioned through processors to support the data center infrastructure. I think there will be things like power supplies, NIC cars, cooling systems. But we also have our high-performance products there for control functions and things that they need probably security like PQC. We don't break this revenue out separately, but it is growing nicely, and it will contribute to industrial momentum in 2026. Operator: Thank you. I would now like to turn the call back over to Rafael for closing remarks. Rafael Sotomayor: Thank you, everyone, for joining us today and your thoughtful questions. This quarter reaffirms the continuity of our strategy and the durability of our model, focused on profitable growth, disciplined execution and predictable returns. With clear visibility into our company-specific growth drivers, we're confident in our ability to compound value through 2026 and beyond. Thank you. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Good morning. And welcome to the Galaxy Digital fourth quarter 2025 earnings call. Today's call is being recorded. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. 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 US Securities and Exchange Commission and on SEDAR plus. 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 Mike Novogratz, founder and CEO of Galaxy. Michael Novogratz: Good morning, everybody. We're in 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 three cities. Not two cities. And so I'm gonna 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 improved 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 it'd 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, you know, hopefully, in the next period of time have news on who's gonna occupy that site. At the same time, we've got over a thousand 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 '1. And so the data center business will start cash flowing, you know, quite quickly. On top of that, you know, 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 five or six major players. But underneath that, there are a whole lot of other players that are, you know, building out data centers themselves. And so couldn't be more bullish on the data center business. You know, the crypto business or the digital assets business, that itself is a tale of two cities. You know, 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 in Bitcoin, there was a lot of price action above that ever since then. I thought it's been in a 75 to a 100 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. So when that happens, you gotta think through what's going on. And I think there's a lot that's gone on. I think people got excited over a 100,000 and felt like, ugh, the race was won. You know? I've got all the hard work over fifteen 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 huddled 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 to stop. You know, 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 five years realizes that part of the ethos of this whole industry is pain. And that often when things feel worst, 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 US, 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 gonna get someone who would do the president's bidding, and I think the market reaction both in precious metals and in crypto was telling in was a nod 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 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 two cities within crypto, has had a great year. Right? Did over $500 million in operating revenue. And so again, 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, you know, I would say neutral, to getting ready to hopefully feel bullish about the overall crypto market. 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 gonna participate in this transition to a digital world. Where wallets replace accounts. And so you read about the kind of the stablecoin debates that are going on in DC, hopefully, in the next period of time, we're gonna have some big announcements about different endeavors we're taking with trade by companies. But Galaxy sees ourselves as a partner for lots of these people. We're gonna partner with some in our office, we're like, 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 know, we could go into a period where the old business doesn't do as well but you're building it to the new business. And what is that new business? That new business is gonna be more on chain stuff, but it's gonna be traditional assets that use crypto rails. You already see it. There's a protocol called XYZ, which trades on the hyperliquid platform. And 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 literary metaphor for their piece and I'm gonna 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 one-time items that occurred earlier in the year, including write-downs and other expenses related to our legacy Bitcoin mining infrastructure, costs tied to our US 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 $5 million in the year, up from $3 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 and 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 one 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 and 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 two strategic capital raises in Q4. A $1.3 billion exchangeable note issuance 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 two primary uses. Continued investments in data center infrastructure to ensure we stay on track for upcoming data haul 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, soft 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, electronic trading and ETF create redeem workflows. For a quick update on Galaxy One, 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 four 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 Galaxy One. 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 and 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 continue to expand our product suite to meet the needs of our clients. We partnered with Invesco to launch the Invesco Galaxy Solana ETP, collaborated with State Street Global Advisors to tokenize a private liquidity fund 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% 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 Gold. But I think today, we're gonna 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 timeline 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 Helios is among the largest AI data center campuses currently under development 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, have two 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 timelines 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 one project and remain on track to deliver the remaining data halls representing the full 133 megawatts of critical IT for phase one within the first half of the year. In order to make this possible, the team has been incredibly busy. 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 ehouses 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 continued moving through the process. Recently, severe winter weather swept across much of the country, including Texas, as winter storm fern 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 five 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 two development at 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 two. 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 proven its ability to execute on a hyperscale AI data center development. Turning briefly to phase two financing. Continuing to evaluate various debt financing structures and are having 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. Evaluated more than 100 campuses across The US, including many in Texas, giving our deep familiarity with ERCOT and existing development footprint. At the same time, we are actively exploring additional markets where power availability permitting timelines, and grid dynamics may offer more attractive paths to accelerate time to power. 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 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: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then 2. Please note, once your question has been addressed, we will be moving on to the next caller. If you have more than one question, please rejoin the question queue as needed. At this time, we will pause momentarily to assemble our roster. And today's first question comes from Patrick Moley with Piper Sandler. Please go ahead. Patrick Moley: Yes. Good morning. Thanks for taking the question. Mike, maybe to start things off, would love to get your thoughts on everything that's been going on in 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 kinda 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? Thanks. Michael Novogratz: Yeah. Great question. First, I would say, we have spent a lot of time on this. We've got a great team in DC. 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 eight 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 a necessity to get it done. The Republicans kind of took all this crypto money and ran that they were gonna be the party of crypto. And get stuff done. And so they have a tremendous amount of pressure on their side quite frankly, Democrats realized last election cycle that being anti-crypto was a really dumb political strategy. And you know, the whole party didn't have enough knowledge about crypto. It was really being driven by a small faction led by Elizabeth Warren, 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 you know, we're on the putting green. Between the Republican version and the Democratic version. There have been a couple 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 DC yesterday. Both sides laid out their cases again. The White House is putting pressure and say, guys, you're gonna come up with a solution yourselves. And I do think the crypto industry you know, when you think about it, the revolutionary transformative technology would be an interest-bearing stablecoin. That's not to happen. Some version of that and no interest is gonna be the compromise. And so I do think we'll get to a compromise in the next, you know, two to six weeks. You'll get a bill passed. It's important for a lot of reasons. I said earlier, all the trade flight companies are already working on their transition right, to where I mean, listen. Paul Atkins says I want every market you know, on chain. And you're seeing a bunch of on-chain activity both in sandboxes and actually on public chains. That's gonna wildly accelerate post the clarity that comes with the Clarity bill. And so you know, DeFi is a space to watch. Right? How DeFi impacts the traditional exchanges, I already talked about both Hyperliquid and XYZ and does that 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 by companies that probably feel short. And so you'll see a pickup in M&A post that bill passing. Operator: Thank you. And our next question today comes from Brett Knoblauch at Cantor Fitzgerald. Please go ahead. Brett Knoblauch: Hi, guys. This is Gareth on for Brett. I was just wondering if you could go into kinda 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 could provide kinda how it went and if there were any glaring constraints. And, also, I know you talked about kind of two 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, yeah. I'll take the first crack at that. So, you know, we have had, between the prior, interconnect request put in from the Helios campus that we purchased, from Argo back in 2022, plus some incremental, interconnect requests that we've accumulated through, 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, or study with ERCOT and wet. To get done. The 830 that we received a 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 approved over one point 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 gonna 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 gonna look at various batches of requests given how large the queue has grown in ERCOT for request and sort of look at groups of request together. And, 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 on the timing on the next incremental load approvals for us or anyone else in the queue is still a little unknown, and we think it's gonna take a lot of time for ERCOT to really sort out the process on. And so, you know, 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 gonna 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, and where those stand in the queue. Let me just add, you know, given those dynamics, first, a shout out to our whole mining team. Data center team, both here in New York and in Texas because, you know, in lots of ways, we got in under the line. That was because we were prepared way ahead, and we were very diligent the whole process. And so couldn't be more thrilled. You know, it makes that power more valuable. There are not a lot of 830 megawatt chunks of power available, in Texas or The United States. You know, there's a lot of people building for the future behind the meter, and so I think you know, we'll see how the negotiations go with our next group of tenants, but it leaves me pretty bullish. Operator: Thank you. And our next question today comes from James Yaro at Goldman Sachs. Please go ahead. James Yaro: Good morning, and thanks for taking the question. Mike, I really appreciate your comments on the crypto backdrop. I just wanted to expand on one element what you touched on in your prepared remarks. You've 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 know, you're a trader. You look for these signals. So what should we be paying attention to to mark this cycle either continuing to deteriorate or potentially inflecting? Michael Novogratz: Yeah. It's a great question. I mean, listen. It feels pretty chilly right now given that we were at a hundred and what was the high, a hundred and thirty, and we're currently I haven't seen the market in the last two minutes. You know? 78, 80 or something. Look. When you look on the charts, it feels to me we're kind of a 70 to a 100 range until we take out a 100. 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, 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 you know, 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's 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 gonna see demand pick up from pockets that we haven't seen yet. And, again, that is what has kept, you know, crypto. The two-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, you know, painfully in three cycles now is you know, you don't necessarily have to pick the bottom, but you've got a sense 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's word at hand for you guys. Think I made that quote up? Yeah, like I said, I think we're closer to the bottom. I'm not sure we've reached it yet. We'll tell you what we think we have. Operator: Thank you. And our next question today comes from Devin Ryan with Citizens Bank. Please go ahead. Devin Ryan: Great. Thank you. Good morning. Question just on kind of market structure clarity. You talked about that, Mike. I mean, we try to map this out and we're getting questions from investors, trying to understand kind of where Galaxy fits into blur between crypto and kind TradFi over time. And, you know, obviously, the large banks are gonna 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, you know, it's a very technical space, so, it's not gonna be easy for many of them to just enter. And so curious kinda how you think about Galaxy's position in that, you know, the moats, then kinda what role you wanna 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? Thanks. Michael Novogratz: Yeah. It's a great question. We think about it a ton. I think a couple 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 gonna see an on-chain credit world explode. Right? There already is an on-chain credit world and we're participating. But I think in the next three years, it could be one of the big growth areas for both the market and for Galaxy. You know, one of the complaints in DC was, well, if we allow interest-bearing stablecoins and you get deposits light, what does it do for credit creation? And I'm like, credit creation is already starting on chain, and it's gonna explode on chain. And so I could see a future in the next few years, but in the next ten years, where on your cell phone, you've got your bank account, i.e., 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 gonna 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, 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, you know, JPMorgan will trade Bitcoin derivatives and Bitcoin, and that's gonna make our Bitcoin derivative and Bitcoin business, you know, it's gonna be competition for it and it's gonna be a bit more difficult. And so we're hoping the pie expands but that we're skating into the edges where those guys aren't. We use our domain expertise to help those players into the market. Operator: Thank you. And our next question today comes from James Faucette with Morgan Stanley. Please go ahead. James Faucette: Thank you so much. Thanks for all the comments this morning. 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 wanna 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. Etcetera, and timing. Christopher Ferraro: Sure. Thanks for joining, James, as well. I think you're right. That a, for us, the major tenant category we are focused on, I'll call them hyperscalers. I think that term is actually broadening out a little further as it relates to traditional hyperscalers. Now what neo clouds are getting larger and larger, maybe the direct model builders themselves, etcetera. Like, that's the universe of tenant 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 the new modern space race for control of who's gonna have the most frontier model and the smartest brain offering to power 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 of 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-to-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, etcetera. 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, you know, 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, you know, I think just last night overnight, after the close, Oracle successfully punched out close $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 with directly with IG tenant counterparties. Which also offers them an opportunity to be an 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: Thank you. Our next question today comes from Martin Toner with ATB Capital Markets. Please go ahead. Martin Toner: Hi, guys. Thank you very much for taking my questions. So you know and we the last deal we saw believe, was from Cypher 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 and space makes sense, then data centers in Texas must make a lot of sense. And so should Galaxy be driving a harder bargain on new HPC deals? Michael Novogratz: I'll answer this one because, you know, a market's guy. And foremost. Listen, the market's gonna 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 gonna balance that first and 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 you know, we listen. On Core, we took a risk the first train. I think it's gonna be a great risk that we got paid extra because we took credit risk 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 gonna be proven out to be a winner on that bet. And so we'll look at rate plus counterparty and get the best price. You know, there are enough players around the table that there's attention. You know, if there was one, it's a very different story. But and you don't need 10. Christopher Ferraro: Yeah. 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 you know, 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 at 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 Cypher as well. And so that's a dynamic that I think actually plays very favorably to what we were initially underwritten. Way back when when we started this journey. Operator: Thank you. And our next question today comes from Ed Engel with Compass Point. Please go ahead. Edward Engel: Hi, thanks for taking my question. Just another follow-up on Helios. I guess, if you were the security tenant there, could construction be done concurrently with CoreWeave's existing build outs? Or do you think you kind of need to complete Phases one, two and three before really starting any new developments? Thanks. Christopher Ferraro: Yeah. So there's a couple different dimensions to the answer to that question. So one, the new 830 plus megawatts that were approved require infrastructure build, just on the Galaxy side, but also on the grid side as well. And so the availability of that power regardless of, you know, if we could snap our fingers and move mountains ourselves, still cannot come online until late 2028. On the earliest. And so, you know, 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 One side. Largely in advance of, you know, 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 Core phase one project. Anyway, so yes, we can have multiple tests. Operator: Thank you. And our next question today comes from Greg Lewis with BTIG. Please go ahead. Gregory Lewis: Hey, thank you. Good morning. Thanks for taking my questions. 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, you know, how that might have looked if in a recovery in the market, are we is largely with incremental customers? Are we adding any new customers? Any kind of color comfortable sharing around the loan book would be helpful. Anthony Paquette: Yes, Greg. It's Tony. Thanks. 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 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, you know, these are obviously backed by crypto. There wasn't a ton of change underneath the surface. I would say the net interest margins, you know, as we mentioned, I think, last quarter, did compress a little bit earlier in the year. They have roughly held steady over the last, you know, kind of period of time. We have continued to grow our client base. The loan originations were up. And overall, you know, we see it as a healthy business. You know, we've talked about the collateralization on the book being somewhere, you know, 1130% or north of that. That has all been fairly consistent. So, you know, it can be a fluctuating business as a function of, you know, the underlying market cap for crypto, but I would say our demand in that space has remained pretty healthy, which, you 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: Yeah. The only other thing I'll add to what Tony said, being a lender, my core by background is, you know, 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 pretty easy thing to do. Growing your loan book while maintaining the right overclassization 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 just it's not worth it. At the end of the day. So that's that has never that is we've never wavered from that, and that hasn't changed. Yeah. If you guys if this was on video, you would look at both Tony and Chris's outfits, and you'd realize that this is a pretty conservative firm. Operator: Thank you, man. And I appreciate Mike's outfit. Thank you. And the next question today comes from Joseph Vafi with Canaccord. Joseph Vafi: Hey, guys. Good morning. Congrats on the new Helios announcement. Just maybe go back to price action here and Bitcoin and some of the other coins real quick. I know, Mike, you know, that you had the big OG profit taking. You know, we've heard things about, you know, maybe a little over leverage in the system. You know, is Bitcoin a risk asset? Is the store value? Is it trying to be both? Just you know, it was a little surprising to see, and I think it was surprising to everyone to see, you know, that price action. You know? Maybe just some more color on, you know, where maybe you were seeing selling. Was it broad-based across all these groups? Or you know, was it, you know, was it over leveraged? You know, our OGs really kinda, you know, maybe profit taking a little more than we thought just whatever you might wanna add. Thanks. Michael Novogratz: I think the OG profit taking more than we thought is a real thing. And, you know, I think the psychology is you know, if you've ever been a like, a speculator, once you start selling, it becomes like a an idea of a reaction function. Then you sell a little more, you sell a little more, and it is so hard to huddle. 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, you know, 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 know, you're seeing some reaction function. From the industry. I think the industry has been slow to kinda like, fund the quantum institutes to say, hey. This is the real this is the real story. Right? The story in layman's terms, which has always been told to me by the, quote, smart guys who and around the Bitcoin core developers is, we get closer to quantum, we're gonna 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 obstinate 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'll be a big issue for the world, but crypto Bitcoin especially will be able to handle it. But that's been the excuse. And I think that selling has and listen. We had one customer alone who sold $9 billion worth. And to put that in context, that was one quarter or one third of all of IVET's inflows last year. Right? You know, the biggest player in this market. And so these big chunky positions take a while to work their way through. You know, someone wrote an article, it'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 lever 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 gonna be, and it shows up. And then all of a sudden, like, like a wildfire, everyone kinda gets excited again. And I'm blowing smoke on the embers, hoping the wildfire picks up. I you know, it's not here yet, obviously, by the price action. Operator: Thank you. And our final question today comes from Christopher Brendler at Rosenblatt Securities. Please go ahead. Christopher Brendler: Hey, thanks. Good morning and thanks squeezing me in. I'm actually gonna ask two quick ones, if that's okay. The first one is on the new 830 megawatts of power. Does the timeline of late 2028 early 2029 you know, 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 Galaxy One, the 8% yield that that product is offering, is that in any way at risk from the Clarity Act and the Compromise on Stable coin rewards? Thanks. Christopher Ferraro: Sure. I'll take the first one at least. On the 830 megawatts, if the negotiations with tenant goes a year, I'll be somewhere between fired and or tied up in a closet by Mike, I think. We do have a lot of time, and we wanna 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 timelines that we were originally looking at when we started with Helios and people looking at very focused on, well, 2627 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 know, we're gonna 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 couple 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, you know, those lead times today sort of push you up into early '28 at a minimum anyway. And so you gotta pick your partner quick. You gotta make your decisions on what you're gonna do, and you gotta start, locking up supply chain so that you can actually deliver that far out. And so that's how we're thinking about prosecuting an opportunity. On the Galaxy One side, I'll pitch it Tony, and I'll kick in if I can be helpful. Anthony Paquette: Yeah, Chris. So the short answer is you're talking about the premium yield 8% that we're offering on Galaxy One platform right now. Short answer is no, that is not at risk. From the Clarity Act, at least is our understanding the way that anything in the Clarity Act is proposed. That is an offering that is available to accredited investors only. We have, you know, certain customer limits and a total portfolio limit on how much we're offering there. But it is really in the interest of, you know, growing our overall, you know, client, you know, base as that business gets off the ground. That rate is obviously subject to change with a period of notice, and that'll 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, to the Clarity Act at all. Hopefully, it answers your question. Thank you. Operator: And that concludes the 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: Guys, thanks a lot. We appreciate all the insightful questions and your support. I just want you all to know that we are, we're working our tails off here, and, you know, 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. May now disconnect your lines and have a wonderful day.
Operator: As it is time to start, we will now begin the conference call for the presentation of financial results for fiscal year 2025 third quarter. Thank you very much for your participation. Today, Mr. Yamauchi, Executive Officer and General Manager of Accounting Department, will give a briefing. And later, we will have a Q&A session. We will conclude the call at around 16:50. Now Mr. Yamauchi, over to you. Toshihiro Yamauchi: Thank you very much. This is Yamauchi speaking. Thank you very much for attending the Sumitomo Chemical conference call despite your busy schedule. I'd like to thank investors and analysts for your deep understanding and support to our management. Thank you very much for that. Now let me start with a briefing of the financial results for fiscal year 2025 third quarter. Before explaining the details of our financial results, I would like to give a brief update on the status of profit and loss for the third quarter. Core operating income and net income attributable to owners of the parent for the third quarter significantly increased compared to the same period of the previous fiscal year. Core operating income was driven by Sumitomo Pharma's strong sales and partial divestiture of the Asian business recorded a gain. Core operating income of Essential & Green Materials increased significantly year-on-year with a gain on the partial sale of shares in Petro Rabigh and better trade terms. Agro & Life Solutions crop protection and chemical business had solid performance. Net income attributable to owners of the parent already exceeded in the third quarter, the forecast announced in November. However, we anticipate that the recording of losses from nonrecurring items will be concentrated in the fourth quarter. Consolidated financial results of the third quarter of FY 2025. Sales revenue was JPY 1.7063 trillion, down JPY 198.5 billion year-on-year. Core operating income expressing recurring earnings power was JPY 186.8 billion, up JPY 126.8 billion year-on-year. Nonrecurring items not included in core operating income was a loss in total of JPY 6.4 billion. In the same period of the previous year, there was the impact of recognizing our interest in Petro Rabigh's debt forgiveness gain of JPY 86 billion as a nonrecurring item, leading to a profit of JPY 85.4 billion. So compared to the previous year, this has worsened by JPY 91.8 billion. As a result, operating income was JPY 180.4 billion, up JPY 35 billion year-on-year. Finance income was a loss of JPY 36 billion, improvement of JPY 69.3 billion compared to the same period of the previous year when loss on debt waiver for Petro Rabigh was recognized. Gain or loss on foreign currency transactions included in finance income or expenses was a loss of JPY 7.7 billion, worsening JPY 22.8 billion year-on-year. Income tax expenses was a loss of JPY 300 million, increase of tax burden of JPY 900 million year-on-year. Net income or loss attributable to noncontrolling interests was a loss of JPY 56.8 billion, worsening by JPY 44.7 billion year-on-year with improvement of Sumitomo Pharma's income. As a result, net income attributable to owners of the parent for the third quarter was a profit of JPY 87.4 billion, up JPY 58.8 billion year-on-year. Exchange rate and naphtha price, which impact our performance average U.S. dollar rate during the term was JPY 148.71 to a dollar and naphtha price was JPY 65,000 per kiloliter. Yen appreciated feedstock price declined compared to the same period of the previous year. Next, sales revenue by reporting segment. Please look at Page 6. Total sales revenue was down JPY 198.5 billion year-on-year. By segment, sales revenue decreased in all segments except Sumitomo Pharma. As for year-on-year changes of sales revenue by sector, sales price decreased by JPY 49.5 billion, volume decreased by JPY 191 billion. Foreign exchange transaction variance of foreign subsidiaries sales revenue decreased by JPY 28 billion. However, the large negative difference in volume is largely due to business restructuring efforts, such as the sale of subsidiaries and business withdrawals and decrease in shipment volume at our sales subsidiary due to a periodic plant maintenance carried out by Petro Rabigh this fiscal year. Next is Page 7. Total core operating income increased by JPY 126.8 billion year-on-year. Analyzing by sector, price was plus JPY 6 billion. Cost, plus JPY 3.5 billion. Volume variance, including changes in equity in earnings of affiliates was plus JPY 117.3 billion. I will explain the details on the following pages. But significant increase in volume of variance gain was largely due to profits from business divestitures. Next is performance by segment. Please turn to Page 8. Agro & Life Solutions. Core operating income was a profit of JPY 28.1 billion, up JPY 8.6 billion year-on-year. Price variance, trade terms improved for overseas crop protection products. Volume variance, there were long -- there were strong shipments in Japan, India and other regions but income declined from exports due to stronger yen and there was a stronger yen effect of sales of subsidiaries outside Japan when converted into yen. Please turn to the next page. ICT & Mobility Solutions. Core operating income was a profit of JPY 46.5 billion, down JPY 13.2 billion year-on-year. Price variance, selling prices of display-related materials declined. Volume variance, though there was a gain on the sale of large LCD polarizing film business, shipments of display-related materials decreased. Shipments of semiconductor process materials such as resist and high priority chemicals increased due to the continued gradual recovery of the semiconductor market. There was lower income from exports due to stronger yen and the stronger yen effect on the sales of subsidiaries outside Japan when converted into yen. Next page. Advanced Medical Solutions segment. Core operating income was a gain of JPY 300 million, down JPY 900 million year-on-year. Sales and affiliated companies decreased. Please turn to the next page. For the Essential & Green Materials segment, core operating income was JPY 19.8 billion, an improvement of JPY 64.1 billion year-on-year. As for the price variance, the profit margin for synthetic resins improved alongside the decline in primary raw material naphtha prices, and the profit margin for alumina also improved. Regarding the volume and other variances, we recorded a gain on the sale of a portion of our equity in Petro Rabigh equity method investee company. In addition, refining margins improved at that company, leading to an improvement in profitability and investments accounted for using the equity method. Please go to the next page. For the Sumitomo Pharma segment, core operating income was JPY 111.2 billion, up by 86.9 billion year-on-year. As for the price difference, due to the impact of NHI drug price revisions within Japan, the selling price fell. Cost differences resulted in a decrease in SG&A due to progress and rationalization and others. Regarding the volume and other variances, in addition to the increased sales of Orgovyx, a treatment for advanced prostate cancer and Gemtesa, a treatment for overactive bladder, gains from the partial transfer of equity in the Asia business are included. This concludes the overview of by segment performance. Next page will be the explanation of the consolidated statement of financial position. Total assets at the end of December 2025 totaled JPY 3.5104 trillion, up by JPY 70.6 billion compared to the previous fiscal year-end. Growth in inventory assets due to periodic plant maintenance at the Chiba plant and increased buildup for sales in the fourth quarter and beyond along with the acquisition of tangible fixed assets for new plant construction and expansions were the primary factors driving the increase. Interest-bearing debt was JPY 1.2215 trillion, down by JPY 64.6 billion compared to the end of the previous fiscal year. As a result, the D/E ratio at the end of December 2025 improved by 0.23x from 1.2x at the end of March 2025, reaching 0.96x. Next, I will explain the cash flows. Please look at Page 14. Operating cash flows from operating activities was positive at JPY 111.6 billion. However, cash inflows decreased by JPY 29.1 billion year-on-year. Quarterly income before taxes improved. However, this was influenced by factors such as the deduction of gains from business divestitures from operating cash flow and the significant improvement in working capital last year end based on immediate term concentrated measures to improve business performance. Cash flow from investing activities was negative JPY 39.8 billion, a decrease of JPY 96.6 billion year-on-year. This period also had the sale of part of Sumitomo Pharma's Asian operations. However, the same quarter last year included significant income from the sales of Sumitomo Pharma shares and Roivant and the sale of Sumitomo Bakelite shares. As a result, free cash flow was positive JPY 71.8 billion, a deterioration of JPY 125.7 billion compared to the positive JPY 197.5 billion recorded last third quarter. Cash flow from financing activities resulted in a negative JPY 100.6 billion due to factors such as loan repayments and dividend payments. This represents a decrease of JPY 41.1 billion in outflows year-on-year. Next, I will explain the outlook for fiscal year 2025. Please go to Page 16. I will explain from the business environment surrounding our company. Regarding the economic conditions, although investments in the field of technology are firmly supporting the global economy, future prospects remain uncertain due to the expansion of protectionism and increased geopolitical risks. In the main business environment, we use weather symbols to indicate our key business areas and our assessment of their respective environments. From the top regarding crop protection chemicals, we expect price competition to continue and inventory congestion in the distribution chain remains uneven across regions. Regarding the methionine market price, although it recovered in the first half of the fiscal year, we anticipate a continued downward trend in the second half. Displays are showing steady growth in mobile-related components. Demand for silicon semiconductors has recovered more than anticipated since our previous forecast and is currently showing steady growth. However, performance continues to vary across different fields. The petrochemical and raw materials market will continue to have low margins. That concludes the business environment overview. Now let me explain the consolidated performance summary. Please turn to Page 17. This is the summary of financial forecast for fiscal year 2025. Core operating income for fiscal year 2025 is forecasted at JPY 200 billion, showing improvement over time with an expected increase of JPY 15 billion compared to the November performance forecast. As shown in the graph in blue, excluding gains on the divestment of business, profit from business activities improved significantly at Sumitomo Pharma and Essential & Green Materials due to the results of fundamental structure reforms, resulting in a significant increase in profits from approximately JPY 80 billion in the previous fiscal year to approximately JPY 120 billion in the current fiscal year. So it has largely increased. Furthermore, and as for the profits attributable to owners of the parent, it has increased by JPY 1.5 billion to JPY 55 billion. Now furthermore, in light of the upward revision due to improved profit and loss, the year-end dividend per share to shareholders will be increased by JPY 1.5 from the JPY 6 announced in the November financial forecast to JPY 7.5 per share. As a result, the annual dividend amount will increase by JPY 4.5 from the previous year's JPY 9 to JPY 13.5. The payout ratio is expected to be approximately 40%. And please go to Page 18. This is showing the details of the business performance forecast. First, sales revenue is forecasted at JPY 2.3 trillion, up by JPY 10 billion from the previous forecast. As for the core operating income, as mentioned before, it is forecasted at JPY 200 billion. Net income attributable to owners of the parent as mentioned before will be JPY 55 billion, an increase of JPY 10 billion year-on-year. The assumptions regarding exchange rates and naphtha price are as stated on this slide. As for the sales revenue, we expect an increase due to higher shipments of semiconductor processing materials within our ICT & Mobility Solutions segment. As for core operating income, I will explain the situation by segment on the next slide. Please go to Page 19. As for the full year business performance by segment, regarding Agro & Life Solutions, Advanced Medical Solutions, Essential & Green Materials and Sumitomo Pharma segments, these 4 segments, as you can see here, the previously announced guidance remains unchanged. As for ICT & Mobility, Semiconductor processing material shipments are expected to increase, leading to a slight increase in profit compared to the previously announced guidance by JPY 2 billion. For others and company-wide expenses, compared to the previous forecast, we are expecting a JPY 13 billion increase. At the time we made an announcement last time, we consider the uncertainties in the business environment, so we have incorporated risks to a certain extent. The business activities are now progressing steadily. Therefore, we are forecasting an increase in profit compared to the previously announced forecast. This concludes the explanation of financial results and forecast. I would now like to take questions from the participants. Operator: [Operator Instructions] Now we would like to receive the first question. From Morgan Stanley MUFG Securities, Mr. Watabe. Takato Watabe: I'm Watanabe from Morgan Stanley. For Agro & Life Solutions, I have a question. In the third quarter, your profits and sales was not that large, but why was the profit in the third quarter and there are differences by region. And what is the situation of inventory adjustment and the movement towards fourth quarter? And by main products, what is the trend in the fourth quarter forecast compared to last year's fourth quarter, you expect a reduction in profit. Could you talk about Agro & Life Solutions? Toshihiro Yamauchi: Thank you for your question. For Agro & Life Solutions sector, first, in the third quarter situation. Compared to last year, it is true that it is better. And by region, India and also in Japan, things were very solid. And Europe as well, the amount is not that large, but Europe was also firm. And in North America, compared to the same period of previous year, it is at a similar level. South America, it is slightly difficult. Last year, there was a drought, which is giving an impact. And credit concerns about the clients exist, so there are difficulties in increasing sales. Customers with high creditworthiness, in this case, competition is becoming strong. And by product, well, in that sense, is the main product [indiscernible], South America is a main market, but growth is a little slow. Takato Watabe: Sales and profit trend still is not increasing that much, but profit is increasing. What is the reason for that? In the same quarter of the previous year, compared to the previous quarter or previous year, the impact of foreign exchange rate is seen in each region, there will be increase in local currency, but when converted into yen, there are cases which is flat or slightly declining. I think that is the impact. What is the progress of inventory adjustment from crop protection products? What is your prospect for the next fiscal year? Toshihiro Yamauchi: For inventory, in general, it is moving to an improvement direction. United States and India, we are seeing improvements. But in South America, there is still some inventory remaining. So towards the next fiscal year, South America is the place where we have to resolve. Thank you. Operator: We would like to take the next question Mizuho Securities, Mr. Yamada. Mikiya Yamada: This is Yamada from Mizuho Securities. I was told to ask you one question. So I'd like to hear about the third quarter situation outlook regarding the ICT & Mobility Solutions. In the same way as the previous question related to Agro & Life Solutions, I would like to know the details. Specifically, 3 months in third quarter, the -- when you are doing analysis of the variances of core operating income, in 3 months, it was minus JPY 5 billion. And in the 9 months, it was minus JPY 3.7 billion. So year-on-year, it's a plus JPY 1.3 billion is what I think. For display-related products the shipment has declined. And thinking about the foreign exchange being negative, that means that the semiconductor was quite performing strongly. And so in semiconductor, was resist a good performer or in others good or is resist the contributor? And if so, the DRAM and NAND, the high prices are maintaining. So I would like to know the future trend of this. Toshihiro Yamauchi: Thank you very much for your question. The ICT & Mobility Solutions situation for the third quarter is what you have asked. Looking at the year-on-year basis -- just a moment, please. Regarding semiconductors, from last year, gradually, it is recovering. And by field, memory-related area, the DRAM utilization is increasing and NAND is recovering. However, depending on the customer, it varies. For DRAM, due to the generation change, the South Korean usage is declining. For logic usage, Taiwan and China, new plants are being -- starting their operation and increasing. So our shipment volume is on the trend of increasing. However, on the other hand, South Korea and United States is flat. Mikiya Yamada: Well, the resist specifically, is there such factors? With memory, it's going to change the generation. However, the U.S. capital part is increasing very well for resist? Toshihiro Yamauchi: For resist, this is the overall situation compared to last year, the sales is increasing. Mikiya Yamada: And this time, you have revised upward so that situation from the third quarter to the fourth quarter, it is a quarter that usually declines, but it's not going to be that way. Is that the correct understanding? Toshihiro Yamauchi: Yes. I have high expectations. Looking forward to it. Thank you. Operator: Now the next question from SMBC Nikko Securities, Mr. Miyamoto. Go Miyamoto: I'm Miyamoto from SMBC Nikko Securities. I also had a question about Agro & Life Solutions. This may be like Mr. Watabe's question. In the third quarter, there was an increase of JPY 11.5 billion year-on-year in terms of profit. And fourth quarter, you expect a decline compared to previous year. Same quarter, methionine is showing a declining trend. But there were shipments carried forward. So could you tell me what is the impact? In particular, in Q3, as Watabe-san mentioned, sales trend is showing a difference. Sales in the segment in Q3 year-on-year is a drop of about JPY 4 billion, but profit has increased. So when I see your analysis by sector, looking at the volume variance in the first half, it's minus JPY 3.9 billion. So for 3 months, volume variance is a factor of JPY 12 billion increase in profit. But on Page 23, analysis of sales differences, volume variance and for first half was minus JPY 4 billion, but now it's minus JPY 8.4 billion. So minus JPY 4.4 billion in 3 months. So the sales volume variance is quite negative but profit is positive. Could you explain a little more about it? I think the foreign exchange rate has not changed that much. Toshihiro Yamauchi: Please give me a minute. Yes. Thank you for waiting. With regards to relationship with sales, methionine volume is declining. So as sales, there's a drop. However, this is not giving a big impact on profit or losses. But for crop protection chemicals, India is doing well, in Japan also. In particular, in Japan, from Q4, sales carried forward. In other words, there's a trend of customers placing orders in advance. So Q3 has improved. That's a factor for the improvement of Q3. Go Miyamoto: I see. On Page 27, the sales that we have indicated on crop protection, it is flat. And for Q3, 8 months, it has increased about JPY 2 billion. But one variance has increased that much. Why is it so? Toshihiro Yamauchi: Page 27. I see. This is indicated in yen. But if you look at these figures in dollars, it may look different. First, United States, JPY 2.6 billion negative. But in local currency, it is nearly flat. And India, it is slightly negative. But in local currency, there is an increase. So these are some of the factors. For sales and profit, there is no particular major factors. Go Miyamoto: I understand. In the fourth quarter, you expect a decline in profit year-on-year. Could you explain that? Toshihiro Yamauchi: Because shipments were carried forward for crop protection products and methionine sales price is showing a declining trend. So that is taken into consideration. Operator: Next from Daiwa Securities, Mr. Umebayashi. Hidemitsu Umebayashi: This is Umebayashi from Daiwa Securities. I would like to ask a question regarding Essential & Green Materials. From the second quarter to the third quarter, the trend, the profit and losses improved by JPY 51 billion, and that is due to the Rabigh share sales. But other than that, if there are any factors I would like to know. First of all, as a confirmation, Rabigh, the profit you made from the equity method is at 37.5% or 15% as of the third quarter, I wanted to confirm that. And also, the third quarters in Essential & Green, the sales revenue has increased as well. So I would like to know the background of that. I think the fact is that the business performance is doing well. Did the margin improve? Or did the petrochemical product sales improve? And also the fourth quarter, I believe that there is going to be a periodic plant maintenance. So was there a buildup of inventory due to that or not is what I would like to know. Toshihiro Yamauchi: Thank you very much for your question. Regarding the third quarter's Essentials & Green Materials, as you have pointed out correctly, over here, the Petro Rabigh equity sales is included. When we made a timely disclosure in this November, it was JPY 50 billion, and the number that's close to that is incorporated in this. And other than that, there are improvements that were made for Petro Rabigh. Well, over here, up to the third quarter, it was 37.5%. Our interest was that and we have applied the equity method. And from the fourth quarter, it is going to become 15%. And regarding the refining margin improvement also occurred. So this area has improved as well. And in Singapore as well, TPC, they were due to the improvement of the profit margin, the profit and loss situations have also improved. Hidemitsu Umebayashi: So for the sales part, it was a Singapore that was doing well in terms of the sales improvement? Toshihiro Yamauchi: Just a moment, please. Well, the products from Rabigh, the sales of those, that compared to the first quarter and the second quarter, the third quarter is showing a larger growth. And from April to June, it has experienced a periodic shutdown for maintenance. And probably to the second quarter, that impact remained. But from the third quarter, it returned to the regular sales and the fourth quarter for the Rabigh manufactured products, we are looking at it the same way, and that is reflected in the changes. And the impact to the profit is minor. So these are the factors is what we think. Operator: Next, I'd like to receive Mr. Okazaki from Nomura Securities. Shigeki Okazaki: I'm Okazaki from Nomura Securities. About the dividend, I'd like to ask a question. As you have mentioned, this time, you are going to increase the dividend. The annual dividend payout ratio is now about 40%. I think you mentioned 30% before. The final profit figures may differ. So is that meaning as a background? And JPY 7.5 billion for the interim period? And next year, depending on the farmers' milestone, there will be other factors where basically you will continue or it will be rather positive. We are gradually becoming confident. Is this understanding correct about the dividend payment. Toshihiro Yamauchi: Thank you for your question. For dividends, as you mentioned, basically, our dividend policy is stable dividend. And with relation to profit, in general, about 30% is the level. At the moment, the profit for this year, we made an upward revision to JPY 55 billion. It is still in the process of recovery. So in terms of dividend payout ratio, a stable minimum dividend payment is going to be made. That is our feeling. So Instead of 30%, it is now 40%. And compared to our initial plan, profit has increased. And about -- we will consider continuing in the future and taking that into consideration, we decided to have this amount of dividend. Shigeki Okazaki: So this is a minimum level, more than 38.7%. You have not yet to determine what will be the performance next year, but depending upon situation, there may be other factors but among those JPY 7.5 at a moment is amount that you want to keep. Is my understanding correct? Toshihiro Yamauchi: Yes, you are right. Operator: Next, from Morgan Stanley MUFG Securities, Mr. Watabe. Takato Watabe: This is my second time. Regarding Essential & Green Materials, at the flash report, it says that the business transfer gain is JPY 55.8 billion and it was consistent by Rabigh and others. But if you exclude that, it is in the red. And the fourth quarter period of the maintenance shutdown, when we talk about the refining margin right now, I think the Petro Rabigh performance is improving as well, and there is a business integration moving forward. But what is the impact of that? And what are you looking at towards the overall essential and green materials? Toshihiro Yamauchi: Thank you very much. For the divestment gain and the last report, it said JPY 55.8 billion. Yes. After the third quarter cumulative figure, Petro Rabigh, other than Petro Rabigh, we have divested several companies. Nippon AL, which is already disclosed, including that in total is JPY 55.8 billion. And towards turning around into black ink, regarding Petro Rabigh, it's difficult to share with you what's going to happen in the future. But for the refining margin and probably all of you can assume what the situation is going to be. And I think you can assume in that way. And how it can turn around to profit making, we're in the midst of setting the budget for next fiscal year. So I would like to refrain from commenting. Takato Watabe: So the fourth quarter non-recorded loss concentrating, it's mainly in Essential & Green Materials. Is that correct, including essential as well. Toshihiro Yamauchi: To a certain extent, there are planned items for -- from restructuring. But there are some items that we are aware of, such as impairment, but we are looking at it to that extent. Takato Watabe: So there is -- do you think that is going to work positive in the next fiscal year, such as the decline in depreciation? Toshihiro Yamauchi: Yes, that's how we are understanding it. However, at this point, it's difficult to give you the full answer. Operator: Well, it is time to conclude. So the next question will be the last question. Yamada-san from Mizuho Securities. Mikiya Yamada: I'm Yamada from Mizuho Securities. This is a detailed point. Under others, this time, though there is an upward revision, for Q4, you expect some level of negative figures. So these are corporate expenses. So it is possible that, that will surface on Q4 and things will become more transparent. So JPY 20 billion to JPY 25 billion corporate costs could be expected from next year onwards. What is the trend of that? Could you tell me that? Toshihiro Yamauchi: Thank you. Under corporate expenses, as you know, the corporate expenses, in particular, R&D expenses are included here. And recently here, regenerative cell research is still under development. So the progress of research expenses is very difficult to make a projection. So these are also included. So we don't expect a large drop next year, but we expect to maintain a certain level in terms of these expenses. Mikiya Yamada: About more than JPY 10 billion R&D will be spent for regenerative cells. And then that is surfaced in a specific quarter like this? Toshihiro Yamauchi: Yes, that is what it is. Operator: Mr. Yamada, thank you very much. With this, I would like to conclude today's conference call. Thank you very much for your participation today. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Tom Erixon: Good morning, and welcome to Alfa Laval's Fourth Quarter and Full Year Earnings Call for 2025. So Fredrik and I, we will give you a rundown presentation, a summary of the quarter and the year, and then we will go to the Q&A as always. So let me start with some introductory comments to the quarter and the year. In all, we felt it was a strong year in 2025, resulting in record invoicing and record earnings with earnings per share for the first time climbing to SEK 20 per share. So the supply chain was strong, especially in the quarter, and we delivered a record invoicing of SEK 19 billion in the fourth quarter. With that said, we still need capacity additions that are required to support our customer base in the data center applications. And yesterday, the Board of Directors approved a targeted CapEx program of SEK 1 billion for this purpose specifically. Then finally, during 2025, Alfa Laval has prepared for further growth by simplifying the operating model and consolidating the business unit structure. It is a substantial reorganization of the company. And as of January 1, the new organization is operational after considerable efforts on many hands. And with that, let's move on to key figures. Orders held up well with a 2% organic decline in Q4. We had good support from -- and strong demand from the U.S. and several important Asian markets. The margin was okay and as always, a bit affected by the seasonal high share of project invoicing. In addition, we carried approximately SEK 150 million of one-off costs, partly related to the ongoing reorganization program. On a divisional level, first to the Energy division. Orders reached an all-time high in the quarter at SEK 6.1 billion with firm demand in both HVAC and CleanTech applications. Data center orders were increasing as anticipated and was accounting for approximately 15% of the divisional orders. Service has been slow during 2025 for the Energy division, partly due to internal constraints. In Q4, the service was again showing double-digit growth and the growth trend may well continue into 2026. As indicated earlier, a new CapEx program of SEK 1 billion is launched to maintain a leading market share for the heat transfer applications in the data center business. The program is spread over our existing footprint in the U.S., in China and in Europe. We are with the existing infrastructure in a very good position to scale our volumes and capacities in this area specifically. Then to the Food & Water division. Orders remained flattish organically, both sequentially and year-on-year. We continue to see considerable growth opportunities in many end markets going forward, and the new growth strategy launched in 2025 is supported by targeted investments into application specialists and the global sales force to cover areas like pharma and protein. The margin in Q4 was impacted by some one-offs, both in weak project execution and the reorganization as discussed earlier, and it amounted to approximately SEK 80 million in the division. In 2026, we will take some cost for driving the growth strategy forward in the areas described with some margin impact in 2026 and possibly into 2027. Then on to the Marine division. Orders were stable sequentially and the lower cargo pumping orders were as before, partly offset by growth in the other application areas. In all, the market is and is expected to remain stable to positive for ship contracting. Invoicing continues on a good level based on a solid order book with a positive mix. The order book mix remains unchanged in 2026. Then on to Service. After many years of growth, the Service business now accounts for about SEK 20 billion of invoicing. The growth trend slowed a bit in 2025 compared to before, but the structural demand trends remain positive and the troubleshooting in the Energy division specifically is now completed and resolved. As a consequence, in the quarter, we had unusually large mix differences between the divisions, with the Marine division at almost 40% share of service orders, partly related to lower project order intake on the Marine division. And the Energy on the other side, with just above 20% of service order intake after a very strong capital sales quarter in Q4. The spread between the divisions is expected to decrease going forward. All right. And then a couple of regional comments to round up. In many aspects, it was a positive quarter with good progress in important growth markets like Southeast Asia and India. China was positive in Energy and Food & Water, but not fully compensating for the slower cargo pumping volumes that we expected in the quarter. U.S. grew in many end markets with special focus, obviously, on the data center market, and we had an all-time high in the quarter for the U.S. market as such. And with that, let me hand over to Fredrik for some further financial details. Fredrik Ekstrom: Right. So let us dive straight into it and take the order intake in quarter 4 amounted to SEK 17.1 billion with a negative currency impact of 8.7%, a structural growth of 3.3% and an organic contraction of 2.2%. What's notable in the quarter is the continued slow conversion of large project business from project pipelines that are both extensive and with quality projects. The Energy division reflected demand strength in HVAC with a 7% growth, and on data centers, more than doubled. On a whole year basis, order intake accumulated to SEK 66.7 billion with a negative currency impact of 6.1%, growth from acquisitions of 1.6% and an organic contraction of 6%. Of the negative organic growth, the majority of the contraction is slow conversion of large projects, which lagged behind with some 20%, of which the majority stems from the normalization of our marine pumping systems and large project orders in Food & Water. Transactional business, on the other hand, increased with 2% during the year to compensate. The order book stood at SEK 48.3 billion at the end of the year, of which some SEK 7.5 billion is invoicing for 2027. During the year, SEK 1.9 billion of negative revaluation due primarily to currency impacted the backlog and order intake. Quarter 4 book-to-bill was 0.89 with a good invoicing and project execution in Q4. Now moving on to sales. Revenues in quarter 4 reached an all-time high of SEK 19.1 billion with a growth compared to last year of 4.6%, of which 10.9% was organic, 3.1% coming from acquisitions and the negative impact of currency with a whole 9.4%. The higher revenue stems from good project execution in the quarter and a good mix of growing transactional sales. Revenue in all 3 divisions grew in the quarter, Energy division with 12%, Food & Water with 1%, and Marine division with 3%. On a year basis, revenues grew with 4.1%, driven by 7.9% growth of organic business, 1.8% structural and a negative currency impact of 5.6%. Revenues from the Marine Pumping Systems increased with 23% on an annual basis and project execution in the Food & Water division contributed with 10%. The large order book we carry into 2026 supports a continued good development in revenues. Now to some key figures. The adjusted gross profit (sic) [ adjusted gross margin ] of 34.7% was in line with quarter 4 in 2024, but sequentially lower than quarter 3 at 37.8%, reflecting the heavier project execution mix in quarter 4. The adjusted gross profit margin as in previous quarters, continues to be supported by strong manufacturing results. S&A grew with 2%, while R&D grew with 11.6% as expected in the quarter. Operating income grew with 8.3%, yielding an adjusted EBITA margin of 16.9%. To be noted further is that the adjusted margin is affected by the last tranche of the acquisition costs incurred in the cryogenics transaction, lower yield from a project execution in Food & Water division and costs arising from the new organizational structure with some SEK 150 million in the quarter. The increase of financial costs in quarter 4 is driven by higher interest costs and more substantially by the net of exchange rate differences. Profit before tax is on a similar level as last year and finally, an EPS of SEK 4.79 for the quarter. On an annual basis, adjusted gross profit margin increases to 37%, reflecting the revenue mix, a strong factory and engineering result and positive purchasing price variances. S&A grew with 4.5% and R&D with 4.9%. However, both remained stable in relation to revenues at 15% and 2.5%, respectively. Operating income increases with 12.6% to yield SEK 11.7 billion and EPS for the year just above SEK 20, an increase of 12%. Now on to some profitability comments. The adjusted EBITA margin for the quarter ended at 16.9%, an increase of 1% compared to quarter 4 2024. In absolute terms, the adjusted EBITA in quarter 4 increases with SEK 437 million despite the negative currency impact and the additional burdening of the result with SEK 150 million in the quarter as previously detailed. On an annual level, the adjusted EBITA margin was 17.7%, an increase of 1% compared to 2024. Adjusted EBITA increases with 12% to yield SEK 12.3 billion. Now some comments on debt position. Debt has increased with SEK 7 billion, reflecting the financing of acquisitions during the year of SEK 9.4 billion, with a resulting leverage to EBITDA of 1.21. Net debt after subtracting a healthy liquidity position of SEK 7.8 billion is SEK 9.4 billion, which corresponds to 0.66 in relation to EBITDA. Finally, net debt, including lease liabilities, lands at 0.92 in relation to EBITDA. Cash flow from operating activities in the quarter was on a good level given the increase in revenues. Release of working capital was positive, but on a lower level than quarter 4 last year. CapEx in the quarter was in line with guidance, bringing the free cash flow for the quarter to SEK 2.6 billion. On an annual level, cash flow from operating activities was SEK 9.2 billion, capital expenditures in line with yearly guidance at SEK 2.7 billion. 3 acquisitions during the year totaled SEK 9.4 billion. And after financing activities, the final cash flow for the year was positive with SEK 168 million. And finally, for some guidance on Q1 2026 and whole year 2026. CapEx in quarter 1 is expected around SEK 0.7 billion and a whole year guidance of SEK 2.5 billion to SEK 3 billion. Amortizations at SEK 175 million in quarter 1 and SEK 670 million for the year, and that includes all recent acquisitions. Tax rate guidance remains in the range of 24% to 26%. With that, I conclude my financial overview, and I hand it back to Tom for some closing remarks. Tom Erixon: Thank you, Fredrik. So let me give you our forward-looking comments before we go to the Q&A. As we're all aware, the synchronized global business cycles are not so synchronized anymore. So in reality, geographies and different end markets tend to move in different directions. So all in all, we remain in a situation where we don't have extremely clear trend lines. With that said, the general feeling we have in the market is that it is overall, everything said and done, somewhat positive momentum in the market. And we also perceive that the slowdown we've been having in large CapEx projects from customers is maybe easing somewhat as we move into 2026. So with that said, we expect after a strong Q4, sequential demand in the first quarter to be on about the same level as we had in Q4 with the Energy division being somewhat lower compared to an all-time high record level, as you remember in Q4. The Food & water, we expect to be somewhat higher and the Marine division somewhat lower. And all in all, it takes us to market conditions that are relatively unchanged in Q1 compared to Q4. And so with that, we round off the presentation, and we are open for questions. Thank you. Operator: [Operator Instructions] Our first question comes from Magnus Kruber with Nordea. Magnus Kruber: Magnus here from Nordea. A couple of questions. First, light industry and tech obviously posted very solid growth in the quarter and a distinct step-up from prior levels. How should we think about sort of the trends going forward here? I think it's been perceived that it's been a little bit underwhelming here in the prior quarters, and now we see a very big step-up. So just some comments on how to look at the outlook here would be helpful. Tom Erixon: Well, we don't really guide more than the quarter, and the quarter is somewhat lower. So I think that's all we really have to say on the matter. But it is true that we've been a little bit low for a number of quarters previously. We were not surprised exactly by the amount of orders that came in, in Q4. It was partly to be expected. And as we've guided you before, when it comes to the data center question specifically, we are a little bit on a shorter cycle than many of the project orders that you otherwise see in the market. So the pickup of that played a reasonable role in the development. But on top of that, I would like to add that despite concerns on the energy transition and what's going on, we did have a good quarter on CleanTech applications. And we see both in the Food & Water division when it comes to biofuel applications and in the Energy division when it comes to carbon capture, hydrogen and other related issues, that there is still some momentum in the market on that level. So we are sticking to our energy transition strategy. I think it's going to be a bit slower, obviously, than people thought 3, 4, 5 years ago. And it may gradually become more market-driven and policy driven, but there is still a growing momentum in those areas. Magnus Kruber: Excellent detail. Super helpful. You also talked a little bit about SEK 150 million headwinds here in the quarter from various one-off effects and alluded to that could continue somewhat into the first half. Is the SEK 150 million run rate a reasonable level? Or should it be more sort of benign than that? Tom Erixon: Well, it's going to depend a little bit. The SEK 150 million, you can kind of split 50-50 between reorganization aspects and project execution write-offs. So I hope the project execution issues are not repeating itself. The question on what running cost we will have on the reorganization part, which is now -- so we are sort of on the top level, all managers are appointed on a high level and the financial reporting is going in the new organization, but there's still a fair amount of implementation work to be done, both in sales regions and in business unit structures. And so if we see a higher reorg cost than in Q4, it's because we have so far non-communicated savings opportunities on it. So it's going to be on a business case basis, let's put it at that way. But at this point in time, we would estimate that the one-off cost level will decrease in Q1, Q2, unless we identify substantial opportunities going forward. Magnus Kruber: Perfect. And just one final one. The investments you make in data center additional capacity now, how does that compare with your current capacity? Some way of framing that would be helpful. Tom Erixon: Well, I think we are in a unique position to scale. We can work off our existing footprint. As you know, we have done considerable investment that earlier was related to heat pump and part of the supply chain and part of the infrastructure needs and equipment needs do overlap between the 2 applications. So we get a lot of leverage in the brazed heat exchanger technology specifically. So what I would say to put some framework around it is that we are delivering substantial volumes of both gasketed heat exchangers and brazed heat exchangers into this application and a few other things, by the way. And on the gasket side, we are still very well set with the ongoing investment program that we already have committed and partly executed. So there is nothing that of the SEK 1 billion that goes there. So it's going to be entirely related to expanding the press and to some degree, furnace capacity on the brazed side. And so we get a substantial leverage for the applications on that. We expect with all the production plans from integrated into our production planning, we're going to -- this will take us a couple of years forward. That's as much as I feel I can say. Operator: Our next question comes from Meihan Yang with Goldman Sachs. Meihan Yang: I have one question relating to the China Marine. So was the weakness in the Marine side in China more related to the underlying end market weakness? Or are you seeing any signs of market share erosion to domestic players? And if this continues, do you plan to do any capacity adjustments there? Tom Erixon: No, I think the -- in all, we feel the market is -- so as we speak, our main challenge in China is the amount of commissioning and invoicing that we need to do in 2026. We have a substantial order book and a substantial overhang. And we are expanding our technical capacities in China substantially is to cope with it. So if we have any capacity issues, it is that we need to scale up, not scale down. The market conditions in China, they were stable and normalized in 2025, and we believe they will remain stable and normalized on the order intake side in 2026 as well. The somewhat elevated invoicing levels that we have right now in end last year and partly through 2026 may come down a bit depending on where the market goes. But in general, we feel that the contracting level currently at the running rate that we are at is supporting perfectly well the infrastructure we have. So we're happy with that. On market share, Marine is the only market where we know on the decimal what our market share is for every single product category because we know every hull that is registered and we know every hull where we are in and where we're not. And so we are monitoring this extremely carefully. And we are making sure that there is no market share slips in this market, and it hasn't happened for the last 5 years. Operator: Our next question comes from Akash Gupta with JPMorgan. Akash Gupta: I got 2 questions. My first question is for you, Tom. In your comments in the report, you say that the group functions are adjusting to meet new regulatory demand and alignment with the business unit. I was wondering if you can elaborate about what do you mean by these new regulatory demand? That's the first one. Tom Erixon: You can say what we've been going through in order to adjust the group in terms of speed of decision-making and flexibility to manage towards the SEK 100 billion goals that we have in 2030 and to cope with the doubling of the business volume that we've been having over the last 6 years or so. We needed to take some actions to adjust to that. And you can say, well, first part is, to a degree, a consolidated business unit structure. So we will move with fewer global larger business units than we did in the previous structure. The second part is that we will go from cluster organizations in our sales companies to more regional setups with a slightly more operational twist to how the regions will operate compared to the previous clusters. And the third part is that the supporting group functions need to be adjusted in various ways. In some areas, we need to increase our resources somewhat to cope with the compliance demands and the regulatory demands and the reporting demands we have related to sustainability, but also related to ensuring that the ever more complicated sanctions environment between EU and U.S. is being adequately implemented and with an adequate control. So there are certain areas where we certainly will continue to build professionalism and capacities. In other areas, we are trying to make sure that we don't end up too centralized in part of our group support functions. So we also decentralizing out in a clear way to our sales regions and to our business units so that we have a responsibility for a number of these staff areas that is being carried by our operating units, and we are not too centralized in how we operate those functions. So it's a gradual -- you will not see any impact of it. But for us, it's a very important part of how we operate the company. Akash Gupta: And my second question is on capital allocation. So I mean when we look at your leverage, you have gone below 1x at the end of the year. So can you talk about prospects of M&A, particularly in 2026, given you will be quite busy with implementing the new operating model. So would it be reasonable to think something might happen? Or is it now probably a lower priority with internal heavy lifting? Fredrik Ekstrom: No. We believe we can do both things in parallel. We believe that the M&A strategy that we presented in the Capital Markets Day remains quite relevant and remains a priority. We continue to look at acquisition targets that fit the criteria that we defined at that point in time. We have a pretty good list of prospects that we're looking at. But as always, it's a long process when it's M&A, and we set very high standards. But we have in our capital structure created the firepower to continue to do acquisitions and presented with the right opportunity and the right price level, we will do so. So we don't see that the reorganization in any way compromises our ambition when it comes to acquisitions. Tom, would you like to add anything? Tom Erixon: Yes. We might add that we already closed the first one, a small but still meaningful acquisition in China in the energy sector. So we will -- as the beginning of this year. So we will give some further comments to that in the Q1 report. Operator: Our next question comes from Sebastian Kuenne with RBC. Sebastian Kuenne: I have 2. The first relates to the Energy business and specifically data center products, the brazed heat exchangers. I was wondering if you can tell us a little bit about the margin profile. I mean this is a product business. It's not a service business. it will probably change the blend, the mix and that might have implications on margin. Can you give us a little bit of an idea of where you see the profitability of these products going forward? That would be my first. Tom Erixon: It is obviously difficult for me to comment on application product profitability levels. I think you are -- listen, the -- if you divide it into the brazed heat exchangers and the gasket heat exchangers, the brazed is a non-service product. It's brazed together, so you can't take it apart. What happens is that when lifetime is over, it will be scrapped. And that is the cycle of that business. It may grow a bit compared to the entire product area may grow its share somewhat in -- as a share of the Energy division. But I don't think it's going to be a huge mix change on that because we're also growing the gasketed. And as for the gasketed, the data center applications are not extremely service demanding. It's kind of similar to a HVAC application, where we're dealing with clean water applications. So -- but that will have its normal HVAC-related service program. So I don't see a lot of challenges when it comes to -- I think overall, your observation is probably correct that it may dilute the share of service invoicing a little bit as a whole. But I'm not -- I don't see any meaningful -- there are other things that are -- I'm thinking a lot more about when it comes to the margin development than this one. Sebastian Kuenne: Okay. I will try to interpret this information. My second question is actually also data center again. Can you tell us a little bit again about who the clients are? Because it would help the investors now that the business becomes so big, would help investors to track a little bit the CapEx or the client's revenue. Is it the nVent and Vetiv of this world? Are there other major clients that we should be aware of when it comes to especially the brazed heat exchanger business? Tom Erixon: Well, listen, I think when you're looking at a market leader in this area, it is not possible to be there unless you are pretty much covering the market. And so the customers that are out there are, by and large, our customers. There are -- in terms of the procurement process, and that's why I've been saying that we are probably lagging a little bit in terms of bringing the orders into our order book because we are supplying components and not systems, we are coming a little bit later than many others into the process because we are selling to the system builders. And they are the companies we're invoicing. With that said, there are a number of frame agreements with the final owners who may want to specify suppliers and standardize the way they build their data centers in various areas. So this is business, which is not just a clear, straightforward answer. There are frame agreements in place. There are frame agreements negotiated as we speak. And there are supplier relationships with system builders. And you can safely assume that most of them that you are well aware of are most likely on our customer list. Sebastian Kuenne: Understood. Last question, just for clarification. You talked about project costs affecting Energy. Just for me to understand, does this relate to pricing of longer projects where you book at cost or you invoice at cost early on and then you invoice for the profit at completion? Or are we just talking about projects overrunning? Tom Erixon: No. The specific project execution problem was in the Food & Water Division. So that was weighing on that margin. What happens in the Energy division is that we are invoicing and we do in all companies doing a percentage of completion, invoicing process for our projects. But normally, sort of it adds up towards the Q4 and it did also in Energy division, so on Welded. But the project pipeline and the execution side on the Energy division has been spotless on the Q4. So we are good with it, but it does sort of as a mix effect, weigh down a little bit. I may add that we had a very good integration of Fives Cryo, which is also a project business. They are right in line with our expectations. They are well on track with Energy average margin. And the only thing that is weighing on that side is that we are taking a number of million euros as integration costs, and that has more or less now been finalized. So it's been a very short, concise and excellent integration process of getting the Fives Cryo team into the group. It's been a good process. Operator: Our next question comes from Max Yates with Morgan Stanley. Max Yates: I just had 2 questions. The first one was just around the Pumping Systems business and order intake. I guess when I look at the kind of Pumping Systems orders, it looks like maybe up SEK 100 million quarter-on-quarter. And I guess when we look at some of the tanker ordering data in Clarksons, it was very strong, up 60% in Q4. I think we've had a good start to January. So I was just wondering kind of what are we missing? Because I'm fairly used to kind of this business. When we see the tanker orders pick up, it filters through within kind of 1 or 2 months to your business relatively quickly, yet that doesn't seem to be happening when I look at Q4 orders or when I look at your kind of outlook for Marine for Q1. So is there anything kind of we're missing or we should understand that's happening in the market? I'm just trying to better understand that dynamic. Tom Erixon: No, I don't think so. And I think in our books after -- and so I remind you that in 2024, the Pumping System business, including offshore and aquaculture and another of other applications, we were at about SEK 15 billion in order intake for an operating unit, which historically has been on around SEK 5 billion. So we guided carefully that, a, we are not a SEK 15 billion unit in Bergen. So that's not the running rate that is possible in any case; b, we built the order book for 2 years going forward. And essentially, yards and ourselves are fully booked and running at 110% capacity anyway, so we didn't want to see and didn't expect a repeat. And in 2025, we didn't see a repeat. We ended up approximately at SEK 6 billion, which is SEK 9 billion down from the year before, a good number. SEK 6 billion was a normalized plus level compared to where we have historically has been and well in line with expectations. That -- right now in the statistics, that converts to about -- if you look at the cargo pumping specifically, it converts to about 250 contracted product and chemical tankers that we've seen in 2025, which is on about a normalized level. So the worry that after high contracting levels, we will go flat down on that market. It did not materialize, and we didn't think so. We think the age of the current fleet on the product chemical tanker side is still not all that young. So we think a normalized contracting level is to be expected. And that's what we've seen all in all for 2025. I think we ended the year a little bit higher than we started on it. So the trend curve was positive. And so let's see where we go in Q1. But putting everything together, 2025 was not a weak year for order intake all in all. And so we are not overstating our expectations into 2026. Max Yates: Okay. And maybe just a quick follow-up on currency. So you've had -- in the quarter, it looks like about -- you have had a SEK 271 million impact on your EBIT on a kind of revenue number that's about SEK 520 million headwind. So I was wondering, would you be able to help us at all with kind of any views for 2026? Because I know historically, you've always hedged. So I wonder whether there is any kind of lagging impact from last year? And just any kind of view on -- is that sort of drop-through from sales to EBIT impact for FX, the kind of 50% plus. Should we expect that going forward? Were there some currency revaluations? So just any framing of how to think about the FX impact on EBIT as we go into 2026 would be helpful. Fredrik Ekstrom: Right. And so let me try to take that. There's several components to this. You're quite correct. We have a hedging strategy for committed orders. And what we mean with those is usually the large orders, those get hedged as they come in. And then we have, of course, the uncommitted volume or rather the transactional volume that comes in sequentially over the year and that we hedge as separate volumes. So we do have a hedging that covers a substantial part of our revenues and turnover. The differences that you are seeing trickling down to the EBIT is, of course, the net of all of those effects. It's the net of the movement of invoicing. It's a net of the hedging contracts that we take. It is also the impact that we see from a translational point of view between 2 quarters in 2 different years. When it comes to forward-looking, when it comes to FX right now, your crystal ball is as good as mine, but I would assume that the strengthening of the Swedish krona that we have seen over the last quarter is probably going to stabilize or to some degree, return to a weakening, maybe not a strong weakening, but it's speculation at this point. What we can do is that we secure as much of our turnover as possible through hedging contracts. Then to refer to another part, which you had in your question embedded there is a revaluation of backlog. And the revaluation of backlog in relation to currency only happens when we take in an order in a foreign currency into our backlog, and that's primarily in the Pumping Systems where everything is booked into U.S. dollars. And there is, of course, the movement of the NOK to the U.S. dollar. And there, we also have seen a strengthening of the NOK, and we don't see that there is too much more headroom for the NOK to continue to strengthen. But again, it is a volatile FX market out there right now. And any quick movements that we see that happen over a quarter like we've seen in Q4 will create, of course, a currency impact on the results. Operator: The next question comes from Sven Weier with UBS. Sven Weier: The first one is on Marine. And just reminding us of the packing order on content per vessel. Is it not true that your content per crude tankers is actually much lower than product tankers? And that's why maybe the crude tanker orders we had in Clarksons were quite strong, were not really affecting you disproportionately? Or am I getting the packing order wrong here on content? That's the first one. Tom Erixon: You're getting it right. Sven Weier: Crude is more like an average. Is that fair to say in terms of content? Tom Erixon: Well, yes, to the degree that there is a meaningful average in this, crude tankers, they are large. They are energy consuming, efficiency matters. And so it is a meaningful part of the fleet for us, but it is -- compared to a product tanker, it doesn't provide quite the same mix. It's absolutely true. And so you need to shave off -- maybe I shouldn't speculate too much, but shave off EUR 1 million or so and then you are there. Sven Weier: Okay. Understood. And then to follow up on Marine because in the report, you mentioned the impact of sanctioned vessels on Services, right, and that it has a negative impact. Can you drill a little bit deeper into that comment, how it impacts you specifically? Tom Erixon: Well, there's been lots of dialogues about how big is the shallow fleet, which is sanctioned and which we do everything we can to definitely not serve and not ship spare parts. And so probably that the number of ships, including that fleet is in the order of magnitude of at least 400. And so 400 large vessels is -- does impact. With that said, I think Q4 service volume for Marine was not primarily the numbers that you're looking at there was more impacted by a very large service order, non-repeat service order in Q4 2024. So we had a bit of a challenging -- reach for us. It's not a favorable situation. Sven Weier: When the U.S. now enforces these sanctions more forcefully, for you, it doesn't make a difference because the shadow fleet was a shadow fleet before and you didn't service it anyhow. So that doesn't make an incremental difference. Tom Erixon: Absolutely not. No. It's -- on the contrary, we find it helpful that there is a strong action taken because with all the efforts we are doing to make sure that not a single spare parts one way or another reach a sanctioned ship is a big challenge. So we're working exceptionally hard in protecting that we are doing everything we can to follow the sanctions, but it's helpful for us if the ships are removed. It makes our life easier, and it has no impact on our financials at all. Sven Weier: Final question is on the new Food & Pharma division because I was wondering on those projects where you had cost overruns. I mean, did I understand you correctly that this is now done at the end of Q4, and this should no longer have an effect? Is that fair? Tom Erixon: I'm always careful in prognosticating a future where there are no problems. But we have been dealing with specifically in the quarter where one specific project, and I think we're taking all the measures needed now financially to make sure that, that is completed. It is financially not a good project for us, but we are extremely committed to our customers that we are delivering a well-functioning process at the end of the day. And so we should be clear of that now. So -- and I remind you that during -- when we started the journey 10 years ago, we continuously had a number of project execution problems. We cleaned that up very well. So we've been going on a good level for many years now in the project execution. And in the acquisition of Desmet, it's been the same, and it remains the same with Desmet. So this was the first time for a period of time where we actually got into executional challenges. And I think we've been handling it now. So in terms of what we know in our books now, we don't have a recurring item on this coming back. Sven Weier: And if I may, what was -- I mean at the end of '25, what was the share of biofuels within the division in terms of orders or sales? Tom Erixon: Good question. I don't have that number in my head. Maybe you can check a little bit as we speak. But it's been 5%. And so it's been very little. It's been depressed. We see a more interesting market in biofuels coming into 2026. They are typically large orders, so they are a little bit -- either they come or they don't. But when I'm commenting on the sentiment in the market when it comes to larger projects, that includes the biofuel segment where we may see some movements in 2026. We are hopeful. Sven Weier: And that 5% was of the order intake, right? Fredrik Ekstrom: Correct. Operator: The next question comes from Uma Samlin with Bank of America. Uma Samlin: So first one is a follow-up on Marine. So I guess you're guiding somewhat lower in Q1. How should we think about the mix of Pumping Systems orders versus other marine categories in Q1? So from your answer to the questions previously, it seems to me that you're thinking like a relatively -- still relatively strong Pumping Systems orders. Do I understand you correctly that it's the other Marine categories that drives your somewhat lower guide? Some clarification would be really helpful. Tom Erixon: We are hesitant. Here is the thing without the crystal ball, the more granular we are in our forecasting, the more off we're going to be. So on a group level, we feel fairly confident. And as you will notice, if you compare backwards on divisional levels, we have a slightly larger variation of outcome versus forecasting. And it gets even worse if we break it down into business units and individual product categories. So I'm a little bit hesitant to meet your question. But in terms of our earlier discussion on this call, the activity level and contracting level as forecasted and as what we've seen in Q4 looks relatively stable. So it may not be a bad guess that we are reasonably close in Q1 to Q4. Uma Samlin: That's very helpful. My second one is on Food & Water. If I heard you correctly, it seems like you expect some sort of margin impact from your growth strategy in '26. Can you perhaps elaborate a bit more? And what do you think is the long-term margin good for Food & Water? Because I remember this division used to be at 17%, 18%. And after the acquisition of Desmet, it was lower to like 14%, 15%. What is your long-term sort of ambition for the margin profile of Food & Water? Tom Erixon: Well, we typically don't want to run businesses below 15%. So our change in our corporate profitability target to 17% anticipated that part of our business most likely is going to be above the 17% and part of the business may be somewhat below. So we are not running a business strategy in Food & Water aiming to go below 15%. What we have done, and I remind you of this, we are building this company for the future. We are running at compared to historically exceptionally high CapEx volume, which in part is complemented with higher OpEx cost running in parallel to that CapEx program. And we are building both product technologies and capacities in the market additionally. So we have been doing that for a long period of time. And I don't see -- I guess what we are indicating with the increased investment program in the data center applications and the increased focus on growth strategy in certain newer areas in Food & Pharma should give you sort of the feel that what we've been doing historically is what we will continue to do. So if we stop doing that, I said it before, any monkey could get the margins up with 1% or 2% on the Alfa Laval margin. But we think building us towards the SEK 100 billion is the primary target, and we're going to do so with acceptable margins and healthy business conditions. And for Food & Water, that means that we are definitely aiming in the short to medium term to be somewhat north of the 15% target. Operator: The next question comes from Carl Deijenberg with DNB. Carl Deijenberg: So 2 questions from my side. First of all, I wanted to come back on the Energy division and maybe specifically on the HVAC side. Obviously, that was a drag for you on the order side in '25, but with some improvement here towards the latter part of the year. But I do want to understand a little bit. Is that -- do you see that more as a result of this inventory drawdowns on the OEM side being behind you and production rates being more sort of indicative of end consumer demand? Or do you still see some elevated inventories there among your customers? Tom Erixon: I think the -- maybe you want to take that, Fredrik. You used to run that business. Fredrik Ekstrom: Well, I think in relation to inventories, I would say that the inventory at our customers' distributor network is depleted. That I think we can reasonably see in the call-off for the frame agreements that we have with the larger OEMs. So that would confirm that we are past the destocking and that we start to return to growth or we start to return to normal production. When it comes to heat pumps specifically, I think we see the beginning of a resumption of a normal business and a normal trajectory of business growth in relation to defossilizing heating, particularly then in Europe. And I think that's a strong indication. There is a shift in players in the market. There is going to be consolidation in the market most likely. But we see definitely that also on the air conditioning side that we are starting to have larger call-offs on frame agreements. So I would assume that, that confirms the case that destocking is complete. Carl Deijenberg: Okay. Very well. Then secondly, I wanted to ask also on sort of recent raw material movements. I mean we've obviously seen some quite dramatic price movements on certain raw materials. I guess, one quite important component for you is, for example, copper on the brazed side or on the heat exchanger side. And I just wanted to hear a little bit if you expect any sort of tangible price impact on that entering '26 now given where prices are. Fredrik Ekstrom: Right. And so without getting too much into detail here, we set the standard cost during the year that is based on the frame agreements that we have with our metal suppliers, and we have more than one metal supplier, and they have a little bit of different sort of timing and phasing of when we renew those frame agreements with our metal suppliers. So we have a little bit of stability, and we have a little bit of visibility going forward to what our material prices will be. We also have some metal hedgings that are in place. So all in all, we don't have -- you can say in the short term, it doesn't impact us. But in the long term, it means we need to consider how we plan our productions and how we plan our pricing structure, but we allow ourselves a little bit of breathing space to make those decisions in a foundational way in line with our strategy. Tom, would you add anything? I could add one thing on the copper, by the way. I would say that if you look at the other metals, we probably have a little bit of speculation creeping into the pricing. When it comes to copper, there is actually a foundational demand or supply problem that needs to be sorted out. So there is probably a more sustained higher price level for copper going forward. Operator: Our last question comes from Klas Bergelind with Citi. Klas Bergelind: Klas from Citi. So I just had a -- sorry, a follow-up question on Marine again, a lot of questions on Marine. But I want to zoom in on product tankers. Obviously, crude is strong, but product is still pretty volatile where your value is higher. We saw a pretty strong first read in December at 19 contracts, but slowed down again in January as we could see yesterday. The product tanker market is still pretty soft with mid-single-digit supply growth against around 1% demand growth and scrapping doesn't seem to increase that much at the moment. I'm just trying to understand, Tom, how you look at demand here in the product tanker category in 2026. If you share this view or if your discussions out there are showing a more positive picture because it seems like product tanker, given the short-cycle nature of that business, is something that maybe can surprise positively, but I just want to hear your view there. Tom Erixon: It's a good question. The difficulty on what's going to happen on the contracting side. So I remind you that in terms of deliveries from our side, commissioning from our side and delivering from the yards to the shipowners, the 2026 pipeline is very strong. So what we're discussing is not affecting invoicing in 2026. And to a degree, we also cover 2027 already, although not fully. So if you're going to see any meaningful impact in a 2-year perspective on this, it means that existing slots need to be converted, that containers are being swapped into product tankers. And that type of switches is happening in the market. People are selling options and production slots. So I don't know. I would refer to Clarksons as the most solid foundation for this forecast. We don't have, I think, a better view on the market than they do. But as I said, we came out 2025 on a pretty normalized level. I remind you that the monthly numbers and the yearly numbers are updated afterwards. So all of the bookings are not registered at Clarksons at this point in time, not for 2025 and certainly not for January. So we will see some movement there. And we don't expect tremendous volatility short term. But you've seen the volatility down over a period of time when we were a bit unpleasantly surprised. And then you saw the enormous spike in -- starting in 2023 and into 2024. So we haven't exactly nailed the prognosis historically. I'm afraid we're not be able to do it now either. But we're good for a period of time. Klas Bergelind: We typically do the 6 months revisions to the date as well, but it doesn't look very strong. So that is why I asked the question, but I appreciate your comments. Tom Erixon: All right. So thank you very much. Thanks for the call. And if we don't run into each other before at some of the investor conferences that are happening in London, Miami and a couple of other places where we will be, then we will meet up at the earnings call for the first quarter in April. So thanks a lot.
Tom Erixon: Good morning, and welcome to Alfa Laval's Fourth Quarter and Full Year Earnings Call for 2025. So Fredrik and I, we will give you a rundown presentation, a summary of the quarter and the year, and then we will go to the Q&A as always. So let me start with some introductory comments to the quarter and the year. In all, we felt it was a strong year in 2025, resulting in record invoicing and record earnings with earnings per share for the first time climbing to SEK 20 per share. So the supply chain was strong, especially in the quarter, and we delivered a record invoicing of SEK 19 billion in the fourth quarter. With that said, we still need capacity additions that are required to support our customer base in the data center applications. And yesterday, the Board of Directors approved a targeted CapEx program of SEK 1 billion for this purpose specifically. Then finally, during 2025, Alfa Laval has prepared for further growth by simplifying the operating model and consolidating the business unit structure. It is a substantial reorganization of the company. And as of January 1, the new organization is operational after considerable efforts on many hands. And with that, let's move on to key figures. Orders held up well with a 2% organic decline in Q4. We had good support from -- and strong demand from the U.S. and several important Asian markets. The margin was okay and as always, a bit affected by the seasonal high share of project invoicing. In addition, we carried approximately SEK 150 million of one-off costs, partly related to the ongoing reorganization program. On a divisional level, first to the Energy division. Orders reached an all-time high in the quarter at SEK 6.1 billion with firm demand in both HVAC and CleanTech applications. Data center orders were increasing as anticipated and was accounting for approximately 15% of the divisional orders. Service has been slow during 2025 for the Energy division, partly due to internal constraints. In Q4, the service was again showing double-digit growth and the growth trend may well continue into 2026. As indicated earlier, a new CapEx program of SEK 1 billion is launched to maintain a leading market share for the heat transfer applications in the data center business. The program is spread over our existing footprint in the U.S., in China and in Europe. We are with the existing infrastructure in a very good position to scale our volumes and capacities in this area specifically. Then to the Food & Water division. Orders remained flattish organically, both sequentially and year-on-year. We continue to see considerable growth opportunities in many end markets going forward, and the new growth strategy launched in 2025 is supported by targeted investments into application specialists and the global sales force to cover areas like pharma and protein. The margin in Q4 was impacted by some one-offs, both in weak project execution and the reorganization as discussed earlier, and it amounted to approximately SEK 80 million in the division. In 2026, we will take some cost for driving the growth strategy forward in the areas described with some margin impact in 2026 and possibly into 2027. Then on to the Marine division. Orders were stable sequentially and the lower cargo pumping orders were as before, partly offset by growth in the other application areas. In all, the market is and is expected to remain stable to positive for ship contracting. Invoicing continues on a good level based on a solid order book with a positive mix. The order book mix remains unchanged in 2026. Then on to Service. After many years of growth, the Service business now accounts for about SEK 20 billion of invoicing. The growth trend slowed a bit in 2025 compared to before, but the structural demand trends remain positive and the troubleshooting in the Energy division specifically is now completed and resolved. As a consequence, in the quarter, we had unusually large mix differences between the divisions, with the Marine division at almost 40% share of service orders, partly related to lower project order intake on the Marine division. And the Energy on the other side, with just above 20% of service order intake after a very strong capital sales quarter in Q4. The spread between the divisions is expected to decrease going forward. All right. And then a couple of regional comments to round up. In many aspects, it was a positive quarter with good progress in important growth markets like Southeast Asia and India. China was positive in Energy and Food & Water, but not fully compensating for the slower cargo pumping volumes that we expected in the quarter. U.S. grew in many end markets with special focus, obviously, on the data center market, and we had an all-time high in the quarter for the U.S. market as such. And with that, let me hand over to Fredrik for some further financial details. Fredrik Ekstrom: Right. So let us dive straight into it and take the order intake in quarter 4 amounted to SEK 17.1 billion with a negative currency impact of 8.7%, a structural growth of 3.3% and an organic contraction of 2.2%. What's notable in the quarter is the continued slow conversion of large project business from project pipelines that are both extensive and with quality projects. The Energy division reflected demand strength in HVAC with a 7% growth, and on data centers, more than doubled. On a whole year basis, order intake accumulated to SEK 66.7 billion with a negative currency impact of 6.1%, growth from acquisitions of 1.6% and an organic contraction of 6%. Of the negative organic growth, the majority of the contraction is slow conversion of large projects, which lagged behind with some 20%, of which the majority stems from the normalization of our marine pumping systems and large project orders in Food & Water. Transactional business, on the other hand, increased with 2% during the year to compensate. The order book stood at SEK 48.3 billion at the end of the year, of which some SEK 7.5 billion is invoicing for 2027. During the year, SEK 1.9 billion of negative revaluation due primarily to currency impacted the backlog and order intake. Quarter 4 book-to-bill was 0.89 with a good invoicing and project execution in Q4. Now moving on to sales. Revenues in quarter 4 reached an all-time high of SEK 19.1 billion with a growth compared to last year of 4.6%, of which 10.9% was organic, 3.1% coming from acquisitions and the negative impact of currency with a whole 9.4%. The higher revenue stems from good project execution in the quarter and a good mix of growing transactional sales. Revenue in all 3 divisions grew in the quarter, Energy division with 12%, Food & Water with 1%, and Marine division with 3%. On a year basis, revenues grew with 4.1%, driven by 7.9% growth of organic business, 1.8% structural and a negative currency impact of 5.6%. Revenues from the Marine Pumping Systems increased with 23% on an annual basis and project execution in the Food & Water division contributed with 10%. The large order book we carry into 2026 supports a continued good development in revenues. Now to some key figures. The adjusted gross profit (sic) [ adjusted gross margin ] of 34.7% was in line with quarter 4 in 2024, but sequentially lower than quarter 3 at 37.8%, reflecting the heavier project execution mix in quarter 4. The adjusted gross profit margin as in previous quarters, continues to be supported by strong manufacturing results. S&A grew with 2%, while R&D grew with 11.6% as expected in the quarter. Operating income grew with 8.3%, yielding an adjusted EBITA margin of 16.9%. To be noted further is that the adjusted margin is affected by the last tranche of the acquisition costs incurred in the cryogenics transaction, lower yield from a project execution in Food & Water division and costs arising from the new organizational structure with some SEK 150 million in the quarter. The increase of financial costs in quarter 4 is driven by higher interest costs and more substantially by the net of exchange rate differences. Profit before tax is on a similar level as last year and finally, an EPS of SEK 4.79 for the quarter. On an annual basis, adjusted gross profit margin increases to 37%, reflecting the revenue mix, a strong factory and engineering result and positive purchasing price variances. S&A grew with 4.5% and R&D with 4.9%. However, both remained stable in relation to revenues at 15% and 2.5%, respectively. Operating income increases with 12.6% to yield SEK 11.7 billion and EPS for the year just above SEK 20, an increase of 12%. Now on to some profitability comments. The adjusted EBITA margin for the quarter ended at 16.9%, an increase of 1% compared to quarter 4 2024. In absolute terms, the adjusted EBITA in quarter 4 increases with SEK 437 million despite the negative currency impact and the additional burdening of the result with SEK 150 million in the quarter as previously detailed. On an annual level, the adjusted EBITA margin was 17.7%, an increase of 1% compared to 2024. Adjusted EBITA increases with 12% to yield SEK 12.3 billion. Now some comments on debt position. Debt has increased with SEK 7 billion, reflecting the financing of acquisitions during the year of SEK 9.4 billion, with a resulting leverage to EBITDA of 1.21. Net debt after subtracting a healthy liquidity position of SEK 7.8 billion is SEK 9.4 billion, which corresponds to 0.66 in relation to EBITDA. Finally, net debt, including lease liabilities, lands at 0.92 in relation to EBITDA. Cash flow from operating activities in the quarter was on a good level given the increase in revenues. Release of working capital was positive, but on a lower level than quarter 4 last year. CapEx in the quarter was in line with guidance, bringing the free cash flow for the quarter to SEK 2.6 billion. On an annual level, cash flow from operating activities was SEK 9.2 billion, capital expenditures in line with yearly guidance at SEK 2.7 billion. 3 acquisitions during the year totaled SEK 9.4 billion. And after financing activities, the final cash flow for the year was positive with SEK 168 million. And finally, for some guidance on Q1 2026 and whole year 2026. CapEx in quarter 1 is expected around SEK 0.7 billion and a whole year guidance of SEK 2.5 billion to SEK 3 billion. Amortizations at SEK 175 million in quarter 1 and SEK 670 million for the year, and that includes all recent acquisitions. Tax rate guidance remains in the range of 24% to 26%. With that, I conclude my financial overview, and I hand it back to Tom for some closing remarks. Tom Erixon: Thank you, Fredrik. So let me give you our forward-looking comments before we go to the Q&A. As we're all aware, the synchronized global business cycles are not so synchronized anymore. So in reality, geographies and different end markets tend to move in different directions. So all in all, we remain in a situation where we don't have extremely clear trend lines. With that said, the general feeling we have in the market is that it is overall, everything said and done, somewhat positive momentum in the market. And we also perceive that the slowdown we've been having in large CapEx projects from customers is maybe easing somewhat as we move into 2026. So with that said, we expect after a strong Q4, sequential demand in the first quarter to be on about the same level as we had in Q4 with the Energy division being somewhat lower compared to an all-time high record level, as you remember in Q4. The Food & water, we expect to be somewhat higher and the Marine division somewhat lower. And all in all, it takes us to market conditions that are relatively unchanged in Q1 compared to Q4. And so with that, we round off the presentation, and we are open for questions. Thank you. Operator: [Operator Instructions] Our first question comes from Magnus Kruber with Nordea. Magnus Kruber: Magnus here from Nordea. A couple of questions. First, light industry and tech obviously posted very solid growth in the quarter and a distinct step-up from prior levels. How should we think about sort of the trends going forward here? I think it's been perceived that it's been a little bit underwhelming here in the prior quarters, and now we see a very big step-up. So just some comments on how to look at the outlook here would be helpful. Tom Erixon: Well, we don't really guide more than the quarter, and the quarter is somewhat lower. So I think that's all we really have to say on the matter. But it is true that we've been a little bit low for a number of quarters previously. We were not surprised exactly by the amount of orders that came in, in Q4. It was partly to be expected. And as we've guided you before, when it comes to the data center question specifically, we are a little bit on a shorter cycle than many of the project orders that you otherwise see in the market. So the pickup of that played a reasonable role in the development. But on top of that, I would like to add that despite concerns on the energy transition and what's going on, we did have a good quarter on CleanTech applications. And we see both in the Food & Water division when it comes to biofuel applications and in the Energy division when it comes to carbon capture, hydrogen and other related issues, that there is still some momentum in the market on that level. So we are sticking to our energy transition strategy. I think it's going to be a bit slower, obviously, than people thought 3, 4, 5 years ago. And it may gradually become more market-driven and policy driven, but there is still a growing momentum in those areas. Magnus Kruber: Excellent detail. Super helpful. You also talked a little bit about SEK 150 million headwinds here in the quarter from various one-off effects and alluded to that could continue somewhat into the first half. Is the SEK 150 million run rate a reasonable level? Or should it be more sort of benign than that? Tom Erixon: Well, it's going to depend a little bit. The SEK 150 million, you can kind of split 50-50 between reorganization aspects and project execution write-offs. So I hope the project execution issues are not repeating itself. The question on what running cost we will have on the reorganization part, which is now -- so we are sort of on the top level, all managers are appointed on a high level and the financial reporting is going in the new organization, but there's still a fair amount of implementation work to be done, both in sales regions and in business unit structures. And so if we see a higher reorg cost than in Q4, it's because we have so far non-communicated savings opportunities on it. So it's going to be on a business case basis, let's put it at that way. But at this point in time, we would estimate that the one-off cost level will decrease in Q1, Q2, unless we identify substantial opportunities going forward. Magnus Kruber: Perfect. And just one final one. The investments you make in data center additional capacity now, how does that compare with your current capacity? Some way of framing that would be helpful. Tom Erixon: Well, I think we are in a unique position to scale. We can work off our existing footprint. As you know, we have done considerable investment that earlier was related to heat pump and part of the supply chain and part of the infrastructure needs and equipment needs do overlap between the 2 applications. So we get a lot of leverage in the brazed heat exchanger technology specifically. So what I would say to put some framework around it is that we are delivering substantial volumes of both gasketed heat exchangers and brazed heat exchangers into this application and a few other things, by the way. And on the gasket side, we are still very well set with the ongoing investment program that we already have committed and partly executed. So there is nothing that of the SEK 1 billion that goes there. So it's going to be entirely related to expanding the press and to some degree, furnace capacity on the brazed side. And so we get a substantial leverage for the applications on that. We expect with all the production plans from integrated into our production planning, we're going to -- this will take us a couple of years forward. That's as much as I feel I can say. Operator: Our next question comes from Meihan Yang with Goldman Sachs. Meihan Yang: I have one question relating to the China Marine. So was the weakness in the Marine side in China more related to the underlying end market weakness? Or are you seeing any signs of market share erosion to domestic players? And if this continues, do you plan to do any capacity adjustments there? Tom Erixon: No, I think the -- in all, we feel the market is -- so as we speak, our main challenge in China is the amount of commissioning and invoicing that we need to do in 2026. We have a substantial order book and a substantial overhang. And we are expanding our technical capacities in China substantially is to cope with it. So if we have any capacity issues, it is that we need to scale up, not scale down. The market conditions in China, they were stable and normalized in 2025, and we believe they will remain stable and normalized on the order intake side in 2026 as well. The somewhat elevated invoicing levels that we have right now in end last year and partly through 2026 may come down a bit depending on where the market goes. But in general, we feel that the contracting level currently at the running rate that we are at is supporting perfectly well the infrastructure we have. So we're happy with that. On market share, Marine is the only market where we know on the decimal what our market share is for every single product category because we know every hull that is registered and we know every hull where we are in and where we're not. And so we are monitoring this extremely carefully. And we are making sure that there is no market share slips in this market, and it hasn't happened for the last 5 years. Operator: Our next question comes from Akash Gupta with JPMorgan. Akash Gupta: I got 2 questions. My first question is for you, Tom. In your comments in the report, you say that the group functions are adjusting to meet new regulatory demand and alignment with the business unit. I was wondering if you can elaborate about what do you mean by these new regulatory demand? That's the first one. Tom Erixon: You can say what we've been going through in order to adjust the group in terms of speed of decision-making and flexibility to manage towards the SEK 100 billion goals that we have in 2030 and to cope with the doubling of the business volume that we've been having over the last 6 years or so. We needed to take some actions to adjust to that. And you can say, well, first part is, to a degree, a consolidated business unit structure. So we will move with fewer global larger business units than we did in the previous structure. The second part is that we will go from cluster organizations in our sales companies to more regional setups with a slightly more operational twist to how the regions will operate compared to the previous clusters. And the third part is that the supporting group functions need to be adjusted in various ways. In some areas, we need to increase our resources somewhat to cope with the compliance demands and the regulatory demands and the reporting demands we have related to sustainability, but also related to ensuring that the ever more complicated sanctions environment between EU and U.S. is being adequately implemented and with an adequate control. So there are certain areas where we certainly will continue to build professionalism and capacities. In other areas, we are trying to make sure that we don't end up too centralized in part of our group support functions. So we also decentralizing out in a clear way to our sales regions and to our business units so that we have a responsibility for a number of these staff areas that is being carried by our operating units, and we are not too centralized in how we operate those functions. So it's a gradual -- you will not see any impact of it. But for us, it's a very important part of how we operate the company. Akash Gupta: And my second question is on capital allocation. So I mean when we look at your leverage, you have gone below 1x at the end of the year. So can you talk about prospects of M&A, particularly in 2026, given you will be quite busy with implementing the new operating model. So would it be reasonable to think something might happen? Or is it now probably a lower priority with internal heavy lifting? Fredrik Ekstrom: No. We believe we can do both things in parallel. We believe that the M&A strategy that we presented in the Capital Markets Day remains quite relevant and remains a priority. We continue to look at acquisition targets that fit the criteria that we defined at that point in time. We have a pretty good list of prospects that we're looking at. But as always, it's a long process when it's M&A, and we set very high standards. But we have in our capital structure created the firepower to continue to do acquisitions and presented with the right opportunity and the right price level, we will do so. So we don't see that the reorganization in any way compromises our ambition when it comes to acquisitions. Tom, would you like to add anything? Tom Erixon: Yes. We might add that we already closed the first one, a small but still meaningful acquisition in China in the energy sector. So we will -- as the beginning of this year. So we will give some further comments to that in the Q1 report. Operator: Our next question comes from Sebastian Kuenne with RBC. Sebastian Kuenne: I have 2. The first relates to the Energy business and specifically data center products, the brazed heat exchangers. I was wondering if you can tell us a little bit about the margin profile. I mean this is a product business. It's not a service business. it will probably change the blend, the mix and that might have implications on margin. Can you give us a little bit of an idea of where you see the profitability of these products going forward? That would be my first. Tom Erixon: It is obviously difficult for me to comment on application product profitability levels. I think you are -- listen, the -- if you divide it into the brazed heat exchangers and the gasket heat exchangers, the brazed is a non-service product. It's brazed together, so you can't take it apart. What happens is that when lifetime is over, it will be scrapped. And that is the cycle of that business. It may grow a bit compared to the entire product area may grow its share somewhat in -- as a share of the Energy division. But I don't think it's going to be a huge mix change on that because we're also growing the gasketed. And as for the gasketed, the data center applications are not extremely service demanding. It's kind of similar to a HVAC application, where we're dealing with clean water applications. So -- but that will have its normal HVAC-related service program. So I don't see a lot of challenges when it comes to -- I think overall, your observation is probably correct that it may dilute the share of service invoicing a little bit as a whole. But I'm not -- I don't see any meaningful -- there are other things that are -- I'm thinking a lot more about when it comes to the margin development than this one. Sebastian Kuenne: Okay. I will try to interpret this information. My second question is actually also data center again. Can you tell us a little bit again about who the clients are? Because it would help the investors now that the business becomes so big, would help investors to track a little bit the CapEx or the client's revenue. Is it the nVent and Vetiv of this world? Are there other major clients that we should be aware of when it comes to especially the brazed heat exchanger business? Tom Erixon: Well, listen, I think when you're looking at a market leader in this area, it is not possible to be there unless you are pretty much covering the market. And so the customers that are out there are, by and large, our customers. There are -- in terms of the procurement process, and that's why I've been saying that we are probably lagging a little bit in terms of bringing the orders into our order book because we are supplying components and not systems, we are coming a little bit later than many others into the process because we are selling to the system builders. And they are the companies we're invoicing. With that said, there are a number of frame agreements with the final owners who may want to specify suppliers and standardize the way they build their data centers in various areas. So this is business, which is not just a clear, straightforward answer. There are frame agreements in place. There are frame agreements negotiated as we speak. And there are supplier relationships with system builders. And you can safely assume that most of them that you are well aware of are most likely on our customer list. Sebastian Kuenne: Understood. Last question, just for clarification. You talked about project costs affecting Energy. Just for me to understand, does this relate to pricing of longer projects where you book at cost or you invoice at cost early on and then you invoice for the profit at completion? Or are we just talking about projects overrunning? Tom Erixon: No. The specific project execution problem was in the Food & Water Division. So that was weighing on that margin. What happens in the Energy division is that we are invoicing and we do in all companies doing a percentage of completion, invoicing process for our projects. But normally, sort of it adds up towards the Q4 and it did also in Energy division, so on Welded. But the project pipeline and the execution side on the Energy division has been spotless on the Q4. So we are good with it, but it does sort of as a mix effect, weigh down a little bit. I may add that we had a very good integration of Fives Cryo, which is also a project business. They are right in line with our expectations. They are well on track with Energy average margin. And the only thing that is weighing on that side is that we are taking a number of million euros as integration costs, and that has more or less now been finalized. So it's been a very short, concise and excellent integration process of getting the Fives Cryo team into the group. It's been a good process. Operator: Our next question comes from Max Yates with Morgan Stanley. Max Yates: I just had 2 questions. The first one was just around the Pumping Systems business and order intake. I guess when I look at the kind of Pumping Systems orders, it looks like maybe up SEK 100 million quarter-on-quarter. And I guess when we look at some of the tanker ordering data in Clarksons, it was very strong, up 60% in Q4. I think we've had a good start to January. So I was just wondering kind of what are we missing? Because I'm fairly used to kind of this business. When we see the tanker orders pick up, it filters through within kind of 1 or 2 months to your business relatively quickly, yet that doesn't seem to be happening when I look at Q4 orders or when I look at your kind of outlook for Marine for Q1. So is there anything kind of we're missing or we should understand that's happening in the market? I'm just trying to better understand that dynamic. Tom Erixon: No, I don't think so. And I think in our books after -- and so I remind you that in 2024, the Pumping System business, including offshore and aquaculture and another of other applications, we were at about SEK 15 billion in order intake for an operating unit, which historically has been on around SEK 5 billion. So we guided carefully that, a, we are not a SEK 15 billion unit in Bergen. So that's not the running rate that is possible in any case; b, we built the order book for 2 years going forward. And essentially, yards and ourselves are fully booked and running at 110% capacity anyway, so we didn't want to see and didn't expect a repeat. And in 2025, we didn't see a repeat. We ended up approximately at SEK 6 billion, which is SEK 9 billion down from the year before, a good number. SEK 6 billion was a normalized plus level compared to where we have historically has been and well in line with expectations. That -- right now in the statistics, that converts to about -- if you look at the cargo pumping specifically, it converts to about 250 contracted product and chemical tankers that we've seen in 2025, which is on about a normalized level. So the worry that after high contracting levels, we will go flat down on that market. It did not materialize, and we didn't think so. We think the age of the current fleet on the product chemical tanker side is still not all that young. So we think a normalized contracting level is to be expected. And that's what we've seen all in all for 2025. I think we ended the year a little bit higher than we started on it. So the trend curve was positive. And so let's see where we go in Q1. But putting everything together, 2025 was not a weak year for order intake all in all. And so we are not overstating our expectations into 2026. Max Yates: Okay. And maybe just a quick follow-up on currency. So you've had -- in the quarter, it looks like about -- you have had a SEK 271 million impact on your EBIT on a kind of revenue number that's about SEK 520 million headwind. So I was wondering, would you be able to help us at all with kind of any views for 2026? Because I know historically, you've always hedged. So I wonder whether there is any kind of lagging impact from last year? And just any kind of view on -- is that sort of drop-through from sales to EBIT impact for FX, the kind of 50% plus. Should we expect that going forward? Were there some currency revaluations? So just any framing of how to think about the FX impact on EBIT as we go into 2026 would be helpful. Fredrik Ekstrom: Right. And so let me try to take that. There's several components to this. You're quite correct. We have a hedging strategy for committed orders. And what we mean with those is usually the large orders, those get hedged as they come in. And then we have, of course, the uncommitted volume or rather the transactional volume that comes in sequentially over the year and that we hedge as separate volumes. So we do have a hedging that covers a substantial part of our revenues and turnover. The differences that you are seeing trickling down to the EBIT is, of course, the net of all of those effects. It's the net of the movement of invoicing. It's a net of the hedging contracts that we take. It is also the impact that we see from a translational point of view between 2 quarters in 2 different years. When it comes to forward-looking, when it comes to FX right now, your crystal ball is as good as mine, but I would assume that the strengthening of the Swedish krona that we have seen over the last quarter is probably going to stabilize or to some degree, return to a weakening, maybe not a strong weakening, but it's speculation at this point. What we can do is that we secure as much of our turnover as possible through hedging contracts. Then to refer to another part, which you had in your question embedded there is a revaluation of backlog. And the revaluation of backlog in relation to currency only happens when we take in an order in a foreign currency into our backlog, and that's primarily in the Pumping Systems where everything is booked into U.S. dollars. And there is, of course, the movement of the NOK to the U.S. dollar. And there, we also have seen a strengthening of the NOK, and we don't see that there is too much more headroom for the NOK to continue to strengthen. But again, it is a volatile FX market out there right now. And any quick movements that we see that happen over a quarter like we've seen in Q4 will create, of course, a currency impact on the results. Operator: The next question comes from Sven Weier with UBS. Sven Weier: The first one is on Marine. And just reminding us of the packing order on content per vessel. Is it not true that your content per crude tankers is actually much lower than product tankers? And that's why maybe the crude tanker orders we had in Clarksons were quite strong, were not really affecting you disproportionately? Or am I getting the packing order wrong here on content? That's the first one. Tom Erixon: You're getting it right. Sven Weier: Crude is more like an average. Is that fair to say in terms of content? Tom Erixon: Well, yes, to the degree that there is a meaningful average in this, crude tankers, they are large. They are energy consuming, efficiency matters. And so it is a meaningful part of the fleet for us, but it is -- compared to a product tanker, it doesn't provide quite the same mix. It's absolutely true. And so you need to shave off -- maybe I shouldn't speculate too much, but shave off EUR 1 million or so and then you are there. Sven Weier: Okay. Understood. And then to follow up on Marine because in the report, you mentioned the impact of sanctioned vessels on Services, right, and that it has a negative impact. Can you drill a little bit deeper into that comment, how it impacts you specifically? Tom Erixon: Well, there's been lots of dialogues about how big is the shallow fleet, which is sanctioned and which we do everything we can to definitely not serve and not ship spare parts. And so probably that the number of ships, including that fleet is in the order of magnitude of at least 400. And so 400 large vessels is -- does impact. With that said, I think Q4 service volume for Marine was not primarily the numbers that you're looking at there was more impacted by a very large service order, non-repeat service order in Q4 2024. So we had a bit of a challenging -- reach for us. It's not a favorable situation. Sven Weier: When the U.S. now enforces these sanctions more forcefully, for you, it doesn't make a difference because the shadow fleet was a shadow fleet before and you didn't service it anyhow. So that doesn't make an incremental difference. Tom Erixon: Absolutely not. No. It's -- on the contrary, we find it helpful that there is a strong action taken because with all the efforts we are doing to make sure that not a single spare parts one way or another reach a sanctioned ship is a big challenge. So we're working exceptionally hard in protecting that we are doing everything we can to follow the sanctions, but it's helpful for us if the ships are removed. It makes our life easier, and it has no impact on our financials at all. Sven Weier: Final question is on the new Food & Pharma division because I was wondering on those projects where you had cost overruns. I mean, did I understand you correctly that this is now done at the end of Q4, and this should no longer have an effect? Is that fair? Tom Erixon: I'm always careful in prognosticating a future where there are no problems. But we have been dealing with specifically in the quarter where one specific project, and I think we're taking all the measures needed now financially to make sure that, that is completed. It is financially not a good project for us, but we are extremely committed to our customers that we are delivering a well-functioning process at the end of the day. And so we should be clear of that now. So -- and I remind you that during -- when we started the journey 10 years ago, we continuously had a number of project execution problems. We cleaned that up very well. So we've been going on a good level for many years now in the project execution. And in the acquisition of Desmet, it's been the same, and it remains the same with Desmet. So this was the first time for a period of time where we actually got into executional challenges. And I think we've been handling it now. So in terms of what we know in our books now, we don't have a recurring item on this coming back. Sven Weier: And if I may, what was -- I mean at the end of '25, what was the share of biofuels within the division in terms of orders or sales? Tom Erixon: Good question. I don't have that number in my head. Maybe you can check a little bit as we speak. But it's been 5%. And so it's been very little. It's been depressed. We see a more interesting market in biofuels coming into 2026. They are typically large orders, so they are a little bit -- either they come or they don't. But when I'm commenting on the sentiment in the market when it comes to larger projects, that includes the biofuel segment where we may see some movements in 2026. We are hopeful. Sven Weier: And that 5% was of the order intake, right? Fredrik Ekstrom: Correct. Operator: The next question comes from Uma Samlin with Bank of America. Uma Samlin: So first one is a follow-up on Marine. So I guess you're guiding somewhat lower in Q1. How should we think about the mix of Pumping Systems orders versus other marine categories in Q1? So from your answer to the questions previously, it seems to me that you're thinking like a relatively -- still relatively strong Pumping Systems orders. Do I understand you correctly that it's the other Marine categories that drives your somewhat lower guide? Some clarification would be really helpful. Tom Erixon: We are hesitant. Here is the thing without the crystal ball, the more granular we are in our forecasting, the more off we're going to be. So on a group level, we feel fairly confident. And as you will notice, if you compare backwards on divisional levels, we have a slightly larger variation of outcome versus forecasting. And it gets even worse if we break it down into business units and individual product categories. So I'm a little bit hesitant to meet your question. But in terms of our earlier discussion on this call, the activity level and contracting level as forecasted and as what we've seen in Q4 looks relatively stable. So it may not be a bad guess that we are reasonably close in Q1 to Q4. Uma Samlin: That's very helpful. My second one is on Food & Water. If I heard you correctly, it seems like you expect some sort of margin impact from your growth strategy in '26. Can you perhaps elaborate a bit more? And what do you think is the long-term margin good for Food & Water? Because I remember this division used to be at 17%, 18%. And after the acquisition of Desmet, it was lower to like 14%, 15%. What is your long-term sort of ambition for the margin profile of Food & Water? Tom Erixon: Well, we typically don't want to run businesses below 15%. So our change in our corporate profitability target to 17% anticipated that part of our business most likely is going to be above the 17% and part of the business may be somewhat below. So we are not running a business strategy in Food & Water aiming to go below 15%. What we have done, and I remind you of this, we are building this company for the future. We are running at compared to historically exceptionally high CapEx volume, which in part is complemented with higher OpEx cost running in parallel to that CapEx program. And we are building both product technologies and capacities in the market additionally. So we have been doing that for a long period of time. And I don't see -- I guess what we are indicating with the increased investment program in the data center applications and the increased focus on growth strategy in certain newer areas in Food & Pharma should give you sort of the feel that what we've been doing historically is what we will continue to do. So if we stop doing that, I said it before, any monkey could get the margins up with 1% or 2% on the Alfa Laval margin. But we think building us towards the SEK 100 billion is the primary target, and we're going to do so with acceptable margins and healthy business conditions. And for Food & Water, that means that we are definitely aiming in the short to medium term to be somewhat north of the 15% target. Operator: The next question comes from Carl Deijenberg with DNB. Carl Deijenberg: So 2 questions from my side. First of all, I wanted to come back on the Energy division and maybe specifically on the HVAC side. Obviously, that was a drag for you on the order side in '25, but with some improvement here towards the latter part of the year. But I do want to understand a little bit. Is that -- do you see that more as a result of this inventory drawdowns on the OEM side being behind you and production rates being more sort of indicative of end consumer demand? Or do you still see some elevated inventories there among your customers? Tom Erixon: I think the -- maybe you want to take that, Fredrik. You used to run that business. Fredrik Ekstrom: Well, I think in relation to inventories, I would say that the inventory at our customers' distributor network is depleted. That I think we can reasonably see in the call-off for the frame agreements that we have with the larger OEMs. So that would confirm that we are past the destocking and that we start to return to growth or we start to return to normal production. When it comes to heat pumps specifically, I think we see the beginning of a resumption of a normal business and a normal trajectory of business growth in relation to defossilizing heating, particularly then in Europe. And I think that's a strong indication. There is a shift in players in the market. There is going to be consolidation in the market most likely. But we see definitely that also on the air conditioning side that we are starting to have larger call-offs on frame agreements. So I would assume that, that confirms the case that destocking is complete. Carl Deijenberg: Okay. Very well. Then secondly, I wanted to ask also on sort of recent raw material movements. I mean we've obviously seen some quite dramatic price movements on certain raw materials. I guess, one quite important component for you is, for example, copper on the brazed side or on the heat exchanger side. And I just wanted to hear a little bit if you expect any sort of tangible price impact on that entering '26 now given where prices are. Fredrik Ekstrom: Right. And so without getting too much into detail here, we set the standard cost during the year that is based on the frame agreements that we have with our metal suppliers, and we have more than one metal supplier, and they have a little bit of different sort of timing and phasing of when we renew those frame agreements with our metal suppliers. So we have a little bit of stability, and we have a little bit of visibility going forward to what our material prices will be. We also have some metal hedgings that are in place. So all in all, we don't have -- you can say in the short term, it doesn't impact us. But in the long term, it means we need to consider how we plan our productions and how we plan our pricing structure, but we allow ourselves a little bit of breathing space to make those decisions in a foundational way in line with our strategy. Tom, would you add anything? I could add one thing on the copper, by the way. I would say that if you look at the other metals, we probably have a little bit of speculation creeping into the pricing. When it comes to copper, there is actually a foundational demand or supply problem that needs to be sorted out. So there is probably a more sustained higher price level for copper going forward. Operator: Our last question comes from Klas Bergelind with Citi. Klas Bergelind: Klas from Citi. So I just had a -- sorry, a follow-up question on Marine again, a lot of questions on Marine. But I want to zoom in on product tankers. Obviously, crude is strong, but product is still pretty volatile where your value is higher. We saw a pretty strong first read in December at 19 contracts, but slowed down again in January as we could see yesterday. The product tanker market is still pretty soft with mid-single-digit supply growth against around 1% demand growth and scrapping doesn't seem to increase that much at the moment. I'm just trying to understand, Tom, how you look at demand here in the product tanker category in 2026. If you share this view or if your discussions out there are showing a more positive picture because it seems like product tanker, given the short-cycle nature of that business, is something that maybe can surprise positively, but I just want to hear your view there. Tom Erixon: It's a good question. The difficulty on what's going to happen on the contracting side. So I remind you that in terms of deliveries from our side, commissioning from our side and delivering from the yards to the shipowners, the 2026 pipeline is very strong. So what we're discussing is not affecting invoicing in 2026. And to a degree, we also cover 2027 already, although not fully. So if you're going to see any meaningful impact in a 2-year perspective on this, it means that existing slots need to be converted, that containers are being swapped into product tankers. And that type of switches is happening in the market. People are selling options and production slots. So I don't know. I would refer to Clarksons as the most solid foundation for this forecast. We don't have, I think, a better view on the market than they do. But as I said, we came out 2025 on a pretty normalized level. I remind you that the monthly numbers and the yearly numbers are updated afterwards. So all of the bookings are not registered at Clarksons at this point in time, not for 2025 and certainly not for January. So we will see some movement there. And we don't expect tremendous volatility short term. But you've seen the volatility down over a period of time when we were a bit unpleasantly surprised. And then you saw the enormous spike in -- starting in 2023 and into 2024. So we haven't exactly nailed the prognosis historically. I'm afraid we're not be able to do it now either. But we're good for a period of time. Klas Bergelind: We typically do the 6 months revisions to the date as well, but it doesn't look very strong. So that is why I asked the question, but I appreciate your comments. Tom Erixon: All right. So thank you very much. Thanks for the call. And if we don't run into each other before at some of the investor conferences that are happening in London, Miami and a couple of other places where we will be, then we will meet up at the earnings call for the first quarter in April. So thanks a lot.
Marilyn Tan: Good morning, everyone. Welcome to the FY '25 Results Audio Webcast for Keppel Infrastructure Trust, or KIT. I'm Marilyn from the Keppel IR and Sustainability team. Let me introduce the KIT management team. We have with us this morning, CEO, Mr. Kevin Neo; CFO, Mr. Raymond Bay and Director of Portfolio Management, Mr. [indiscernible]. They will be making a presentation that will cover KIT's FY '25 highlights and business strategy, followed by the FY '25 business and financial update. Please leave your questions for the Q&A session at the end of the presentation. For analysts who are joining us on the MS Teams platform, please check now that on mute before we start the presentation. I will now hand the time over to Kevin for the presentation. Kevin, please. Tzu Chao Neo: All right. Thanks, Marilyn. Good morning, everyone, and thank you for joining us today. 2025 marks a 10th year of KIT's trading commencement as an enlarged trust, and we are glad to report a strong KIT unitholder return of 36% in the last 10 years. This compares very well against the 61% achieved by the REIT index over the same period. With more than 18 years of infrastructure investment and management experience, KIT has built a strong track record and continues to grow through acquisitions and value creation. We have accumulated a portfolio of very attractive assets that are essential to our daily lives. We are the sole producer and retailer of piped town gas in Singapore. We supply 13% of commercial power in Singapore. We produce more than 20% of the drinking water in Singapore as well. We are the sole producer and distributor of chlorine gas for water treatment in Australia, and we maintain 31% of global subsea cable length. As at 31st December 2025, KIT's AUM stood at approximately $9.1 billion. This is anchored by essential businesses and assets in developed markets across all segments, namely energy transition, environmental services, distribution and storage and digital infrastructure. The next slide. KIT's portfolio is well positioned to capture tailwinds driven by long-term structural trends of energy transition, digitalization and rapid urbanization. Our strategy is focused on essential infrastructure that provides stable cash flows and has long-term growth potential. Our assets are located in developed markets in Asia Pacific and Europe, where there's strong legal and regulatory frameworks in place. And last but not least, we are in sectors where we have operational expertise either in Keppel or in partnering experienced local teams on the ground. Overall, 2025 was a good year for KIT unitholders. We reported DI of $249.5 million for the year, which is an increase of 24% year-on-year. We achieved total unitholder return of over 17% for the year. We continue to add value to the trust, having unlocked over $300 million in net proceeds from capital recycling and deployed $120 million to acquire GMG, marking our foray into the digital infrastructure segment. We have the financing flexibility to utilize the remaining proceeds of about $180 million and have the debt headroom for further accretive acquisitions. As at end 2025, the gearing levels and ICR for KIT remained strong at 39% and 7.6x, respectively. KIT received industry awards last year, and our appreciation goes out to the Edge Singapore and AustCham Singapore for these accolades. KIT was named the overall sector winner and recognized as a top performer in shareholder returns over the past 3 years at the Edge Singapore Billion Club Awards 2025. This achievement reflects our sustained focus on long-term value creation for our unitholders. At the AustCham Singapore, Australia Business Alliance Award 2025, KIT was recognized as a Singaporean company with a significant contribution towards advancing sustainable infrastructure that supports communities in Australia. We are declaring a DPU of $0.0197 for the second half of 2025, and this will be paid on 20th February 2026. This aggregates to the full year 2025 DPU of $0.0394 which is an implied yield of 8% based on the year-end closing unit price of $0.49 for 2025. Looking back on the track record, KIT's transformation and asset recycling strategy since 2019. The chart on the left shows illustratively the income profile for the DI from initial portfolio without acquisition versus the chart on the right that shows the actual reported DI to unitholders. The green bars above represents the income contribution to KIT's portfolio DI derived from various acquisitions and realizations made since 2019. We have been very successful in investing and replacing the recap of DI when certain concession assets were extended. We have also grown our evergreen businesses within the initial portfolio. For instance, City Energy accounts for 22% of DI in FY 2018 but contributed more than 60% of the initial portfolio DI in FY 2025. Our focus is to deliver resilient cash flows to unitholders through active portfolio management to strengthen portfolio constitutions anchored by essential businesses bearing cash flows that are very defensive against market disruptions. This is how we managed to maintain our DPU through COVID-19, which is one of the most significant market disruptions in the last 10 years. Next slide. KIT's portfolio of essential businesses and assets provide products and solutions, for which demand remains steady because of economic cycles. These are business strategies that we look to drive the next stage of value creation for KIT. First, portfolio cash flow stability remains a key priority, and we will continue with our proven capital recycling approach of invest, divest and reinvest discipline to build a resilient portfolio with strength in underlying cash flows. Second, you want to strengthen the operating cash flows for existing assets and businesses by driving value-creating initiatives and capitalizing on sector-specific growth drivers. Third, we will employ active capital management to support sustainable distributions and continued growth in unitholder returns. With these strategies in mind, we have outlined specific objectives and areas to share with our unitholders. As an active manager, we will continue to evaluate our portfolio on an ongoing basis to recycle capital from divested assets for redeployment into accretive assets or businesses with stable cash flows. The goal is to manage DPU stability and offset the expected decline in income from concession assets. The focus on new acquisition is expected to be on energy transition, digital infrastructure and environmental solutions. This is in line with the recent OCBC report where analysts expect growing adoption of AI to drive demand for fiber connectivity, data centers, power generation and grid infrastructure. Our objective is to build and own an optimal portfolio of stable assets and growth assets to achieve DPU stability and growth. Currently, we have $180 million of divestment proceeds remaining from the sale of Philippine Coastal and Ventura for immediate redeployment. In addition, KIT's net gearing of 39% is healthy. Therefore, we could make use of debt headroom to acquire. Concurrently, we are focused on driving organic and inorganic growth in revenue and achieving operational cost efficiency for existing assets in our portfolio. In tandem, we work with the respective operating teams from the evergreen businesses such as City Energy, Ixom and GMG to execute on the planned growth strategies to grow KIT's operating earnings. As part of active capital management, we have been monitoring the market for opportunities to undertake early refinancing amidst the conducive interest rate environment. We expect to complete and execute on KIT's FY 2026, refinancing needs well ahead of maturity. Raymond, our CFO, will cover this in greater details. Financial flexibility is key as we pursue various options, including utilizing recycled capital, pre-invested cash and KIT's debt headroom with prudence for accretive acquisitions. Our main goal is to achieve DI and DPU continuity into the long run, and we are working to achieve this through the successful execution of our planned accretive acquisitions and value creation initiatives. But with that, let me hand over to [indiscernible] for the FY '25 business updates. Unknown Executive: Thanks, Kevin. Hello, everyone. I'm [indiscernible] joined the team as Director of Portfolio Management since November. I'll take you through the KIT portfolio business updates in the next few slides. Going to Slide 12. FY '25 saw stable operations for our assets and businesses in the energy transition segment. City Energy achieved higher FFO of $62 million for the year, mainly through its core operations. We tracked total gas water heater sales and the increase in market share in the residential market has been meaningful with potential for future growth. Growth opportunities are also present in the commercial and industrial market in new developments and in retrofit projects for existing properties. The FFO for the transition assets was an aggregate $124 million for FY '25, which included a cash surplus from capital management of AGPC 4Q '25. For AGPC, we had higher volumes in FY '25 compared to the prior year, underpinned by stronger demand. The FFO for the wind farms portfolio came in lower year-on-year mainly due to BKR2. However, wind resources in the second half of '25 have recovered compared to the same period last year. The European onshore wind platform saw stable production levels in FY '25 at lower power prices. The FFO for the German solar portfolio was SGD 46 million for FY '25, up 18% year-on-year, underpinned by stable performance. For the Environmental Services segment, the Singapore concession assets contributed an aggregate $52 million for FY '25. We maintained stable operations and met all contractual obligations with the regulators, such as NEA and PUB in the financial year. We continue to pursue potential opportunities for concession extensions following SingSpring's extension to 2028, noting that our land lease is only due in 2033. Moving on to EMK. Pricing in the private landfill business is expected to remain largely sideways. We continue to stay disciplined on pricing and focused on optimizing the NAV of our asset. For the incineration business, starting 1st of Jan this year, the Seoul Metropolitan Area or SMA, implemented a direct landfilling ban for municipal solid waste. With this in place, we see pricing upside for private incineration facilities. Public incineration facilities are running near full utilization, and this ban is expected to drive higher demand for private incineration facilities such as EMK, which are located near the SMA. Therefore, EMK plans to grow its incineration capacity, which is also running at full utilization to capture this tailwind and increase FFO for the Distribution & Storage segment. The FFO for Ixom was $71 million for FY '25, an increase of 42% year-on-year, underpinned by strong operating earnings. The bolt-on acquisition of the Hilditch base oils import and distribution business in 4Q '25 is expected to drive continued revenue and EBITDA growth in 2026. Hilditch earns a stable margin per unit volume and is expected to benefit from near-term tailwinds from Australia's new fuel emission standards supporting demand for refined and cleaner base oils. The FFO for Ventura was $23 million for FY '25 and was higher year-on-year on a 100% basis, underpinned by higher EBITDA. For the year, it achieved 100% service reliability and on-time performance exceeding 90% and secured new charter contracts. Ventura's maintenance CapEx is mainly debt funded. And for FY '25, the maintenance CapEx of $21 million was added back to derive DI. Ventura's business model requires ongoing maintenance CapEx, and the company will debt fund this CapEx in the near term. We completed the acquisition of GMG on 25th of November 2025. Hence the income contribution to KIT of about a month of about SGD 1 million is in line with our due underwriting. Since completion, the team has successfully extended a long-term charter to 2028 and are maintaining zone contract to 2030. Similar to Ventura, GMG is a business which requires ongoing maintenance CapEx for vessel upkeep, such as dry docking and we expect to be debt funding lease in the near future. In the next 2 slides, we will outline the strategic priorities for our evergreen businesses. We continue to work closely with the respective operating teams on the ground to execute these strategies and drive future operating earnings. These essential businesses have established strong local brands and local market positions in markets with high barriers to entry. They are long-term platforms focused on delivering customer-led solutions and creating sustainable value over time. For City Energy, our focus is on driving further market share gains in residential water heaters from the current 20%, increasing commercial and industrial gas usage and raising consumer awareness of the benefits of gas water heaters to support broader adoption. For Ixom, the key priority is to strengthen our market-leading positions across the core manufactured and traded product segments supported by long-standing relationships with key customers in the water utilities, manufacturing and resources segments. Other initiatives include continued growth in the bitumen business supported by disciplined growth CapEx and unlocking revenue and cost synergies from the recently acquired Hilditch business. For Ventura, we aim to maintain our strong track record in service delivery and standards, grow market share in the charter business for both public and private runs and position ourselves in a public bus service contract renewals coming up in 2028. EMK has the potential to further strengthen its position as one of the largest private incinerators in South Korea. The key catalyst ahead is the scaling up of incineration capacity to capture demand tailwinds driven by favorable policy changes. For GMG as one of the leading independent providers of subsea fiber optic maintenance, installation and support vessels, the focus is on maintaining strong operational reliability and a track record of vessels. At the same time, we aim to grow our fleet of specialized cable installation and maintenance vessels, underpinned by strong global demand for subsea cable connectivity. Moving on to the ESG slide, we met our ESG targets for the year across the 3 pillars of our sustainability framework, environmental stewardship, responsible business and people and community. In addition, we achieved a rating of A in MSCI ESG ratings assessment in recognition of the strong management of financial and industry relevant ESG risks and opportunities. I will now hand the presentation to Raymond for the financial and capital management of KIT. Teong Ming Bay: Thank you, [indiscernible]. Hello, everyone. I'll kick off my section with this slide that demonstrates KIT's strong earnings track record in the last 5 years. Moving to the next slide. The DI for FY '25 increased over 24% year-on-year to approximately $250 million. Asset DI before corporate cost was higher at $349.1 million. This is underpinned mainly by higher contribution from City Energy, the German solar portfolio, Ixom and Ventura. This included a cash surplus for AGPC, which was substantially used for debt repayment at KIT trust level. In the Environmental Services segment, lower income from Senoko after concession renewal was partially offset by the full year contribution from MEDP in FY '25. Corporate expenses, excluding the debt repayment, were lower year-on-year, mainly due to no performance fee accrued in FY '25. We recognized a divestment gain of $49 million from the sale of interest in Philippine Coastal and Ventura. Moving to the next slide. This is the second half FY 2025 DI. The DI increased about 21% year-on-year to $130.1 million. Asset DI before corporate cost was higher at $199 million, underpinned by higher DI for City Energy, the wind farm portfolio, AGPC and the German solar portfolio. In the Environmental Services segment, lower income from Senoko after concession renewal was partially offset by the full year contribution from MEDP in the second half of FY '25. Corporate expenses, excluding the debt repayment, were higher year-on-year, mainly due to higher trustee manager base fee. We recognized a divestment gain of $27 million from the sale of interest in Ventura in the second half of FY '25. Moving to the next slide. On to the balance sheet. KIT reported net gearing of approximately 39% with interest coverage ratio at 7.6x. The consolidated debt for KIT aggregated to about $3.2 billion as at end FY '25. Pending capital deployment, about $180 million of the remaining divestment proceeds have been used to pay down existing borrowings at the trust level. The weighted average cost of debt at the group was lower year-on-year at 4.4%, the weighted average cost of debt at the trust level was also lower at 3.4%. KIT has hedged approximately 73% of the trust's foreign income and approximately 72% of the KIT's total borrowings are hedged. Moving to the next slide. We have received firm commitments to refinance Ixom's loan subject to documentation and expect to complete the early refinancing ahead of its expiry in the second half of this year. We are also evaluating refinancing options for the remaining $330 million debt at trust level maturing later in the year. To date, we have approximately $239 million of committed RCF that is undrawn. To conclude, the refinancing needs for FY '26 will be met as we look to complete the refinancing ahead of expiry. With $180 million of remaining divestment proceeds and ample debt headroom, we are well positioned to execute our planned accretive acquisitions and value creation initiatives to achieve DI and DPU continuity into the long term. Thank you. With that, I will now hand over the time back to Marilyn. Marilyn Tan: Thank you, Kevin, [indiscernible] and Raymond. We will now proceed to the Q&A session. [Operator Instructions] Okay. We have the first question from Shekhar. Shekhar Jaiswal: [indiscernible], welcome to KIT. Okay. Good, good set of numbers. Really impressed, but I have a few things to ask about 2026. How should I look at GMG's distributable income in '26? Like the 1-month contribution we should look at annualizing it? Unknown Executive: Correct. Yes. So as you correctly mentioned, GMG contributed SGD 1 million. Going forward, the DI run rate is expected to remain for FY '26. And -- but I think one thing we would like to note is that GMG is a business which requires regular maintenance CapEx from vessel dry docking, right? But most of this maintenance CapEx is expected to be debt funded. So the focus is on DI. Tzu Chao Neo: So maybe I could add to that. When we -- something like what we did with Ventura, when we bought the business, we are aware that there is certain CapEx or maintenance requirements, which could be a bit lumpy, right? So when we enter into the transaction, we kind of size the capital structure such that we could use the debt capacity to debt fund certain expenses. This is to maintain DI's ability. So that's our plan. Shekhar Jaiswal: Okay. That helps. Just continuing on the same topic. You said there's now a long-term charter extended to 2028, maintenance contract to 2030. Can I get a sense on what percentage of your revenue or EBITDA from GMG is now covered with multiyear agreements? Unknown Executive: So to give you a sense, right, we have 6 vessels to our long-term charters. We have already secured 5 of those. We are in the process of renegotiating another one. And all 4 maintenance vessels, which are under the consortium model have been recontracted. So to answer your question, it's 5 out of 6 have charter certainty. Tzu Chao Neo: So I think when we announced the acquisition during our AGM last year, I think certain contracts was coming up -- certain contracts was renewed even before we entered into the transaction. And I think there was one contract that will come soon after the AGM, and that contract was renewed. And I think this basically plays to what we have been saying, right? There is a lot of demand for such vessels given the outlook for CapEx requirements to build new cables, to maintain cables in DCs, right? So this is where I think we want to ride that macro trend. Shekhar Jaiswal: Understand, understand. Okay. I just have two more questions before I jump back in the queue. I see there's a lot of other people waiting to ask. On BKR2, can I get an update on the wind situation? How should we look at 2026. You did mention in the slides that second half is looking better than year-on-year, but on half-on-half and how should we look at the 2026 DI for it? Unknown Executive: Yes. So as a recap, thinking about the factors which drive BKR2 performance, it's number 1 is mainly related to wind, right? Because the pricing is actually locked in by a feed-in contract -- feeding tariff contract backed by the German government. So if you look at the wind speeds in second half of 2025 and compare that against second half of 2024, they are at or already above levels in the previous period. Tzu Chao Neo: So I think last year, I think there was a lot of concerns around BKR2, given the winds, yes, we have said that in the first half of 2025, wind speed was very bad due to pretty rare climate phenomenon. I think we are glad to share that as what [indiscernible] has mentioned, the wind speed for second half has recovered. And the wind speed for second half 2025 is higher than that of the second half of 2024. But we hope that this will continue. And if this continues in 2026, hopefully, the performance from BKR2 is better than that in 2025, if we have a full year of proper winds. Shekhar Jaiswal: Okay. Okay. Fair enough. So we still look at it. We see how the first quarter goes and then reassess, is it? Tzu Chao Neo: Yes. Yes. So unfortunately, wind is not something that we can control. But like I said, when we look at wind, we have to look at it from a long-term perspective. There will be years where it may be below average, there'll be years where it may be above average. But long term wise, over the midterm, it should average out. Shekhar Jaiswal: Okay. Fair enough. Just 1 more question and then I'll jump back in the queue. In terms of pipeline, anything from Keppel's ecosystem where you -- and which verticals where you think most actionable ideas would come through or needs could come through over the next 12 months? Tzu Chao Neo: Sorry, Shekhar, I missed your question. If you don't mind, could you just repeat it? Shekhar Jaiswal: Yes. I'm saying from Keppel's ecosystem, if you have to look at deal flows, which verticals where you think will be the most actionable deal flow would be in the next 12 months? Tzu Chao Neo: Yes. So I think Keppel is across the verticals that we are in at the moment. I think certain assets are being constructed, and I think some of them were probably coming online over the period of time. As and when they come due and if they are appropriate core for KIT, we will definitely put our hands up to kind of -- to express our interest in acquiring them. But this will be done on a so-called very unplanned basis. But we do expect to call it a bit of activity in the energy transition sector, not just from the Keppel's tabled assets. But I think globally, right, we do expect a lot of activities around the energy transition and digital infrastructure segment. Marilyn Tan: Okay. The next would be to Hoo Ezien. Can you identify which house you're from? Ezien Hoo: Sure. It's Ezien from OCBC's credit research team. So my question is on AGPC. I think I may have missed a bit of what management was saying. There was a cash surplus from capital management at AGPC. Was that used to pay debt at the trust level. And if so, can you please explain more what actually happened at AGPC and what was done with the capital? That's all. Teong Ming Bay: Ezien, thanks for the question. I'll take that. So yes, so what happened was there was a refinancing activity in AGPC level. When the refinancing happened, there is a need to relook into the hedge position that led to a certain IRS has been -- we unwind certain IRS, which resulted in a gain. So the gain is approximately $51 million. This is -- I would like to stress that this is a one-off, right? And what happened is we -- this $51 million has been utilized to repay debt. And this debt will basically is an RCF facility. When we pare it down, it would become a war chest for us. We will have extended financial flexibility for acquisitions. Ezien Hoo: So the RCF facility is at the trust level. Teong Ming Bay: That's right. KIT's trust level. Tzu Chao Neo: So just to be clear, right, the total DI is not impacted by this because the proceeds is used to completely pay down debt at a KIT level. So it's a flush trigger. Marilyn Tan: Next question we have from Jialin. Jialin Li: Congrats on strong results. This is Jialin from CGSI. I have 3 questions before I jump back to the queue. So the first one could you walk through the CapEx for FY '26, I think especially for EMK, Ventura and GMG where you see strategic opportunities to grow? So what's the quantum of CapEx we are talking about? Should I finish all my questions before we dive into the answers or ...? Marilyn Tan: Yes. Jialin, it would be good if you give us all 3 questions. Jialin Li: Okay. Yes. So my next question is on GMG. So if we just focus on DI management guided just now, right? So can we think of resemble distributable income as a so-called clean DI meaning without debt repayment, without CapEx? And is it how we should be looking at FY '26 DI? And my third question is looking at distribution for next year, right, what's your thoughts around distribution trajectory for next year? Unknown Executive: Yes. So maybe I'll touch on the CapEx slide, right? So I think going on the CapEx plan for EMK, as we previously alluded to, we are dedicating some CapEx towards incinerator capacity expansion this year. This is to account for the fact that our incinerators today are 100% utilized, coupled with the fact that we are seeing incremental demand from the direct landfilling ban in Seoul which is supportive of pricing. So we are actually expanding capacity in 2 of the 4 incinerators that EMK currently operates. So that's on EMK. For Ventura, we are on the constant lookout to replace and deploy maintenance and growth CapEx towards the bus fleet. Tzu Chao Neo: So maybe I can just shed a bit of light on the CapEx plans for both EMT and Ventura. I think as what [indiscernible] mentioned, I think our incinerator is at maximum utilization. We do expect waste for incineration to increase especially given the policy change in the Seoul metropolitan area. Our landfills -- sorry, our incinerators are located just outside of SMA. So we are well positioned to receive the additional waste, right? And in order to capitalize on that long-term trajectory, we need to expand our capacity, right? And we do not expect this expansion to have an impact on EMK's cash flow because they're funded by cash on the books or by debt facilities that we have sized for this purpose. And I think this will be done over phases, right? And I think what I would like to point out is that this year, the incinerator at EMK is scheduled for some refurbishment. And we are just using that period of time to undertake the expansion. So this is a very efficient way of undertaking expansion. As probably everyone knows, Keppel as a group, my sponsor, has very strong operating and technical expertise in this area. We have obtained support in helping EMK to expand. And this is something that we spoke about last year. And I think we are -- we are seeing all this execution panning out as we speak. All right. And I think there is this question about GMG, the DI for December. Yes, that's clean where you can -- almost for the full year in 2026, you can annualize that to get to a estimates of the DI forecast from GMG. So last year, there's a 1 month or slightly over month of contribution. This year, we received 12 months of contributions. So the DI from 2025 had to be adjusted for that to get a more accurate estimation for 2026. Have we answered your question? Anything that's unanswered? Jialin Li: Yes. I think maybe one follow-up question is on CapEx, whether we could share certain amount like planned for -- planned aside for CapEx just for modeling purposes. And another -- the last question was on distribution trajectory for next year. Teong Ming Bay: Jialin, if you don't mind, could you refer to Slide 34 of our presentation slide. We have disclosed our CapEx guidance and also the debt amortization over there. Tzu Chao Neo: And I think on the distribution guidance, right, I mean, we don't want to give profit guidance. But I would say, I think we are in a good position. Our -- the 2025 DI from certain assets does not reflect the full contributions. For example, you need to annualize the DI from GMG to project what we will get for the full year of 2026. And I think we have -- last year, we realized about $300 million of capital from recycling of Philippine Coastal and a stake in Ventura, we have redeployed about $120 million of debt. There's about another $180 million that we can deploy this year. In addition to that, our balance sheet is very strong at 39%. So there's additional debt headroom that we can leverage on undertaking accretive acquisitions there. Marilyn Tan: Next in the queue would be questions from Suvro. Suvro Sarkar: Kevin and team, I just -- the first question from me is on the divestment gains part of it. So I'm a bit confused by the classification of divestment gains as part of our DI. So I mean, I always thought that divestment gains or losses, whatever it means is an accounting item and not a cash item, the whole cash sale proceeds should be a cash item. So how does it fit in with the DI, which is the cash flow basically? And if you're using divestment gains to the distributions, then how come we are still saying that we have $180 million remaining from the $300 million sales proceeds for -- so there must be some cash that has been used for the distributions from this side. Teong Ming Bay: Yes. Suvro, thanks for the question. So in fact, the divestment gain is an actual gain. What we have done with the divestment gain is you could think of it as a real gain at a principal level, right? What we have done is we have taken debt meanwhile to repay the debt at trust level as a cash management basis. Tzu Chao Neo: Yes. So maybe So the way I would explain is that we sold PCSPC last year. We saw a 25% stake in Ventura, right, at a very good gains. I think the gains over there is about over 30% in a year, right? So we make profit on the sale of a 25% stake in on GMG, that's on the real cash gain, right? So we recognize that a part of that real cash gain into a DI and the vast majority of that proceeds is not recognized in our DI. We only recognized a gain in our DI. The principal is still left in our balance sheet, which we have used part of it to reinvest in GMG. So of the $300 million, $120 million is used to take like a very significant stake in GMG. And we have about $180 million left, right? And part of this $180 million, we have used to reduce the pay down debt. The reduced interest expense across KIT, right? And that basically lowers our gearing down to 39%, which is very healthy, right? So we have those divestment proceeds as well as the additional debt headroom that we can do that can utilize to make further accretive acquisitions. Hopefully, that clarifies. Suvro Sarkar: Yes. So you're talking about the debt headroom not actual. So -- because you have to pay distributions of $240 million this year if you're distributing $0.0395. And your DI is $250 million. So at least of the $50 million divestment gains have to pay out at least 40 million to -- from that to the unitholders. So how do you classify it as a increased debt headroom? Tzu Chao Neo: Okay. Sure. So maybe let me just take a step back and explain it. We have certain proceeds from the sale, right? And we did not recognize the full sale proceeds into the DI, we only recognize the gain that we make right on Ventura, et cetera, into the DI, right? So yes, we have about $250 million, $40 million is about -- or $40 million is from the sale of Ventura. So that still reflects well against the delivery performance because it's still higher DI. But more importantly is I do not -- I think we want to kind of make it clear that recurring DI that you're trying to back so for 2025 results, does not reflect the full DI generation potential of KIT. Because that operating or recurring DI only includes 1 month of contribution from GMG, right? So if you annualize that, then you'll get to a better amount. And there's also a certain growth that we are trying to achieve in our portfolio that also had to give additional DI vis-a-vis 2025. And what we would also like to say is that the deficit proceeds, right, have not been fully redeployed as some of it has been used to pay down debt. Some of it has cash on balance sheet. And these are the amount, right, that we can use to reinvest that will create additional DI -- surplus for our -- KIT's uniholders. Suvro Sarkar: Got it. One other question on the CapEx front. In terms of growth CapEx versus maintenance CapEx breakdown -- so I see the 2026 numbers on Slide 34. So we are projecting around $100 million growth CapEx in total for next year. How does that compare with the growth CapEx in 2025? Is it higher and how do we finance this growth CapEx? Teong Ming Bay: Yes. Suvro, maybe I can take this. So the growth CapEx is largely stable. I wouldn't say there's a huge increase on this. In terms of growth CapEx, I think it's largely going to be funded through internal cash of the respective business or debt facilities. Suvro Sarkar: Okay. So shouldn't affect DI to a lot extent. Teong Ming Bay: No, no. Tzu Chao Neo: So Suvro, maybe just 1 point that I'd like to just add because I think what we're trying to do is we are trying to solve for the KIT's recurring DI, if -- and I think your question is about that gain in our DI. The way I'd probably look at it is that if we did not sell a 25% stake in Ventura, our DI will also be higher than what you are projecting here. Marilyn Tan: Thanks,Suvro, for the questions. We have another question from Jialin. Jialin Li: Yes. Sorry, it's me again. Yes, I have a follow-up question on Ixom. So just wondering whether you could share details on the acquisition of one its subsidiary happened this year? And also because I saw the CapEx breakdown for next year, there is quite some amount spent on Ixom. So just wondering whether you have plans for another acquisition of -- one of its, I don't know, maybe like subsidiary under Ixom or whether this is just expanding its current project line? Unknown Executive: Yes. So thanks, Jialin, for the question. So I think sharing more details around the Hilditch acquisition. So this is a base oil importer and distributor. So these are actually like engine oils and lubes used for vehicles typically for long-distance transport. So these are like logistics vehicles. And the business is expected to benefit generally from a tightening of fuel emission standards towards higher spec type of base oils. So the acquisition is expected to contribute roughly about a single-digit percentage EBITDA to Ixom's pre-acquisition levels. Tzu Chao Neo: Maybe again, just a bit more. Ixom, as we always say, there is two key businesses in Ixom. One is the chlorine business, the other is the chemical distribution business where [indiscernible] Australia. And it owns these fleets of very specialized chemical -- hazardous chemicals distribution fleets, right? So this acquisition is done by -- it's a bolt-on for this chemical distribution business. So the thinking behind that is to use the same infrastructure to distribute that product to retain customers. So it basically increases revenue to us. I think this acquisition was done pretty late last year. So our DI for last year does not reflect the full contribution from these acquisitions. So come 2026, you should see the full year contribution over that. So we expect an uplift over there as well. And more importantly, it's because we are using the same infrastructure to distribute more products to the same customers. There's also some operational efficiency that we can realize over there. Jialin Li: Okay. could you remind me of your -- because just now you mentioned the financial implication is on the EBITDA level, right? So could you maybe remind us of the EV EBITDA before this acquisition or maybe at the acquisition of Ixom itself? Unknown Executive: So I believe we had disclosed in one of our previous slides that Ixom's EBITDA is roughly AUD 200 million. In the current slide, we also have the EBITDA levels for Ixom, if you refer to our business updates. Jialin Li: Okay. Got it. And sorry, just to clarify. So the financial implication of this new acquisition is -- should we look at it via EV EBITDA? Or should we look at a certain percentage increase in EBITDA? Unknown Executive: Yes. So as I previously mentioned, it's going to be a single -- mid-single-digit EBITDA contribution to Ixom's pre-acquisition EBITDA. Tzu Chao Neo: So let me put a little bit more. So Ixom's last year, full year ending 2025, I think it's doing over $200 million -- slightly over $200-plus million EBITDA. This acquisition is done late last year. So it's not fully reflected into the number. As what [indiscernible] has mentioned, this acquisition on a full year basis could result in a mid-single-digit increase to Ixom's EBITDA. So this is then flows down to our DI. Marilyn Tan: Do we have any other questions from the analyst community? Okay. If not, then let me just quickly raise -- first and foremost, thank you to our public audience for your questions posed. I believe most of the questions have been addressed earlier through the common questions raised by the analysts. I just have 1 or 2 other additional questions that I will pose to our management team now. The first question is on Ixom's debt. The question is whether -- is there an expected refinancing cost for the Ixom's debt that we should be considering? And whether or not it is significant? Teong Ming Bay: I can take that. So we do not foresee an increase in refinancing costs. In fact, we do see a loan margin compression for Ixom. But do take note that the current markets situation in Australia. There are talks about RBA may increase the base rate. So I think at the end of the day, it would be netted off position. So to answer your question, there will not be an increase in refinancing cost for Ixom. Marilyn Tan: Okay. Thank you, Raymond, for the response. The second question is on the query on the projected CapEx for GMG, can management please advise on the CapEx? Tzu Chao Neo: Yes. So I think when we sought unitholder's approval for these acquisitions, I think we have disclosed that there is a lot of growth potential in this business. Our vessels are fully utilized. We want to grow the business, and we want to either buy new vessels -- construct new vessels or buy existing vessels and compare them into cable laying vessels. I think I'll say we are making good projections over there. I think we have acquired a vessel that's being repurposed into cable laying vessels, which we hope once it's been completed, can be deployed and we should then add to revenue, right. The -- and when we look at these acquisitions, right, we are aware of certain -- growth CapEx that will be coming up. And our plan, right, is to actually -- and we have also sized debt facility that we plan to use the debt fund all this CapEx. And so as a result, which is a result of this funding method, the impacts to our DI -- of the growth CapEx on a DI is not going to be material. But of course, we have also set aside as disclosed certain equity commitments that we have prepared to put in to buy even more vessels, right? At this stage, we have not utilized -- or we have not planned to put in that equity yet. But as and when we are able to see on new vessels, we will inform the market accordingly. Marilyn Tan: Thanks, Kevin, for response. Let me just quickly check to see if there are any additional questions that have come through. Okay. I think we just have one more question to -- from the public. So the question here is how big is our onshore wind farm capacity? And then the second part of the question is whether we intend to buy more of assets? Tzu Chao Neo: Yes. I would say we have about 1.3 gigawatts of renewable capacity, right, of which, I would say, 450 megawatts or 470 megawatts is for the German BKR2, the offshore wind farm. Then a big chunk of the remaining actually goes to our -- comes from our solar asset, the German solar portfolio, where it is doing very well. I think it has received or registered a good increase in DI from the German solar portfolio. And our wind farm basically -- our onshore wind farm is basically distributed across Norway and Sweden. From an investment quantum perspective, it's a relatively small part of our portfolio. Do we have more plans to buy more wind farms? I think as and when we find good assets in this sector, we will do it. But if there isn't any attractive assets, I think we're happy to kind of consider other sectors as well. Marilyn Tan: Thanks, Kevin. I think with that, we have completed all the questions that have been posed to us by analysts and the public. Thank you so much, everyone, for making time to attend our call. If there are no further questions, we will now close this morning's call, and have a good day ahead. Thank you.
Operator: Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Fourth Quarter 2025 Operating Results. [Operator Instructions] And for your information, this conference call is now being broadcasted live over the Internet. A webcast replay will be available within an hour after the conference is finished. Please visit CHT IR website at www.cht.com.tw/ir under the IR Calendar section. And now I would like to turn it over to Ms. Angela Tsai, Vice President of Financial Department. Thank you. Ms. Tsai, please begin. Angela Tsai: Thank you. I'm Angela Tsai, Vice President of Finance at Chunghwa Telecom. Welcome to our fourth quarter 2025 Earnings Conference call. Joining me on the call today are Chunghwa's President Rong-Shy Lin; and our Chief Financial Officer, Audrey Hsu. During today's call, management will begin by sharing our recent strategic achievements and providing an overview of our fourth quarter business results. This will be followed by a discussion of our segment performance and financial highlights. We will then open the floor for questions and answers. Please turn to Slide 2 to review our disclaimers and forward-looking statement disclosures. Now without further delay, I will turn the call over to our President. President Lin, please go ahead. Rong-Shy Lin: Thank you, Angela, and hello, everyone. Welcome to our fourth quarter 2025 results conference call. To begin, I am pleased to report our exceptional financial performance for 2025, driven by our dedicated efforts. Chunghwa Telecom's revenue, operating income, income before tax and EPS for 2025 all exceeded the upper end of our guidance, reflecting our strong execution and market-leading position. On the revenue front, our full year revenue reached an all-time high, demonstrating our continued focus on strengthening our core businesses and active expansion in the ICT sector. Notably, our full year EPS of TWD 4.99 marked an 8-year high, extending our annual growth momentum for the sixth consecutive year. This milestone underscore our commitment to driving innovation and enhancing long-term shareholders' value. Based on the strong outperformance in 2025, we are entering 2026 with confidence for our telecom businesses. We see Taiwan's mobile market remaining stable and favorable to us as the market leader. We are also pleased with our fixed broadband performance and will extend the successful existing strategy for further ARPU enhancement. In terms of ICT business, our technology capability will continue to remain cutting edge to support future growth. A particular highlight is our satellite opportunities as we believe demand of satellite services as the communication backup solution will increase with our satellites of OneWeb and SES commencing operation in 2025. The Astranis satellite will join in second half of 2026 to enhance our multilayer satellite capability. Furthermore, we will also focus on extending pre-6G-related opportunities in AIoT, satellite and big data services and expect their combined revenue to surpass the TWD 10 billion in 2026. We particularly expect to convert our AI capabilities into our service offering. We expect to assist our customers to integrate AI into their operational processes, legal compliance and infrastructure management. In addition, as a leader in AI drive connectivity, we are introducing AI edge computing into our AIDC to create a new revenue stream alongside our continued construction of AIDC in 2026. Ultimately, in the fourth quarter, we were honored with multiple awards recognizing both our ESG accomplishments and the technical acknowledgment. We won The Asset's Jade Award for corporate sustainability leadership for the fifth time, received the several AI Innovation Award at the World Communication Awards for our smart customer services solution and was recognized as the only Taiwanese telecom company on Newsweek's World's Most Trustworthy Companies 2025 list. More importantly, we have secured 4.6 billion kilowatt hour of renewable energy through a 20-year Corporate Power Purchase Agreement, CPPA, to support our 2045 net zero commitment. Now let's turn to our fourth quarter 2025 results. Please flip to Page 4 for the business overview. Please turn to Page 5 to review our success in Taiwan mobile market. In the fourth quarter, we solidified our leadership position in Taiwan's mobile market for 2025 with record highs across all dimensions. According to data from our telecom regulator, our mobile revenue market share climbed to unprecedented 41%, while our subscriber market share rose to 39.7%, mainly driven by continued growth in the postpaid subscriber. We are pleased with this strong result. Our 5G performance was equally impressive. Based on regulators' data, our 5G subscriber market share increased to 39.2%, further solidify our industry-leading position. The 5G penetration rate among our smartphone users climbed to 46.4% by the end of 2025, while the average monthly fee uplift from 5G migration remained robust at 41%. Given this solid momentum, we were especially encouraged by our strong mobile service revenue growth in the fourth quarter, which achieved a recent record high of 4.7% year-over-year. Postpaid ARPU also grew 3.6% year-over-year. We expect this positive trajectory to continue, supported by Taiwan's favorable mobile market landscape. Let's move on to Slide 6 for our fixed broadband business update. In the fourth quarter, our fixed broadband ARPU continued its upward trajectory, reaching a new high of TWD 819 per month. This represents a 3.8% increase in revenue and a 0.5% increase in subscribers year-over-year. This strong result were driven by our high-speed upgrade promotion and MOD bundle packages, which successfully boosted customer adoption of higher tier plans. Subscribers choosing speed of 300 megabits per second and above grew by 13% year-over-year, while those opting for 500 megabits per second and above recorded a double-digit growth and the subscription for 1 gigabits per second and above doubled in the fourth quarter. Slide 7 provides a detailed overview of the highlights from our consumer application services. In the fourth quarter, our multiple-play packages, which integrate mobile, fixed broadband and WiFi services increased by 17% year-over-year, marking the 16th consecutive quarter of expansion and representing the collective growth momentum of our customer business group. In 2025, despite the absence of major global sporting event broadcasting, resulting in overall subscription loss, our Hami video service demonstrated a solid resilience as its ARPU increased by more than 25% year-over-year in the fourth quarter. Looking ahead, with the launch of Disney+ bundle this January and our ongoing partnership with Netflix, coupled with the exciting pipeline of popular sporting events such as the FIFA World Cup, Asia Games and et cetera, we expect to drive further revenue growth throughout 2026. Meanwhile, our consumer cybersecurity subscription recorded 11% year-over-year growth with revenue also achieving double-digit gains, contributing to the steady growth for our consumer business group illustrated the key development in our enterprise ICT business. In the fourth quarter, our group's ICT revenue declined by 6% year-over-year due to a higher comparison base in the same period last year, though our full year ICT revenue still recorded robust year-over-year growth. Meanwhile, our recurring ICT revenue grew 15% year-over-year, continuing to show strong momentum, supported by increases across all major service lines, particularly contributions of AIoT, IDC and international public cloud services. Looking at the specific service categories, revenue from IDC, Big Data and 5G private network grew by 19%, 3% and 88% year-over-year, respectively. IDC performance benefited primarily from project completion in Mexico, while big data service revenue increased driven by its recurring revenue growth. Revenue from 5G private network surged, supported by the project revenue recognition from both public and private sector customers. However, revenue from cloud and AIDC business declined by 16% and 27% year-over-year, respectively, due to a high base last year. Our cybersecurity service revenue also decreased by 16% year-over-year as the majority of our cybersecurity revenue for 2025 had already been recognized in 3 quarters. Notably, despite the quarterly fluctuation, both cloud service and cybersecurity business still delivered full year revenue growth. We are also proud to share that we secured an AI customer service solution to build the first integrated AI customer services system for a leading financial institution in Taiwan. Furthermore, we secured a flagship government system integration project to upgrade the labor insurance platform to next-generation infrastructure with a contract value exceeding TWD 3 billion. In addition to further leverage our sea, land and sky network deployment and expand our satellite business scale, we successfully incorporated our satellite services as part of the government's joint procurement contract framework, paving the way for more long-term service contracts from government agencies. Lastly, our deployment of remote surveillance platform for correctional institution nationwide brought us 5 additional new projects in the fourth quarter with a total contract value of TWD 150 million. We expect to further replicate and scale this success in the coming year. Slide 9 illustrates the performance of our international subsidiaries. In the fourth quarter, our international subsidiaries revenue decreased 7% year-over-year, mainly due to softened demand for voice services as well as higher comparison base in the United States and the Japan ICT market last year. However, we were glad to see a 12% year-over-year revenue increase in Southeast Asia market as we completed multiple planned construction projects in Singapore and Thailand, a trend that we expect to continue through 2026. Notably, our Malaysia subsidiary commenced operations in December 2025, aiming to provide more timely, high-efficient ICT integration services for Taiwanese and multinational enterprise in the growing Southeast Asia market. Look ahead of 2026, we maintain a relatively optimistic outlook for our global market development as we have secured several AI supply chain projects in the United States in our pipeline, including key projects in Texas and California, which is expected to significantly boost our U.S. market performance in 2026. Now let's move on to Page 10 for the financial performance of our 3 business groups. In the fourth quarter, our CBG delivered a robust 6% year-over-year revenue growth, supported in both mobile and fixed broadband services, plus higher sales driven by the iPhone demand. However, its income before tax slightly decreased, mainly dragged by the final phase of 3G telecom equipment impairment, which has fully recognized in the fourth quarter and a higher comparison base from government subsidies recorded in the same period last year. Our EBG revenue decreased by 7.9% year-over-year as most of our major ICT project has already been recognized in previous quarters, resulting in a 7% year-over-year drop in the EBG ICT revenue. Income before tax was also impacted by the onetime impairment mentioned earlier. Encouragingly, EBG mobile and fixed broadband services as well as its satellite services still delivered solid growth momentum this quarter. As for our IBG business, revenue grew by 2.5% and income before tax increased by 1.8% year-over-year, driven by rising demand for the international IDC services and stronger roaming revenue. Furthermore, we are pleased to report that our submarine cables, SJC2 and the first phase of Apricot were completed this quarter and further boosted IBG's fixed line services revenue by 2.2% year-over-year. Now I would like to hand the call over to Audrey for financial updates. Wen-Hsin Hsu: Thank you, President. Good afternoon, everyone, and thank you for joining us today. I'm pleased to walk you through our financial performance for the fourth quarter and full year of 2025 and share our financial guidance for 2026. So now please turn to Slide 12 for our income statement highlights. Let's start with our fourth quarter results shown in the first 3 columns on the slide. Revenue and operations. We reported consolidated revenue of TWD 65.65 billion. This represents a steady 0.5% year-over-year increase and makes our highest fourth quarter revenue in nearly a decade. This growth was fueled by strong mobile device sales alongside the sustained momentum of our core telecom service. Income from operations decreased by 2.2%. This was primarily due to one-off impairment losses from the 3G network sunset this quarter, coupled with a high comparative base from last year's investment property valuation gains. Income before tax increased by 2.1% year-over-year. This growth was driven by investment disposal gains reflected in our nonoperating income. As a result of this performance, EPS increased from TWD 1.16 to TWD 1.20. This reflects our consistent profitability and marks the highest fourth quarter EPS in 10 years. Finally, EBITDA for the quarter remained stable at TWD 21.55 billion. The EBITDA margin stood at 32.82%. So now let's expand our view to the full year of 2025, shown in the last 3 columns. The annual view reflects a strong growth trajectory. So for the full year, total revenue reached TWD 236.11 billion, a solid increase of 2.7% compared to 2024. The growth was broad-based and driven by 3 pillars. First, we saw strong momentum in our sales revenue. This was fueled by higher mobile handset volumes and the robust performance of our subsidiary, Chunghwa Precision Test in the semiconductor testing sector. Second, our ICT portfolio continued to deliver with significant contribution from high-growth areas such as IDC, cloud and cybersecurity. Third, we maintained steady growth across our foundational mobile service and fixed broadband business. So this top line strength translated directly into profitability. Income from operations grew by 3.6% and net income rose by 4% year-over-year. Consequently, full year EPS reached TWD 4.99, up from TWD 4.8 last year. EBITDA also grew 2.6% year-over-year to a strong TWD 88.77 billion. Our EBITDA margin remained stable at 37.6%, broadly consistent with the prior year. So in summary, these results reflect high-quality earnings growth. This profit expansion was driven by sustained positive momentum in our core telecom business, complemented by the continued scaling of our IDC, cloud service and other ICT business operations. So now let's turn to Slide 13, balance sheet highlights. So total assets increased by 0.4% year-over-year. The growth reflects strategic allocation into long-term investments and prepayments for satellite infrastructure reported in other assets. The increase was partially offset by a net decrease in property, plant and equipment as depreciation charge existed new capital additions, along with a net decrease in intangible assets due to the 4G and 5G spectrum amortization. On the liability side, total obligation decreased by 0.7%. We repaid older loans while successfully issuing our first-ever sustainability bonds focused on biodiversity. The strategy not only strengthened our capital structure and reinforce our leadership in ESG-driven financing. Our financial health is best illustrated by our key ratios. Our debt ratio improved further to 25.25%. Our current ratio remained healthy, well above 100%. Most notably, our net debt-to-EBITDA ratio stood at 0. Moving to Slide 14 for our cash flow summary. We will review our performance for the full year 2025. Cash flow from operating activities decreased slightly by 2.2%. The variation was primarily driven by working capital dynamics, specifically a decrease in accounts payable between '25 and '24. On the investment front, CapEx declined by 3.7% to TWD 27.7 billion. First, regarding mobile CapEx, spending decreased by TWD 1.4 billion. The reduction aligns with our road map to lower mobile capital intensity now that we have passed the peak of the 5G deployment cycle. Second, regarding nonmobile CapEx, spending increased by 2%. The increase was mainly driven by strategic investment in submarine cables. Consequently, free cash flow stood at TWD 49.8 billion, a marginal decrease of 1.4% year-over-year. Despite this slight variation, we continue to maintain a strong cash position. Our stable cash flow inflows remain fully capable of supporting both our business growth initiatives and our commitment to shareholder returns. So now let's turn to Slide 15 to review our performance highlights against guidance. So in the fourth quarter of 2025, revenue exceeds the target, showing stronger-than-expected demand. Key performance measures such as net income and EPS were all in line with our forecast. For the full year 2025, the cumulative results validate our strategy. We are very proud to report that all major metrics, revenue, income from operations, net income, EPS and EBITDA either met or exceed our full year guidance. Again, this broad-based success was powered by our telecom business, driven by successful 5G migration and mobile service revenue growth alongside our ICT business, which capitals on expanding demand for IDC and cloud big data overseas markets. So now moving on to Slide 16. Please see our guidance for 2026. Looking ahead, total revenue for 2026 is expected to increase between 2.5% to 3.2% year-over-year, primarily driven by growth momentum in our core business. Well-received 5G service and speed upgrade promotion packages for fixed broadband are expected to continuously enhance our subscriber numbers and ARPU. ICT business is also expected to contribute to revenue growth as we continue to see digital transformation opportunities in the market. Operating costs and expenses are expected to increase between 3.5% to 3.7% year-over-year as a result of the investment in talent and infrastructure that support future business development in both core and emerging business. So given these projections, we expect our EPS to be in the range of TWD 4.82 and TWD 5.02. As for capital budgeting, we have budgeted TWD 31.91 billion for 2026. Looking ahead, our strategy remains consistent with our long-term road map, balancing disciplined efficiency with strategic expansion into resilient and sustainable infrastructure. Our mobile-related CapEx is expected to decrease by 6.3% year-over-year. This marks the fifth consecutive year of this decline since our peak in 2021. This demonstrates our ability to maintain our mobile leadership through capital efficiency as we move past the heavy 5G construction phase. Non-mobile related CapEx is expected to increase by 24%. The investment is strictly aligned with our sea, land, sky strategy to capture emerging business opportunities while fortifying our network. Key investments include expanding submarine cables to boost connectability alongside building our IDC data center. We also strengthened infrastructure resilience by upgrading power, cooling and cybersecurity systems. We are turning digital resilience into a unique competitive advantage. So this concludes our financial results highlights. Thank you for your attention. At this time, we would like to open the conference call for questions. Operator: [Operator Instructions] Now the first one want to ask questions, correct me if I pronounce wrongly, okay? Rajesh Panjwani from JP Morgan. Rajesh Panjwani: A quick question on the CapEx. If you can give some more detail about the big increase in the nonmobile CapEx, which is almost 24% for 2026? And also, can you provide some more details about -- you're looking at like almost 3.5% to 4% increase in the operating costs, which is higher than the revenue growth as well. So can you talk a bit about that as well? Wen-Hsin Hsu: Okay. Thank you very much, Raj. So the first question is about CapEx, about more detail on mobile CapEx, about 24% increase in 2026. So there are a couple of categories, as I just mentioned, this includes the fixed line maintenance, which consists of quite the big proportion of the fixed line maintenance. And the second is about the satellite and also the cables. And the third one is the IDC. I should say that mainly that the increase mainly coming from the IDC and also the satellite portion. And so this is for the first part. And the second part about the increase about 3.5% of operating cost. I think that one of the main -- there are 2 main portions. One, a couple of the reasons is that one is the human resource, the talent. I think that, as you know, that we are in emerging -- in a growing -- we have a lot of the sectors in IDC. We need a lot of the AI-related talent. So investment in the human resource is one important area. And the second is that electricity. I think that we are not so sure about the electricity policy in Taiwan. So we are a bit cautious. Also, this is also a second big area that takes the cost. The third one is about depreciation. That in the early stage, we have -- although that we try to trend down a lot of the CapEx, in recent years, as I mentioned, that discipline management is a key philosophy in our CapEx policy. But in the early stage that we still have some CapEx. So you will see -- as you see in our cash flow statements, you will see that the depreciation and also the amortization, these 2 portions is a bit much higher than the net increase of the PPE. So is that clear? Or do you want me to clarify any others? Rajesh Panjwani: Yes, if you can share like of the total increase in nonmobile CapEx, how much is from IDC? Wen-Hsin Hsu: Actually, we didn't separately disclose the exact number of the CapEx budget for each nonmobile items. But I can share with you that I think the CapEx for IDC and cloud it remain, I mean, like the second largest part of the nonmobile CapEx for 2026, okay? And then I want to add one more point for the mobile CapEx. As we know that the 5G CapEx investments, we had just passed the peak, right, but for 2026, actually, we will invest in as a stand-alone related applications like the network slicing for your reference. But the total mobile CapEx for 2026 actually still less than that of the 2025. Rajesh Panjwani: I got it. This is helpful. It would really be helpful if going forward, you can provide greater breakup of nonmobile CapEx because it's almost like more than 3/4 of your CapEx is now nonmobile CapEx. So it would be really helpful to get more details about that in the future. Wen-Hsin Hsu: Okay. Thank you for your opinion. Operator: [Operator Instructions] There seems to be no further questions at this moment. I will turn it over to President Lin. Please go ahead, Lin. Rong-Shy Lin: Okay. Thank you very much for your participation. Happy New Year. Operator: Yes. Thank you, President Lin. And ladies and gentlemen, we thank you for your participation in Chunghwa Telecom's conference. There will be a webcast replay within an hour. Please visit CHT IR website at www.tw/ir under the IR Calendar section. You may now disconnect. Thank you again, and goodbye.
Operator: As it is time to start, we will now begin the conference call for the presentation of financial results for fiscal year 2025 third quarter. Thank you very much for your participation. Today, Mr. Yamauchi, Executive Officer and General Manager of Accounting Department, will give a briefing. And later, we will have a Q&A session. We will conclude the call at around 16:50. Now Mr. Yamauchi, over to you. Toshihiro Yamauchi: Thank you very much. This is Yamauchi speaking. Thank you very much for attending the Sumitomo Chemical conference call despite your busy schedule. I'd like to thank investors and analysts for your deep understanding and support to our management. Thank you very much for that. Now let me start with a briefing of the financial results for fiscal year 2025 third quarter. Before explaining the details of our financial results, I would like to give a brief update on the status of profit and loss for the third quarter. Core operating income and net income attributable to owners of the parent for the third quarter significantly increased compared to the same period of the previous fiscal year. Core operating income was driven by Sumitomo Pharma's strong sales and partial divestiture of the Asian business recorded a gain. Core operating income of Essential & Green Materials increased significantly year-on-year with a gain on the partial sale of shares in Petro Rabigh and better trade terms. Agro & Life Solutions crop protection and chemical business had solid performance. Net income attributable to owners of the parent already exceeded in the third quarter, the forecast announced in November. However, we anticipate that the recording of losses from nonrecurring items will be concentrated in the fourth quarter. Consolidated financial results of the third quarter of FY 2025. Sales revenue was JPY 1.7063 trillion, down JPY 198.5 billion year-on-year. Core operating income expressing recurring earnings power was JPY 186.8 billion, up JPY 126.8 billion year-on-year. Nonrecurring items not included in core operating income was a loss in total of JPY 6.4 billion. In the same period of the previous year, there was the impact of recognizing our interest in Petro Rabigh's debt forgiveness gain of JPY 86 billion as a nonrecurring item, leading to a profit of JPY 85.4 billion. So compared to the previous year, this has worsened by JPY 91.8 billion. As a result, operating income was JPY 180.4 billion, up JPY 35 billion year-on-year. Finance income was a loss of JPY 36 billion, improvement of JPY 69.3 billion compared to the same period of the previous year when loss on debt waiver for Petro Rabigh was recognized. Gain or loss on foreign currency transactions included in finance income or expenses was a loss of JPY 7.7 billion, worsening JPY 22.8 billion year-on-year. Income tax expenses was a loss of JPY 300 million, increase of tax burden of JPY 900 million year-on-year. Net income or loss attributable to noncontrolling interests was a loss of JPY 56.8 billion, worsening by JPY 44.7 billion year-on-year with improvement of Sumitomo Pharma's income. As a result, net income attributable to owners of the parent for the third quarter was a profit of JPY 87.4 billion, up JPY 58.8 billion year-on-year. Exchange rate and naphtha price, which impact our performance average U.S. dollar rate during the term was JPY 148.71 to a dollar and naphtha price was JPY 65,000 per kiloliter. Yen appreciated feedstock price declined compared to the same period of the previous year. Next, sales revenue by reporting segment. Please look at Page 6. Total sales revenue was down JPY 198.5 billion year-on-year. By segment, sales revenue decreased in all segments except Sumitomo Pharma. As for year-on-year changes of sales revenue by sector, sales price decreased by JPY 49.5 billion, volume decreased by JPY 191 billion. Foreign exchange transaction variance of foreign subsidiaries sales revenue decreased by JPY 28 billion. However, the large negative difference in volume is largely due to business restructuring efforts, such as the sale of subsidiaries and business withdrawals and decrease in shipment volume at our sales subsidiary due to a periodic plant maintenance carried out by Petro Rabigh this fiscal year. Next is Page 7. Total core operating income increased by JPY 126.8 billion year-on-year. Analyzing by sector, price was plus JPY 6 billion. Cost, plus JPY 3.5 billion. Volume variance, including changes in equity in earnings of affiliates was plus JPY 117.3 billion. I will explain the details on the following pages. But significant increase in volume of variance gain was largely due to profits from business divestitures. Next is performance by segment. Please turn to Page 8. Agro & Life Solutions. Core operating income was a profit of JPY 28.1 billion, up JPY 8.6 billion year-on-year. Price variance, trade terms improved for overseas crop protection products. Volume variance, there were long -- there were strong shipments in Japan, India and other regions but income declined from exports due to stronger yen and there was a stronger yen effect of sales of subsidiaries outside Japan when converted into yen. Please turn to the next page. ICT & Mobility Solutions. Core operating income was a profit of JPY 46.5 billion, down JPY 13.2 billion year-on-year. Price variance, selling prices of display-related materials declined. Volume variance, though there was a gain on the sale of large LCD polarizing film business, shipments of display-related materials decreased. Shipments of semiconductor process materials such as resist and high priority chemicals increased due to the continued gradual recovery of the semiconductor market. There was lower income from exports due to stronger yen and the stronger yen effect on the sales of subsidiaries outside Japan when converted into yen. Next page. Advanced Medical Solutions segment. Core operating income was a gain of JPY 300 million, down JPY 900 million year-on-year. Sales and affiliated companies decreased. Please turn to the next page. For the Essential & Green Materials segment, core operating income was JPY 19.8 billion, an improvement of JPY 64.1 billion year-on-year. As for the price variance, the profit margin for synthetic resins improved alongside the decline in primary raw material naphtha prices, and the profit margin for alumina also improved. Regarding the volume and other variances, we recorded a gain on the sale of a portion of our equity in Petro Rabigh equity method investee company. In addition, refining margins improved at that company, leading to an improvement in profitability and investments accounted for using the equity method. Please go to the next page. For the Sumitomo Pharma segment, core operating income was JPY 111.2 billion, up by 86.9 billion year-on-year. As for the price difference, due to the impact of NHI drug price revisions within Japan, the selling price fell. Cost differences resulted in a decrease in SG&A due to progress and rationalization and others. Regarding the volume and other variances, in addition to the increased sales of Orgovyx, a treatment for advanced prostate cancer and Gemtesa, a treatment for overactive bladder, gains from the partial transfer of equity in the Asia business are included. This concludes the overview of by segment performance. Next page will be the explanation of the consolidated statement of financial position. Total assets at the end of December 2025 totaled JPY 3.5104 trillion, up by JPY 70.6 billion compared to the previous fiscal year-end. Growth in inventory assets due to periodic plant maintenance at the Chiba plant and increased buildup for sales in the fourth quarter and beyond along with the acquisition of tangible fixed assets for new plant construction and expansions were the primary factors driving the increase. Interest-bearing debt was JPY 1.2215 trillion, down by JPY 64.6 billion compared to the end of the previous fiscal year. As a result, the D/E ratio at the end of December 2025 improved by 0.23x from 1.2x at the end of March 2025, reaching 0.96x. Next, I will explain the cash flows. Please look at Page 14. Operating cash flows from operating activities was positive at JPY 111.6 billion. However, cash inflows decreased by JPY 29.1 billion year-on-year. Quarterly income before taxes improved. However, this was influenced by factors such as the deduction of gains from business divestitures from operating cash flow and the significant improvement in working capital last year end based on immediate term concentrated measures to improve business performance. Cash flow from investing activities was negative JPY 39.8 billion, a decrease of JPY 96.6 billion year-on-year. This period also had the sale of part of Sumitomo Pharma's Asian operations. However, the same quarter last year included significant income from the sales of Sumitomo Pharma shares and Roivant and the sale of Sumitomo Bakelite shares. As a result, free cash flow was positive JPY 71.8 billion, a deterioration of JPY 125.7 billion compared to the positive JPY 197.5 billion recorded last third quarter. Cash flow from financing activities resulted in a negative JPY 100.6 billion due to factors such as loan repayments and dividend payments. This represents a decrease of JPY 41.1 billion in outflows year-on-year. Next, I will explain the outlook for fiscal year 2025. Please go to Page 16. I will explain from the business environment surrounding our company. Regarding the economic conditions, although investments in the field of technology are firmly supporting the global economy, future prospects remain uncertain due to the expansion of protectionism and increased geopolitical risks. In the main business environment, we use weather symbols to indicate our key business areas and our assessment of their respective environments. From the top regarding crop protection chemicals, we expect price competition to continue and inventory congestion in the distribution chain remains uneven across regions. Regarding the methionine market price, although it recovered in the first half of the fiscal year, we anticipate a continued downward trend in the second half. Displays are showing steady growth in mobile-related components. Demand for silicon semiconductors has recovered more than anticipated since our previous forecast and is currently showing steady growth. However, performance continues to vary across different fields. The petrochemical and raw materials market will continue to have low margins. That concludes the business environment overview. Now let me explain the consolidated performance summary. Please turn to Page 17. This is the summary of financial forecast for fiscal year 2025. Core operating income for fiscal year 2025 is forecasted at JPY 200 billion, showing improvement over time with an expected increase of JPY 15 billion compared to the November performance forecast. As shown in the graph in blue, excluding gains on the divestment of business, profit from business activities improved significantly at Sumitomo Pharma and Essential & Green Materials due to the results of fundamental structure reforms, resulting in a significant increase in profits from approximately JPY 80 billion in the previous fiscal year to approximately JPY 120 billion in the current fiscal year. So it has largely increased. Furthermore, and as for the profits attributable to owners of the parent, it has increased by JPY 1.5 billion to JPY 55 billion. Now furthermore, in light of the upward revision due to improved profit and loss, the year-end dividend per share to shareholders will be increased by JPY 1.5 from the JPY 6 announced in the November financial forecast to JPY 7.5 per share. As a result, the annual dividend amount will increase by JPY 4.5 from the previous year's JPY 9 to JPY 13.5. The payout ratio is expected to be approximately 40%. And please go to Page 18. This is showing the details of the business performance forecast. First, sales revenue is forecasted at JPY 2.3 trillion, up by JPY 10 billion from the previous forecast. As for the core operating income, as mentioned before, it is forecasted at JPY 200 billion. Net income attributable to owners of the parent as mentioned before will be JPY 55 billion, an increase of JPY 10 billion year-on-year. The assumptions regarding exchange rates and naphtha price are as stated on this slide. As for the sales revenue, we expect an increase due to higher shipments of semiconductor processing materials within our ICT & Mobility Solutions segment. As for core operating income, I will explain the situation by segment on the next slide. Please go to Page 19. As for the full year business performance by segment, regarding Agro & Life Solutions, Advanced Medical Solutions, Essential & Green Materials and Sumitomo Pharma segments, these 4 segments, as you can see here, the previously announced guidance remains unchanged. As for ICT & Mobility, Semiconductor processing material shipments are expected to increase, leading to a slight increase in profit compared to the previously announced guidance by JPY 2 billion. For others and company-wide expenses, compared to the previous forecast, we are expecting a JPY 13 billion increase. At the time we made an announcement last time, we consider the uncertainties in the business environment, so we have incorporated risks to a certain extent. The business activities are now progressing steadily. Therefore, we are forecasting an increase in profit compared to the previously announced forecast. This concludes the explanation of financial results and forecast. I would now like to take questions from the participants. Operator: [Operator Instructions] Now we would like to receive the first question. From Morgan Stanley MUFG Securities, Mr. Watabe. Takato Watabe: I'm Watanabe from Morgan Stanley. For Agro & Life Solutions, I have a question. In the third quarter, your profits and sales was not that large, but why was the profit in the third quarter and there are differences by region. And what is the situation of inventory adjustment and the movement towards fourth quarter? And by main products, what is the trend in the fourth quarter forecast compared to last year's fourth quarter, you expect a reduction in profit. Could you talk about Agro & Life Solutions? Toshihiro Yamauchi: Thank you for your question. For Agro & Life Solutions sector, first, in the third quarter situation. Compared to last year, it is true that it is better. And by region, India and also in Japan, things were very solid. And Europe as well, the amount is not that large, but Europe was also firm. And in North America, compared to the same period of previous year, it is at a similar level. South America, it is slightly difficult. Last year, there was a drought, which is giving an impact. And credit concerns about the clients exist, so there are difficulties in increasing sales. Customers with high creditworthiness, in this case, competition is becoming strong. And by product, well, in that sense, is the main product [indiscernible], South America is a main market, but growth is a little slow. Takato Watabe: Sales and profit trend still is not increasing that much, but profit is increasing. What is the reason for that? In the same quarter of the previous year, compared to the previous quarter or previous year, the impact of foreign exchange rate is seen in each region, there will be increase in local currency, but when converted into yen, there are cases which is flat or slightly declining. I think that is the impact. What is the progress of inventory adjustment from crop protection products? What is your prospect for the next fiscal year? Toshihiro Yamauchi: For inventory, in general, it is moving to an improvement direction. United States and India, we are seeing improvements. But in South America, there is still some inventory remaining. So towards the next fiscal year, South America is the place where we have to resolve. Thank you. Operator: We would like to take the next question Mizuho Securities, Mr. Yamada. Mikiya Yamada: This is Yamada from Mizuho Securities. I was told to ask you one question. So I'd like to hear about the third quarter situation outlook regarding the ICT & Mobility Solutions. In the same way as the previous question related to Agro & Life Solutions, I would like to know the details. Specifically, 3 months in third quarter, the -- when you are doing analysis of the variances of core operating income, in 3 months, it was minus JPY 5 billion. And in the 9 months, it was minus JPY 3.7 billion. So year-on-year, it's a plus JPY 1.3 billion is what I think. For display-related products the shipment has declined. And thinking about the foreign exchange being negative, that means that the semiconductor was quite performing strongly. And so in semiconductor, was resist a good performer or in others good or is resist the contributor? And if so, the DRAM and NAND, the high prices are maintaining. So I would like to know the future trend of this. Toshihiro Yamauchi: Thank you very much for your question. The ICT & Mobility Solutions situation for the third quarter is what you have asked. Looking at the year-on-year basis -- just a moment, please. Regarding semiconductors, from last year, gradually, it is recovering. And by field, memory-related area, the DRAM utilization is increasing and NAND is recovering. However, depending on the customer, it varies. For DRAM, due to the generation change, the South Korean usage is declining. For logic usage, Taiwan and China, new plants are being -- starting their operation and increasing. So our shipment volume is on the trend of increasing. However, on the other hand, South Korea and United States is flat. Mikiya Yamada: Well, the resist specifically, is there such factors? With memory, it's going to change the generation. However, the U.S. capital part is increasing very well for resist? Toshihiro Yamauchi: For resist, this is the overall situation compared to last year, the sales is increasing. Mikiya Yamada: And this time, you have revised upward so that situation from the third quarter to the fourth quarter, it is a quarter that usually declines, but it's not going to be that way. Is that the correct understanding? Toshihiro Yamauchi: Yes. I have high expectations. Looking forward to it. Thank you. Operator: Now the next question from SMBC Nikko Securities, Mr. Miyamoto. Go Miyamoto: I'm Miyamoto from SMBC Nikko Securities. I also had a question about Agro & Life Solutions. This may be like Mr. Watabe's question. In the third quarter, there was an increase of JPY 11.5 billion year-on-year in terms of profit. And fourth quarter, you expect a decline compared to previous year. Same quarter, methionine is showing a declining trend. But there were shipments carried forward. So could you tell me what is the impact? In particular, in Q3, as Watabe-san mentioned, sales trend is showing a difference. Sales in the segment in Q3 year-on-year is a drop of about JPY 4 billion, but profit has increased. So when I see your analysis by sector, looking at the volume variance in the first half, it's minus JPY 3.9 billion. So for 3 months, volume variance is a factor of JPY 12 billion increase in profit. But on Page 23, analysis of sales differences, volume variance and for first half was minus JPY 4 billion, but now it's minus JPY 8.4 billion. So minus JPY 4.4 billion in 3 months. So the sales volume variance is quite negative but profit is positive. Could you explain a little more about it? I think the foreign exchange rate has not changed that much. Toshihiro Yamauchi: Please give me a minute. Yes. Thank you for waiting. With regards to relationship with sales, methionine volume is declining. So as sales, there's a drop. However, this is not giving a big impact on profit or losses. But for crop protection chemicals, India is doing well, in Japan also. In particular, in Japan, from Q4, sales carried forward. In other words, there's a trend of customers placing orders in advance. So Q3 has improved. That's a factor for the improvement of Q3. Go Miyamoto: I see. On Page 27, the sales that we have indicated on crop protection, it is flat. And for Q3, 8 months, it has increased about JPY 2 billion. But one variance has increased that much. Why is it so? Toshihiro Yamauchi: Page 27. I see. This is indicated in yen. But if you look at these figures in dollars, it may look different. First, United States, JPY 2.6 billion negative. But in local currency, it is nearly flat. And India, it is slightly negative. But in local currency, there is an increase. So these are some of the factors. For sales and profit, there is no particular major factors. Go Miyamoto: I understand. In the fourth quarter, you expect a decline in profit year-on-year. Could you explain that? Toshihiro Yamauchi: Because shipments were carried forward for crop protection products and methionine sales price is showing a declining trend. So that is taken into consideration. Operator: Next from Daiwa Securities, Mr. Umebayashi. Hidemitsu Umebayashi: This is Umebayashi from Daiwa Securities. I would like to ask a question regarding Essential & Green Materials. From the second quarter to the third quarter, the trend, the profit and losses improved by JPY 51 billion, and that is due to the Rabigh share sales. But other than that, if there are any factors I would like to know. First of all, as a confirmation, Rabigh, the profit you made from the equity method is at 37.5% or 15% as of the third quarter, I wanted to confirm that. And also, the third quarters in Essential & Green, the sales revenue has increased as well. So I would like to know the background of that. I think the fact is that the business performance is doing well. Did the margin improve? Or did the petrochemical product sales improve? And also the fourth quarter, I believe that there is going to be a periodic plant maintenance. So was there a buildup of inventory due to that or not is what I would like to know. Toshihiro Yamauchi: Thank you very much for your question. Regarding the third quarter's Essentials & Green Materials, as you have pointed out correctly, over here, the Petro Rabigh equity sales is included. When we made a timely disclosure in this November, it was JPY 50 billion, and the number that's close to that is incorporated in this. And other than that, there are improvements that were made for Petro Rabigh. Well, over here, up to the third quarter, it was 37.5%. Our interest was that and we have applied the equity method. And from the fourth quarter, it is going to become 15%. And regarding the refining margin improvement also occurred. So this area has improved as well. And in Singapore as well, TPC, they were due to the improvement of the profit margin, the profit and loss situations have also improved. Hidemitsu Umebayashi: So for the sales part, it was a Singapore that was doing well in terms of the sales improvement? Toshihiro Yamauchi: Just a moment, please. Well, the products from Rabigh, the sales of those, that compared to the first quarter and the second quarter, the third quarter is showing a larger growth. And from April to June, it has experienced a periodic shutdown for maintenance. And probably to the second quarter, that impact remained. But from the third quarter, it returned to the regular sales and the fourth quarter for the Rabigh manufactured products, we are looking at it the same way, and that is reflected in the changes. And the impact to the profit is minor. So these are the factors is what we think. Operator: Next, I'd like to receive Mr. Okazaki from Nomura Securities. Shigeki Okazaki: I'm Okazaki from Nomura Securities. About the dividend, I'd like to ask a question. As you have mentioned, this time, you are going to increase the dividend. The annual dividend payout ratio is now about 40%. I think you mentioned 30% before. The final profit figures may differ. So is that meaning as a background? And JPY 7.5 billion for the interim period? And next year, depending on the farmers' milestone, there will be other factors where basically you will continue or it will be rather positive. We are gradually becoming confident. Is this understanding correct about the dividend payment. Toshihiro Yamauchi: Thank you for your question. For dividends, as you mentioned, basically, our dividend policy is stable dividend. And with relation to profit, in general, about 30% is the level. At the moment, the profit for this year, we made an upward revision to JPY 55 billion. It is still in the process of recovery. So in terms of dividend payout ratio, a stable minimum dividend payment is going to be made. That is our feeling. So Instead of 30%, it is now 40%. And compared to our initial plan, profit has increased. And about -- we will consider continuing in the future and taking that into consideration, we decided to have this amount of dividend. Shigeki Okazaki: So this is a minimum level, more than 38.7%. You have not yet to determine what will be the performance next year, but depending upon situation, there may be other factors but among those JPY 7.5 at a moment is amount that you want to keep. Is my understanding correct? Toshihiro Yamauchi: Yes, you are right. Operator: Next, from Morgan Stanley MUFG Securities, Mr. Watabe. Takato Watabe: This is my second time. Regarding Essential & Green Materials, at the flash report, it says that the business transfer gain is JPY 55.8 billion and it was consistent by Rabigh and others. But if you exclude that, it is in the red. And the fourth quarter period of the maintenance shutdown, when we talk about the refining margin right now, I think the Petro Rabigh performance is improving as well, and there is a business integration moving forward. But what is the impact of that? And what are you looking at towards the overall essential and green materials? Toshihiro Yamauchi: Thank you very much. For the divestment gain and the last report, it said JPY 55.8 billion. Yes. After the third quarter cumulative figure, Petro Rabigh, other than Petro Rabigh, we have divested several companies. Nippon AL, which is already disclosed, including that in total is JPY 55.8 billion. And towards turning around into black ink, regarding Petro Rabigh, it's difficult to share with you what's going to happen in the future. But for the refining margin and probably all of you can assume what the situation is going to be. And I think you can assume in that way. And how it can turn around to profit making, we're in the midst of setting the budget for next fiscal year. So I would like to refrain from commenting. Takato Watabe: So the fourth quarter non-recorded loss concentrating, it's mainly in Essential & Green Materials. Is that correct, including essential as well. Toshihiro Yamauchi: To a certain extent, there are planned items for -- from restructuring. But there are some items that we are aware of, such as impairment, but we are looking at it to that extent. Takato Watabe: So there is -- do you think that is going to work positive in the next fiscal year, such as the decline in depreciation? Toshihiro Yamauchi: Yes, that's how we are understanding it. However, at this point, it's difficult to give you the full answer. Operator: Well, it is time to conclude. So the next question will be the last question. Yamada-san from Mizuho Securities. Mikiya Yamada: I'm Yamada from Mizuho Securities. This is a detailed point. Under others, this time, though there is an upward revision, for Q4, you expect some level of negative figures. So these are corporate expenses. So it is possible that, that will surface on Q4 and things will become more transparent. So JPY 20 billion to JPY 25 billion corporate costs could be expected from next year onwards. What is the trend of that? Could you tell me that? Toshihiro Yamauchi: Thank you. Under corporate expenses, as you know, the corporate expenses, in particular, R&D expenses are included here. And recently here, regenerative cell research is still under development. So the progress of research expenses is very difficult to make a projection. So these are also included. So we don't expect a large drop next year, but we expect to maintain a certain level in terms of these expenses. Mikiya Yamada: About more than JPY 10 billion R&D will be spent for regenerative cells. And then that is surfaced in a specific quarter like this? Toshihiro Yamauchi: Yes, that is what it is. Operator: Mr. Yamada, thank you very much. With this, I would like to conclude today's conference call. Thank you very much for your participation today. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Cenk Gur: Dear friends, this is Kaan speaking. Thank you for joining us. I hope you are all well. Today, we will first walk you through our financial performance, underpinned by disciplined balance sheet management, strong fee momentum, resilient capital metrics and continued progress across our strategic priorities. Our earnings reflect not only the current operating environment, but also the structural strength of our business model. Building on this performance, we will share our guidance for the years ahead, shaped by a prudent assessment of the operating environment. Our focus remains on risk-adjusted returns, reflecting our commitment to sustainable profitability and prudent risk management. At the same time, we will frame these near-term priorities within our 3-year outlook, where we see clear opportunities to reinforce earnings durability, enhance efficiency and deepen customer penetration. Our direction remains centered on executing today while positioning the bank for consistent and profitable growth over the coming years. Dear friends, before moving on to our bank, I would like to briefly touch upon the operating environment. Global financial conditions and risk appetite are expected to remain favorable for emerging markets, supported by continued Fed rate cuts along with a tight spread and subdued commodity price environment. World growth remains resilient despite trade policy uncertainties driven by AI and technology investments and more supportive financial conditions. In Türkiye, domestic demand and economic activity continues to grow, albeit at a more moderate pace. Consumer inflation is on a gradual downward trend. Central Bank is expected to be attentive to inflation risk with cautious and measured rate cuts while macro prudential regulations are set to remain in place and fiscal consultation is underway. Against this backdrop, we expect the banking sector's profitability to continue in a gradually improving trend while asset quality deterioration is likely to proceed in a contained and orderly manner. Let's move on to our bank. On this slide, you can see how our core strengths have translated into tangible financial outcomes. Our strong capital position with 16.8% total capital and 13.6% Tier 1 actively enabled growth, providing the flexibility to manage the balance sheet with agility and dynamically allocated assets and liabilities across cycles. This disciplined approach is supported by prudent provisioning with further increase in our gross coverage to 3.7%. While growing, effective risk management has kept Stage 2 plus Stage 3 loans limited, below 11% of total loans, preserving earnings stability as we grow. At the same time, operational discipline is reflected in our leading 16% fee to OpEx performance. As a result, we continue to deliver strong market share gains in our priority segments, such as business banking loans, where we added 100 basis points in the second half of the year while maintaining our dominant positioning in general purpose loans with over 19% market share. Supported by our continued focus on our customer acquisition and deepening relationships, we have sustained strong momentum in fee income market share, reaching 17.8% by the end of 2025. All of this positions us to further scale a resilient earnings platform and unlock sustained long-term growth potential in the period ahead. Dear friends, Akbank has made solid progress against the 3-year targets we have shared with you on a regular basis. The achievements delivered to date are clear proof of what we are capable of executing going forward. This progress provides a strong and credible foundation for the next 3 years as we continue to build sustainable customer-driven revenue streams. Importantly, this 3-year period is not a destination, but a stepping stone, positioning us for an even stronger, more ambitious journey ahead. On this slide, we have summarized our road map. Dear friends, we are committed to further strengthen our innovation capabilities by developing differentiated offerings across the group that enhance our value proposition and support scalable AI-enabled operating models. Innovation will be accelerated by rapidly testing and scaling AI, blockchain and hyperpersonalization. We will leverage generative AI to provide proactive self-service recommendations across our channels and equip our frontline teams with tools to provide seamless services to our customers. We aim to expand integrated solutions together with our subsidiaries and broader ecosystem that will further deepen customer engagement and unlock new scalable growth opportunities in targeted areas. In parallel, we will continue to invest in future-ready talent to reinforce execution and sustain innovation momentum. Ongoing efficiency gains alongside deeper customer penetration reinforced by value chain network will remain key priorities across our franchise. Collectively, these factors will enable the consistent delivery of return on equity above inflation on a sustainable basis starting this year. Here, we outline our financial KPIs for the next 3 years, translating our strategic plan into measurable targets. The strong dynamism and motivation felt across the bank at every level continues to support execution and momentum. First, over the next 3 years in total business banking loans, we aim to increase our market share by another 300 basis points. We target to grow in cash as well as noncash loans in both Turkish lira and foreign currency. We already started to build the foundation last year by gaining 100 basis points market share in the segment during the second half of the year. Second, our ambition in consumer loans also continues. On top of last 3 years' market share gains of 440 basis points in consumer loans, we aim to gain further 100 basis points until 2028. Customer deposits will remain the primary source of funding for our growth, while demand deposits will continue to reinforce balance sheet strength. Accordingly, moving on to our third ambition, we aim to gain 200 basis points market share in Turkish lira demand deposits, building on top of the 240 basis points gained over the last 3 years. Fourth, after achieving over 100% of fee to OpEx ratio, our homework is to maintain full coverage of OpEx going forward. This will support us -- this will support us to reach our fifth ambition, which is a cost-income ratio below 35%. These targets will feed into our leadership positioning in capital while driving solid growth at the same time, delivering a return on equity above inflation starting this year. Having navigated multiple cycles, I have full confidence in our people's capabilities and execution. I would like to sincerely thank our teams for their outstanding dedication as well as our stakeholders for their continued trust and confidence. I will now pass it over to Ebru to walk you through our results and guidance. Following that, to Chair, and I will be happy to answer any questions you may have. Thank you. Ebru, over to Kamile Ebru GÜVENIR: Thank you, Kaan Bey. Moving further into the details. Our net income was up by 35% year-on-year to TRY 57.224 billion, resulting in an ROE of 21.5% and an ROA of 1.9% for the full year. During the same period, we achieved a solid revenue growth, up by 50% year-on-year to TRY 222.33 billion, thanks to robust fee income generation and NII building momentum in the second half of the year. Our quarterly net income was up by 30% to TRY 18.317 billion, leading for our quarterly ROE to show a sequential improvement to 24.9%, up from 21% in the third quarter. The quarterly ROE improvement was underpinned by our focus on deepening client relationships and strong cross-sell execution, which continued to fuel fee income while agile ALM and margin accretive growth has been reflected in our solid NII evolution. As we move ahead, our sustainable growth mindset, sound balance sheet and analytical capabilities will drive further NII enhancement and anticipated rate cut cycle, leading to an ROE above inflation starting this year. Moving on to the balance sheet. Last year, our TL loan growth reached 42%, surpassing our full year guidance of over 30% Foreign currency loan growth of 10% also came in well above our mid- to single-digit full year guidance. We strategically accelerated our loan growth in the second half, delivering strong market share gains in both foreign currency and TL business loans while supporting NII evolution. To put in numbers, we captured 80 basis point market share in foreign currency loans and 110 bps market share in TL business loans during this period among private banks. At the same time, we maintained our already solid position in consumer lending. This performance for sure, illustrates the effectiveness of our targeted growth strategy, laying a strong foundation for our 2028 targets while preserving risk return discipline. Moving on to securities. The share of securities in total assets remained stable around 23%, while the composition reflects our balanced approach, maximizing yields. We selectively increased foreign currency security exposure supported by timely buildup of NIM accretive Eurobond investments. Foreign currency securities grew by 35% year-on-year in dollar terms, lifting their share in total by 7 percentage points year-on-year to 34%. On the TL side, we are well positioned in long duration and higher-yielding fixed rate securities complemented by TLREF indexed bond portfolio with decent spread, providing potential for further book value growth through mark-to-market gains. As highlighted before, share of our CPI linkers has been strategically reduced by 31 percentage points since 2022, reflecting a deliberate shift in portfolio composition. Active yield-focused portfolio management has enabled timely repositioning of our securities and reinforces margin resilience going forward. On the funding side, our low TL LDR and strong deposit franchise have allowed us to optimize funding costs while selectively advancing growth. Our demand deposit share in total deposits increased by 5 percentage points year-on-year to 33%, supporting further margin improvement. Sticky and low-cost TL time deposit share in TL time deposit remains solid at 58%. Looking ahead, our well-structured balance sheet, combined with sound deposit mix provides a solid foundation for continued NIM enhancement. Let's move on to the P&L. As you know, our NIM had started to recover during the third quarter, thanks to improved funding dynamics. This trend was sustained during the fourth quarter, backed by disciplined balance sheet management. Our swap adjusted NIM expanded by 40 basis points quarter-on-quarter. On a CPI normalized basis, quarterly NIM performance was even stronger at 60 basis points. This is adjusted for the one-off valuation impact in the third quarter of the CPI. Looking forward, our unwavering focus on profitable growth and effective funding strategies will remain key drivers supporting the anticipated gradual NIM expansion throughout this year. Accordingly, the quarterly evolution will remain sensitive to both the pace of disinflation and also the magnitude of the rate cuts. Last year, our net fees recorded a robust growth of 64%, ending the year above our guidance of around 60%. The growth was broad-based across all business lines, reflecting strong customer engagement, continued innovation and diversified product portfolio. Sector-wide fees have benefited from the high interest rate environment. However, our diversified fee structure and growth in customer base positions us well to mitigate the cyclicality of the payment system fees in the lower interest rate environment. Cost increase remained well below -- actually well below our guidance and also was contained last year, while it was up on a year-on-year basis at 33%, while our guidance is at 40%. Having stabilized cost increase around inflation levels, we had the lowest OpEx base among all of our peers as of third quarter last year. And as you know, we're the first one to announce, so we will be keeping a close eye on this particular parameter. This is a reflection of our disciplined cost management and operational efficiency. However, our full year cost-to-income ratio remained around 50%, reflecting continued pressure on NII. As for this year, improving NII dynamics, along with resilient fee income base are expected to drive a gradual improvement in cost-income ratio toward low 40s. As Kaan Bey just shared, our mid- to long-term ambition remains unchanged with cost-income ratio targeted below 35% by 2028. Cost discipline embedded across our workforce and branch network alongside a targeted application of AI to enhance efficiency and scalability will all be instrumental in achieving our targets. On that note, let's now move on to our superior fee coverage of OpEx. Starting from an already high level, our broader operating footprint and deeper customer penetration alongside disciplined cost management translated into a stronger fee coverage. Our strong momentum in fees across all business lines led for our market share gain among private banks to advance by 1.4 percentage points to 17.8% last year. More importantly, the total market share gain in fees among private banks since end of 2022 has reached 3.9 percentage points. And at the same time, the fee to OpEx ratio has increased by 20 percentage points to 106% in just 1 year. With full coverage of OpEx now firmly in place, our aim is to sustain this level through this year and beyond. Let's move on to asset quality. Retail-led NPL inflows continue to be the persistent trend across the sector as a reflection of the macro environment. Despite this backdrop, our NPL market share among private banks has continued to decline, extending the trend observed since early 2025 with a further 150 basis point improvement in the last quarter. The share of Stage 2 plus Stage 3 loans remains contained at 10.8% of gross loans, underscoring the sound quality of our portfolio. Please also note that the restructured loans represents only 3.4% of the total loan portfolio. Meanwhile, our share in bankruptcy applications stands at less than 4%, which is well below our natural market share, mirroring disciplined underwriting and proactive risk management. Supported by prudent provisioning, our total provisions increased to nearly TRY 71 billion, reflecting the continued buildup of our reserve buffers. As a result, our coverage ratios remained solid with gross coverage at 3.7% and Stage 2 plus Stage 3 coverage at 28.1%, reinforcing balance sheet resilience. Excluding currency impact, net cost of credit ended the year at 214 basis points, slightly above our guidance, while NPL ratio was fully in line at 3.4%. So looking ahead, as we continue to grow, our disciplined risk framework supported by advanced analytics, AI-driven credit decisions in retail, together with the diligent tracking of our corporate and commercial loan portfolio, all position us well to preserve asset quality and contain potential cost of risk pressure for this year. Moving on to capital. Our total capital, Tier 1 and core equity Tier 1 ratios remain robust at 16.8%, 13.6% and 12.5%, excluding the regulatory forbearances. This reflects prudent capital allocation while driving profitable growth. As for sensitivity, 10% depreciation in TL results in around 30 basis point decrease in our capital ratios, while the impact diminishes for larger FX moves. Similarly, 10 basis point increase in TL interest rates would lead to an impact of approximately 10 basis points on our solvency ratios, demonstrating limited sensitivity and the strength of our capital. Overall, our strong capital buffers continue to anchor balance sheet resilience and support long-term profitable growth. Before moving on to Q&A, I'd like to share a few highlights regarding our nonfinancial performance. As highlighted in our ESG video at the beginning of this call, we continue to advance in our sustainable action plan with measurable results. As a result of our knowledge of dedication, we are happy to be among one of the few institutions globally to receive CDP's highest A rating in climate change, water security and forests, reinforcing our leadership in sustainability. And in this context, we are very excited and proud that COP 31 will be taking place in Türkiye this year. It reflects Türkiye's growing commitment to climate action and highlights the increasing importance of sustainable finance and climate risk management for our region. We will continue to support the transition to a low-carbon and inclusive economy in line with our long-term objectives. This slide highlights a snapshot of our 2025 financial performance, and we have shared throughout the whole presentation. But the last note, as we have shared, the main deviation was related to the pressure on net interest margin, and this was due to the tighter-than-expected monetary policy and the divergence between deposit costs and policy rate. And last but not least, our 2026 guidance. Looking forward, as said at the beginning of our presentation, we are committed to strengthen further our already robust positioning in consumer loans while accelerating market share gains in Turkish lira and foreign currency business loans, including noncash loans. Our focused growth and funding adaptability will sustain further NIM improvement this year. And accordingly, our net interest income will be supported by both volume growth and further improvement in margins through ongoing disinflation, obviously. And our resilient fee engine, combined with the cost discipline will continue to contribute to the full coverage of OpEx. Improving net interest margin or NII dynamics and resilient fee income base is expected to translate into a gradual improvement in cost-to-income ratio towards the low 40s. Asset quality will continue to be a priority area in the sector, while our disciplined risk framework will limit cost pressure, leading flattish cost of credit trend for this year. To sum up, our well-structured balance sheet, along with risk return focused growth is to support further NII enhancement in the anticipated rate cut cycle, leading to an ROA above inflation starting this year. Kamile Ebru GÜVENIR: This concludes our presentation, and we can now move on to the Q&A session. Please as always raise your hand or type your question in the Q&A box. And for those of us calling us by telephone please send your questions by email to investor.relations@akbank.com. The first question comes from David Taranto from Bank of America. David Taranto: The first one is about the growth. Historically, Akbank's market share was significantly higher. I remember back in 2007, 2008, it was close to 12%, but the bank deliberately gave away market share until 2020, at some point falling towards 7%. And in the last few years, you have reaccelerated the growth and regained market share across multiple segments. And that strategy is continuing according to the presentation. So my question is, what do you consider to be the natural market share for Akbank in the medium term? And b, assuming a normalized regulatory environment, i.e., relaxation of growth caps, when should we realistically expect Akbank to converge towards that natural market share? And second question is about the margins. Historical NIM averaged around 4% and your '26 outlook points to return towards these normalized levels. However, as rate cycle -- rate cut cycle progresses, one would expect NIM to temporarily exceed the cycle averages, even so macro prudential measures limit how far this can go. So what do you see as the main upside and downside risk to your NIM guidance for this year? And how do you expect deposit rates to move relative to the post rate given the constraints by the macro prudential framework? And finally, on costs, Akbank kept the cost growth relatively controlled versus sector in the past few years, but high inflation and the regulatory pressure still pushed the nominal cost base meaningfully higher. You point to medium-term cost income target of mid-30% levels. And I was wondering what are the key operational levers and time line to move towards that cost of risk levels. The reason why I'm asking is in a declining inflation environment, at some point, revenue growth is going to decelerate, not maybe for this year or perhaps next year, but eventually. So reducing cost income ratio could become a bit more challenging in this environment. So I would appreciate to hear your plans to limit the cost growth. And maybe one more thing, what are your macro expectations for '26, please? David, this is Turker. Thank you very much. Türker Tunali: I'll try to answer your questions. Please. But at the end of my answer, if I missed anything, please ask again. To start with the market share evolution, you're right, like in the past, like maybe like 15 years ago, we used to have like above 10% market share in the sector in some of the products. But as you may know, like in the last 10 years, there have been some periods where actually the state banks actually have acquired some market share from the private sector. So actually, that's why actually now we are seeing ourselves below 10% threshold. But definitely, as Ebru and Kaan Bey have shared, like we have like the ambition of growing the bank in the upcoming years as well. So therefore, like if we can achieve these market share gains as we have like put on to the table on the -- especially on the business lending side as well as further increasing our market positioning on the consumer side, I would assume that everything evolves as we're expecting, we should again see 10% levels, maybe not for all of the products because maybe we will deliberately grow the bank in some areas and maybe we will be more slower in some areas. It will -- the time will show this based on our macro expectations. But definitely, the aim of the bank is leveraging our superior capital and growing the bank and again, seeing that type of market share levels within the sector. With regards to our NIM trajectory, actually, -- for full year, as Ebru has shared, we are expecting like 4% of net interest margin, but we will be observing a gradual improvement in every quarter. So probably so we will be -- it's very likely that we will see the highest NIM towards the end of the year. That would, therefore, actually also support our NIM evolution for upcoming year. Maybe in long term, maybe, maybe, it's too early to talk about it. But in a normalized world, maybe with an inflation level of plus/minus 10%, let's say, that 4% is the normalized level, but definitely going into '26, we may expect a higher net interest margin. And as I just repeat, a gradual improvement in net interest margin. What may be the upside to this NIM trajectory, as we have shared at the very beginning of our presentation, our base case scenario for the macro outlook is like 22% to 25% year-end inflation with a policy rate of 28% to 31%, so with a really sizable real rate. And when we prepared our guidance, we were more on the more -- maybe on the conservative end, i.e., like maybe 24%, 25% year-end inflation with a policy rate of roughly maybe 31%. If this inflation trend evolves like better than this, like bringing the year-end inflation to the level of maybe low 20s or close to 20% and enabling a rate -- policy rate coming down to less than 28%, something like that, that will definitely bring an upside. But having said that, maybe also another thing, which will be also important to monitor, that was also one of your questions, like the deposit rates versus policy rates. As we've seen in the last probably 3, 4 months after the phasing out of the KKM scheme, because up until that time, when we had the KKM in the system, FX protected deposit scheme, the sector was -- it was easier for the sector to meet this TL deposit ratio requirement of the Central Bank. But once this KKM scheme has phased out, it became more challenging, and that's why actually, especially starting from fourth quarter, middle of fourth quarter or fourth quarter onwards, we've seen a divergence between the deposit rates and the policy rate. Maybe just to give you an example, at the beginning -- towards the end of the year and beginning of this year, like we've seen maximum deposit rates going up to 41% versus policy rate of 38%. That's why Central Bank has made a recalibration like a few weeks ago, like extending the reporting period for TL deposit ratio requirement and also like giving some buffers to manage the deposit rates. But frank -- to be frank with you, so far, there is still some gap, maybe not like 41%, but still we are observing rates like close to 40%. So still this divergence is to be observed in the market. So we'll see actually how it's going to evolve, whether we may see further calibration from Central Bank. This will be important factors to observe in the coming period. Maybe final remark with regard to your question on the OpEx. I think as Akbank, we've done a quite good job this year actually. When you look at '24 or '23, like OpEx growth was way above the inflation. So there was a divergence there were different factors to that. So inflation inertia, supply-demand issues globally, which was also creating USD inflation. But this year, actually, there was a normalization. So like low 30s of OpEx growth versus, again, 31% of inflation is I think it's really -- we delivered a strong performance that actually we were able to convert OpEx growth to the inflation. So it's -- again, our guidance for '26 is considering like an average inflation of like maybe high 20s for this year. So we will be again maintaining our cost discipline. And in the upcoming years, like with inflation going down, as you are -- as you have like -- I understand what you are -- how we are like assessing it. but the increase of revenues, revenues may go down, but not forget, currently, we are operating with growth caps. So there is really a huge growth potential. I would assume this volume growth will be absorbed maybe the high interest rates, et cetera, et cetera, or high spreads maybe for some time. Therefore, at least for Akbank, I can say the aim of the bank will be to fully cover its operation expenses with its fee income generation. And not forget it's really journey. We are always looking for efficiency areas in every aspect. So this will be -- we expect them also to be supportive in this low 30s of cost-income ratio ambition. Cenk Gur: Maybe, David, I would like to add something, maybe enhance the importance of the growth for Akbank, especially for 2026. You know that our strong capital base will continue to provide us strategic flexibility. And of course, we are going to in search of sustainable growth across the segments. But as you know, there are some segments and line of business that we would like to grow more, such as business loans, SMEs. So in the same time, when we look into our maybe quarter-on-quarter, the growth performances such as FX loan, Turkish lira loans, actually, we have the capacity to flexibly grow in a very smart way. So we are still on the -- finding new avenues to build up new platform and market share for FX loans. And we are going to be more on the infrastructure projects, multinationals, blue-chip companies. So -- but in the same time, of course, this is going to reflect our prudence and quality focus approach. So I would like to enhance what told before. Yes, we're going to grow. Kamile Ebru GÜVENIR: Thank you, David. Next question comes from Ashwath PT from Goldman Sachs. Ashwath PT: I have a few questions. The first being your guidance for FX loan growth of greater than 10%. Does that also reflect the recent updates to the macro prudential framework where I think the growth limit for the 8-week growth limit for foreign currencies has been reduced from 1% to 0.5%. The second question I have was around the ROE. You mentioned you expect 2026 to be high 20s. Would that be a natural expansion of NIM through the year, like you said earlier, to peak in probably in the second half of 2026. And would it be fair to say that's when you actually expect that the real ROE would actually turn positive towards the second half of the year? And more generally -- my third question would be more generally over a longer term where perhaps inflation does come down to the mid- to low 20s, perhaps next year or the year after. Where do you see the normalized level of NIMs and the normalized level of ROEs for the bank? Türker Tunali: Ash, this is Turker. This latest change of -- like on the FX loan growth cap side actually that was announced after we have actually prepared our guidance. But having said that, when we look at our fourth quarter performance only in the fourth quarter, we grew our FX loan book by 5%. it shows like the flexibility of the bank in tapping areas which are exempt from growth cap. Again, we will be looking at this picture in a similar manner. So therefore, actually, as of today, we don't see any downside risk to our guidance. With regard to NIM and ROE relationship, as actually, your thinking is right. We expect NIM to gradually improve, bringing us to a 4% NIM for full year. So that will definitely support our ROE evolution throughout the year as well. Like if we say what is real ROE, ROE above inflation, you're right, probably maybe not in the first quarter and second quarter, let's wait and see how also inflation evolves. But definitely, in the second half of the year, we should see that the ROE moves above CPI in the second half of the year. With regard to normalized level of net interest margin and ROE, like maybe it's not a short-term topic, but assuming like inflation goes down to plus/minus 10% levels in medium to long term, maybe as of today, we can use like roughly 4% of net interest margin as starting point to get a bit like plus/minus 20% ROE, meaning like maybe, let's say, real ROE, if you define ROE minus inflation as real ROE, then probably like 10% real ROE will be the ambition of the bank in the medium to long term. I hope that was clear. Kamile Ebru GÜVENIR: The next question comes from Simon. Simon. Simon Nellis: My question is around your fee growth guidance for this year of above 30%. So I guess that's nicely above your inflation expectations. I mean, given that inflation is falling, that there's some regulatory tightening on fees, I mean, how comfortable are you with that? And can you just unpack a bit how you expect to get to 30% plus growth on fees? Türker Tunali: Simon, actually, this is why we have guided this above 30%. This is already taking into consideration the expected tightening on the interchange commissions by Central Bank. By the way, they didn't do it in January. So 1 month is maybe -- actually 2 months are like now unchanged. So let's wait and see actually how it goes. Maybe a small item and very recently one of the regulatory changes was also like the fee cap on FX lending have been removed by the authority in the last week. That will be, to some extent, also supportive as well. That was also integrated into our guidance. But we feel comfortable. Simon Nellis: You feel comfortable still despite those headwinds. Kamile Ebru GÜVENIR: I think it's a result, obviously, of our significant market share gains over the last few years on customer acquisition. I mean that's probably going to be a supportive factor of the fee growth above the inflation expectation as well. We have some written questions. So maybe the first question I can ask from Mariana from William Blair. Could you please explain the increase in Stage 2 loans on a quarter-on-quarter basis regarding NPL inflows? Are you seeing inflows from other segments in additional to SME, retail, like addition to retail, SME, commercial? This is our first question. Türker Tunali: Mariana, First of all, maybe to start with like NPL inflows. Actually, when we say retail, actually, we mean actually consumer plus also SME. So that was also the case in the fourth quarter, mainly led by consumer, also some coming from SME. These were the areas where we have seen the majority of NPL inflows. So in the fourth quarter, no change compared to third quarter. With regard to this increase in Stage 2 loans, as we had also time to time also shared with the investor committee in the last quarter of the year, we are always revisiting our IFRS 9 model. And based on that calibration, like inflows because of the model, so rating deterioration in other words. So after our calibration, there has been some increase in Stage 2 loans -- but whereas our restructured loan book has stayed the same, like 3.4%, almost same like in the third quarter. So that was the main driver of this Stage 1 to Stage 2 composition change of roughly 2%. Kamile Ebru GÜVENIR: And regarding NPLs? Türker Tunali: Actually, as I said, this is mainly retail driven. Kamile Ebru GÜVENIR: So moving on to the next question. Capital levels and Basel IV impact, will you see A Tier 1s or Tier 2s to shore up capital [indiscernible]. Türker Tunali: Basel IV will be effective if no change, start in the second half of the year. And as of today, the impact for Akbank is quite limited, roughly like 20 basis points in Basel -- 20 basis points. With regard to our like wholesale funding strategy, you know our practice, we are always like looking for opportunities in the market. And as you know, again, this year, we have really evenly distributed redemption schedule. One of them is also the Tier 2, where we are, again, stick to our benchmark, the call option of our Tier 2. We will look actually at all products based on maturity profile and like cost. And based on that, we will decide which path to go. Kamile Ebru GÜVENIR: Yes. Maybe just to put these in numbers. As you probably know, this month in February, we have a $500 million Eurobond redemption. And then in July, we have a $500 million Tier 2 as sub debt. As Turker mentioned, we always try to go by market practice depending on obviously on BRSA approval. The more important issue for us is that we like to obviously diversify the products and also diversify the maturities and extend the maturities actually. And you probably have seen this in our latest also syndication loan where we have 3 different tranches, 1 year, 2 year and 3 years. So we will be doing the same for this year for also our syndicated loans as well and as well as for, obviously, our maturities on the other product side. And I don't see any other question here that hasn't been answered. So maybe we can move on to -- I mean I don't see anyone raising their hand as well. So maybe I can leave the floor to Kaan Bey for closing remarks. Cenk Gur: Thank you. Thank you, Ebru. Dear friends, thanks a lot again, especially for your continued interest and engagement. We are very happy with that. To conclude, we entered the period ahead with confidence in our strategy and our ability to deliver. Our guidance reflects a balanced outlook grounded in prudent assumptions, disciplined execution and a strong focus on sustainable profitability. With our solid capital position, as I mentioned earlier, our resilient balance sheet structure and diversified business model, we are well positioned to navigate the evolving macro environment while continuing to create long-term value for all stakeholders. Technology remains a key enabler of our strategy, supporting deeper customer engagement, operational efficiency and scalable growth. We will continue to invest selectively in digital capabilities and process transformation and of course, as well as our people at bankers. While maintaining a disciplined approach to risk and capital allocation. Dear friends, we look forward to meeting many of you in the coming period and continuing our dialogue in more detail. Thank you for joining us today. We appreciate your trust and continued engagement. Bye for now. Kamile Ebru GÜVENIR: And for those of you who have additional questions, please do feel free to reach out to Investor Relations team. We are always at your disposal and look forward to seeing all of you throughout the year. Bye-bye.
Operator: Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Fourth Quarter 2025 Operating Results. [Operator Instructions] And for your information, this conference call is now being broadcasted live over the Internet. A webcast replay will be available within an hour after the conference is finished. Please visit CHT IR website at www.cht.com.tw/ir under the IR Calendar section. And now I would like to turn it over to Ms. Angela Tsai, Vice President of Financial Department. Thank you. Ms. Tsai, please begin. Angela Tsai: Thank you. I'm Angela Tsai, Vice President of Finance at Chunghwa Telecom. Welcome to our fourth quarter 2025 Earnings Conference call. Joining me on the call today are Chunghwa's President Rong-Shy Lin; and our Chief Financial Officer, Audrey Hsu. During today's call, management will begin by sharing our recent strategic achievements and providing an overview of our fourth quarter business results. This will be followed by a discussion of our segment performance and financial highlights. We will then open the floor for questions and answers. Please turn to Slide 2 to review our disclaimers and forward-looking statement disclosures. Now without further delay, I will turn the call over to our President. President Lin, please go ahead. Rong-Shy Lin: Thank you, Angela, and hello, everyone. Welcome to our fourth quarter 2025 results conference call. To begin, I am pleased to report our exceptional financial performance for 2025, driven by our dedicated efforts. Chunghwa Telecom's revenue, operating income, income before tax and EPS for 2025 all exceeded the upper end of our guidance, reflecting our strong execution and market-leading position. On the revenue front, our full year revenue reached an all-time high, demonstrating our continued focus on strengthening our core businesses and active expansion in the ICT sector. Notably, our full year EPS of TWD 4.99 marked an 8-year high, extending our annual growth momentum for the sixth consecutive year. This milestone underscore our commitment to driving innovation and enhancing long-term shareholders' value. Based on the strong outperformance in 2025, we are entering 2026 with confidence for our telecom businesses. We see Taiwan's mobile market remaining stable and favorable to us as the market leader. We are also pleased with our fixed broadband performance and will extend the successful existing strategy for further ARPU enhancement. In terms of ICT business, our technology capability will continue to remain cutting edge to support future growth. A particular highlight is our satellite opportunities as we believe demand of satellite services as the communication backup solution will increase with our satellites of OneWeb and SES commencing operation in 2025. The Astranis satellite will join in second half of 2026 to enhance our multilayer satellite capability. Furthermore, we will also focus on extending pre-6G-related opportunities in AIoT, satellite and big data services and expect their combined revenue to surpass the TWD 10 billion in 2026. We particularly expect to convert our AI capabilities into our service offering. We expect to assist our customers to integrate AI into their operational processes, legal compliance and infrastructure management. In addition, as a leader in AI drive connectivity, we are introducing AI edge computing into our AIDC to create a new revenue stream alongside our continued construction of AIDC in 2026. Ultimately, in the fourth quarter, we were honored with multiple awards recognizing both our ESG accomplishments and the technical acknowledgment. We won The Asset's Jade Award for corporate sustainability leadership for the fifth time, received the several AI Innovation Award at the World Communication Awards for our smart customer services solution and was recognized as the only Taiwanese telecom company on Newsweek's World's Most Trustworthy Companies 2025 list. More importantly, we have secured 4.6 billion kilowatt hour of renewable energy through a 20-year Corporate Power Purchase Agreement, CPPA, to support our 2045 net zero commitment. Now let's turn to our fourth quarter 2025 results. Please flip to Page 4 for the business overview. Please turn to Page 5 to review our success in Taiwan mobile market. In the fourth quarter, we solidified our leadership position in Taiwan's mobile market for 2025 with record highs across all dimensions. According to data from our telecom regulator, our mobile revenue market share climbed to unprecedented 41%, while our subscriber market share rose to 39.7%, mainly driven by continued growth in the postpaid subscriber. We are pleased with this strong result. Our 5G performance was equally impressive. Based on regulators' data, our 5G subscriber market share increased to 39.2%, further solidify our industry-leading position. The 5G penetration rate among our smartphone users climbed to 46.4% by the end of 2025, while the average monthly fee uplift from 5G migration remained robust at 41%. Given this solid momentum, we were especially encouraged by our strong mobile service revenue growth in the fourth quarter, which achieved a recent record high of 4.7% year-over-year. Postpaid ARPU also grew 3.6% year-over-year. We expect this positive trajectory to continue, supported by Taiwan's favorable mobile market landscape. Let's move on to Slide 6 for our fixed broadband business update. In the fourth quarter, our fixed broadband ARPU continued its upward trajectory, reaching a new high of TWD 819 per month. This represents a 3.8% increase in revenue and a 0.5% increase in subscribers year-over-year. This strong result were driven by our high-speed upgrade promotion and MOD bundle packages, which successfully boosted customer adoption of higher tier plans. Subscribers choosing speed of 300 megabits per second and above grew by 13% year-over-year, while those opting for 500 megabits per second and above recorded a double-digit growth and the subscription for 1 gigabits per second and above doubled in the fourth quarter. Slide 7 provides a detailed overview of the highlights from our consumer application services. In the fourth quarter, our multiple-play packages, which integrate mobile, fixed broadband and WiFi services increased by 17% year-over-year, marking the 16th consecutive quarter of expansion and representing the collective growth momentum of our customer business group. In 2025, despite the absence of major global sporting event broadcasting, resulting in overall subscription loss, our Hami video service demonstrated a solid resilience as its ARPU increased by more than 25% year-over-year in the fourth quarter. Looking ahead, with the launch of Disney+ bundle this January and our ongoing partnership with Netflix, coupled with the exciting pipeline of popular sporting events such as the FIFA World Cup, Asia Games and et cetera, we expect to drive further revenue growth throughout 2026. Meanwhile, our consumer cybersecurity subscription recorded 11% year-over-year growth with revenue also achieving double-digit gains, contributing to the steady growth for our consumer business group illustrated the key development in our enterprise ICT business. In the fourth quarter, our group's ICT revenue declined by 6% year-over-year due to a higher comparison base in the same period last year, though our full year ICT revenue still recorded robust year-over-year growth. Meanwhile, our recurring ICT revenue grew 15% year-over-year, continuing to show strong momentum, supported by increases across all major service lines, particularly contributions of AIoT, IDC and international public cloud services. Looking at the specific service categories, revenue from IDC, Big Data and 5G private network grew by 19%, 3% and 88% year-over-year, respectively. IDC performance benefited primarily from project completion in Mexico, while big data service revenue increased driven by its recurring revenue growth. Revenue from 5G private network surged, supported by the project revenue recognition from both public and private sector customers. However, revenue from cloud and AIDC business declined by 16% and 27% year-over-year, respectively, due to a high base last year. Our cybersecurity service revenue also decreased by 16% year-over-year as the majority of our cybersecurity revenue for 2025 had already been recognized in 3 quarters. Notably, despite the quarterly fluctuation, both cloud service and cybersecurity business still delivered full year revenue growth. We are also proud to share that we secured an AI customer service solution to build the first integrated AI customer services system for a leading financial institution in Taiwan. Furthermore, we secured a flagship government system integration project to upgrade the labor insurance platform to next-generation infrastructure with a contract value exceeding TWD 3 billion. In addition to further leverage our sea, land and sky network deployment and expand our satellite business scale, we successfully incorporated our satellite services as part of the government's joint procurement contract framework, paving the way for more long-term service contracts from government agencies. Lastly, our deployment of remote surveillance platform for correctional institution nationwide brought us 5 additional new projects in the fourth quarter with a total contract value of TWD 150 million. We expect to further replicate and scale this success in the coming year. Slide 9 illustrates the performance of our international subsidiaries. In the fourth quarter, our international subsidiaries revenue decreased 7% year-over-year, mainly due to softened demand for voice services as well as higher comparison base in the United States and the Japan ICT market last year. However, we were glad to see a 12% year-over-year revenue increase in Southeast Asia market as we completed multiple planned construction projects in Singapore and Thailand, a trend that we expect to continue through 2026. Notably, our Malaysia subsidiary commenced operations in December 2025, aiming to provide more timely, high-efficient ICT integration services for Taiwanese and multinational enterprise in the growing Southeast Asia market. Look ahead of 2026, we maintain a relatively optimistic outlook for our global market development as we have secured several AI supply chain projects in the United States in our pipeline, including key projects in Texas and California, which is expected to significantly boost our U.S. market performance in 2026. Now let's move on to Page 10 for the financial performance of our 3 business groups. In the fourth quarter, our CBG delivered a robust 6% year-over-year revenue growth, supported in both mobile and fixed broadband services, plus higher sales driven by the iPhone demand. However, its income before tax slightly decreased, mainly dragged by the final phase of 3G telecom equipment impairment, which has fully recognized in the fourth quarter and a higher comparison base from government subsidies recorded in the same period last year. Our EBG revenue decreased by 7.9% year-over-year as most of our major ICT project has already been recognized in previous quarters, resulting in a 7% year-over-year drop in the EBG ICT revenue. Income before tax was also impacted by the onetime impairment mentioned earlier. Encouragingly, EBG mobile and fixed broadband services as well as its satellite services still delivered solid growth momentum this quarter. As for our IBG business, revenue grew by 2.5% and income before tax increased by 1.8% year-over-year, driven by rising demand for the international IDC services and stronger roaming revenue. Furthermore, we are pleased to report that our submarine cables, SJC2 and the first phase of Apricot were completed this quarter and further boosted IBG's fixed line services revenue by 2.2% year-over-year. Now I would like to hand the call over to Audrey for financial updates. Wen-Hsin Hsu: Thank you, President. Good afternoon, everyone, and thank you for joining us today. I'm pleased to walk you through our financial performance for the fourth quarter and full year of 2025 and share our financial guidance for 2026. So now please turn to Slide 12 for our income statement highlights. Let's start with our fourth quarter results shown in the first 3 columns on the slide. Revenue and operations. We reported consolidated revenue of TWD 65.65 billion. This represents a steady 0.5% year-over-year increase and makes our highest fourth quarter revenue in nearly a decade. This growth was fueled by strong mobile device sales alongside the sustained momentum of our core telecom service. Income from operations decreased by 2.2%. This was primarily due to one-off impairment losses from the 3G network sunset this quarter, coupled with a high comparative base from last year's investment property valuation gains. Income before tax increased by 2.1% year-over-year. This growth was driven by investment disposal gains reflected in our nonoperating income. As a result of this performance, EPS increased from TWD 1.16 to TWD 1.20. This reflects our consistent profitability and marks the highest fourth quarter EPS in 10 years. Finally, EBITDA for the quarter remained stable at TWD 21.55 billion. The EBITDA margin stood at 32.82%. So now let's expand our view to the full year of 2025, shown in the last 3 columns. The annual view reflects a strong growth trajectory. So for the full year, total revenue reached TWD 236.11 billion, a solid increase of 2.7% compared to 2024. The growth was broad-based and driven by 3 pillars. First, we saw strong momentum in our sales revenue. This was fueled by higher mobile handset volumes and the robust performance of our subsidiary, Chunghwa Precision Test in the semiconductor testing sector. Second, our ICT portfolio continued to deliver with significant contribution from high-growth areas such as IDC, cloud and cybersecurity. Third, we maintained steady growth across our foundational mobile service and fixed broadband business. So this top line strength translated directly into profitability. Income from operations grew by 3.6% and net income rose by 4% year-over-year. Consequently, full year EPS reached TWD 4.99, up from TWD 4.8 last year. EBITDA also grew 2.6% year-over-year to a strong TWD 88.77 billion. Our EBITDA margin remained stable at 37.6%, broadly consistent with the prior year. So in summary, these results reflect high-quality earnings growth. This profit expansion was driven by sustained positive momentum in our core telecom business, complemented by the continued scaling of our IDC, cloud service and other ICT business operations. So now let's turn to Slide 13, balance sheet highlights. So total assets increased by 0.4% year-over-year. The growth reflects strategic allocation into long-term investments and prepayments for satellite infrastructure reported in other assets. The increase was partially offset by a net decrease in property, plant and equipment as depreciation charge existed new capital additions, along with a net decrease in intangible assets due to the 4G and 5G spectrum amortization. On the liability side, total obligation decreased by 0.7%. We repaid older loans while successfully issuing our first-ever sustainability bonds focused on biodiversity. The strategy not only strengthened our capital structure and reinforce our leadership in ESG-driven financing. Our financial health is best illustrated by our key ratios. Our debt ratio improved further to 25.25%. Our current ratio remained healthy, well above 100%. Most notably, our net debt-to-EBITDA ratio stood at 0. Moving to Slide 14 for our cash flow summary. We will review our performance for the full year 2025. Cash flow from operating activities decreased slightly by 2.2%. The variation was primarily driven by working capital dynamics, specifically a decrease in accounts payable between '25 and '24. On the investment front, CapEx declined by 3.7% to TWD 27.7 billion. First, regarding mobile CapEx, spending decreased by TWD 1.4 billion. The reduction aligns with our road map to lower mobile capital intensity now that we have passed the peak of the 5G deployment cycle. Second, regarding nonmobile CapEx, spending increased by 2%. The increase was mainly driven by strategic investment in submarine cables. Consequently, free cash flow stood at TWD 49.8 billion, a marginal decrease of 1.4% year-over-year. Despite this slight variation, we continue to maintain a strong cash position. Our stable cash flow inflows remain fully capable of supporting both our business growth initiatives and our commitment to shareholder returns. So now let's turn to Slide 15 to review our performance highlights against guidance. So in the fourth quarter of 2025, revenue exceeds the target, showing stronger-than-expected demand. Key performance measures such as net income and EPS were all in line with our forecast. For the full year 2025, the cumulative results validate our strategy. We are very proud to report that all major metrics, revenue, income from operations, net income, EPS and EBITDA either met or exceed our full year guidance. Again, this broad-based success was powered by our telecom business, driven by successful 5G migration and mobile service revenue growth alongside our ICT business, which capitals on expanding demand for IDC and cloud big data overseas markets. So now moving on to Slide 16. Please see our guidance for 2026. Looking ahead, total revenue for 2026 is expected to increase between 2.5% to 3.2% year-over-year, primarily driven by growth momentum in our core business. Well-received 5G service and speed upgrade promotion packages for fixed broadband are expected to continuously enhance our subscriber numbers and ARPU. ICT business is also expected to contribute to revenue growth as we continue to see digital transformation opportunities in the market. Operating costs and expenses are expected to increase between 3.5% to 3.7% year-over-year as a result of the investment in talent and infrastructure that support future business development in both core and emerging business. So given these projections, we expect our EPS to be in the range of TWD 4.82 and TWD 5.02. As for capital budgeting, we have budgeted TWD 31.91 billion for 2026. Looking ahead, our strategy remains consistent with our long-term road map, balancing disciplined efficiency with strategic expansion into resilient and sustainable infrastructure. Our mobile-related CapEx is expected to decrease by 6.3% year-over-year. This marks the fifth consecutive year of this decline since our peak in 2021. This demonstrates our ability to maintain our mobile leadership through capital efficiency as we move past the heavy 5G construction phase. Non-mobile related CapEx is expected to increase by 24%. The investment is strictly aligned with our sea, land, sky strategy to capture emerging business opportunities while fortifying our network. Key investments include expanding submarine cables to boost connectability alongside building our IDC data center. We also strengthened infrastructure resilience by upgrading power, cooling and cybersecurity systems. We are turning digital resilience into a unique competitive advantage. So this concludes our financial results highlights. Thank you for your attention. At this time, we would like to open the conference call for questions. Operator: [Operator Instructions] Now the first one want to ask questions, correct me if I pronounce wrongly, okay? Rajesh Panjwani from JP Morgan. Rajesh Panjwani: A quick question on the CapEx. If you can give some more detail about the big increase in the nonmobile CapEx, which is almost 24% for 2026? And also, can you provide some more details about -- you're looking at like almost 3.5% to 4% increase in the operating costs, which is higher than the revenue growth as well. So can you talk a bit about that as well? Wen-Hsin Hsu: Okay. Thank you very much, Raj. So the first question is about CapEx, about more detail on mobile CapEx, about 24% increase in 2026. So there are a couple of categories, as I just mentioned, this includes the fixed line maintenance, which consists of quite the big proportion of the fixed line maintenance. And the second is about the satellite and also the cables. And the third one is the IDC. I should say that mainly that the increase mainly coming from the IDC and also the satellite portion. And so this is for the first part. And the second part about the increase about 3.5% of operating cost. I think that one of the main -- there are 2 main portions. One, a couple of the reasons is that one is the human resource, the talent. I think that, as you know, that we are in emerging -- in a growing -- we have a lot of the sectors in IDC. We need a lot of the AI-related talent. So investment in the human resource is one important area. And the second is that electricity. I think that we are not so sure about the electricity policy in Taiwan. So we are a bit cautious. Also, this is also a second big area that takes the cost. The third one is about depreciation. That in the early stage, we have -- although that we try to trend down a lot of the CapEx, in recent years, as I mentioned, that discipline management is a key philosophy in our CapEx policy. But in the early stage that we still have some CapEx. So you will see -- as you see in our cash flow statements, you will see that the depreciation and also the amortization, these 2 portions is a bit much higher than the net increase of the PPE. So is that clear? Or do you want me to clarify any others? Rajesh Panjwani: Yes, if you can share like of the total increase in nonmobile CapEx, how much is from IDC? Wen-Hsin Hsu: Actually, we didn't separately disclose the exact number of the CapEx budget for each nonmobile items. But I can share with you that I think the CapEx for IDC and cloud it remain, I mean, like the second largest part of the nonmobile CapEx for 2026, okay? And then I want to add one more point for the mobile CapEx. As we know that the 5G CapEx investments, we had just passed the peak, right, but for 2026, actually, we will invest in as a stand-alone related applications like the network slicing for your reference. But the total mobile CapEx for 2026 actually still less than that of the 2025. Rajesh Panjwani: I got it. This is helpful. It would really be helpful if going forward, you can provide greater breakup of nonmobile CapEx because it's almost like more than 3/4 of your CapEx is now nonmobile CapEx. So it would be really helpful to get more details about that in the future. Wen-Hsin Hsu: Okay. Thank you for your opinion. Operator: [Operator Instructions] There seems to be no further questions at this moment. I will turn it over to President Lin. Please go ahead, Lin. Rong-Shy Lin: Okay. Thank you very much for your participation. Happy New Year. Operator: Yes. Thank you, President Lin. And ladies and gentlemen, we thank you for your participation in Chunghwa Telecom's conference. There will be a webcast replay within an hour. Please visit CHT IR website at www.tw/ir under the IR Calendar section. You may now disconnect. Thank you again, and goodbye.
Jaime Marcos: [Interpreted] Good morning, everyone, and thank you very much for attending Unicaja's Q4 2025 Earnings Presentation. First of all, as we usually do, let me confirm that this morning, before the market opened, we published this presentation along with the rest of the usual financial information at the CNMV website and at our corporate website. Today, we are joined by our CEO, Isidro Rubiales; and our Chief Financial Officer, Pablo González. We have divided the presentation into 3 sections. Isidro will begin with the introduction, which includes a summary of the financial year, and a brief review of the first strategic -- first year of the strategic plan. Pablo will explain the financial earnings. And after which Isidro will return to the stage 2, conclude with some final remarks before opening the floor to your questions. We expect the presentation to last just over half an hour. After the presentation, we will take questions from analysts and investors who are following us by telephone on the original Spanish line. And then we will move on to the English [ channel ] line. So without further ado, I give the floor to Isidro. Isidro Gil: [Interpreted] Thank you very much, and good morning, everyone. It's a pleasure for me to be here again, sharing with all of you the main -- the key highlights of the 2025 earnings, which, as Jaime mentioned, is the first year of the strategic plan. And as you will see, we are making good progress, which is also a beginning to be reflected in the entity's financial performance. The strategic plan is designed for the long term. And many of the results and returns we expect to obtain will take time to be reflected. But it's true that some of these measures implemented are already allowing us to move in the right direction with some clear results in the first year of the plan. On Page 3, we show our usual summary of the highlights of the financial year. The first item that we would like to highlight is the significant recovery in business activity that we have achieved throughout 2025. Two years ago in the fiscal year 2023, performing loans fell by 9%, the following year. In fiscal year 2024, the decline was 4%. In 2025, despite not growing in the mortgage segment, which is Unicaja's largest book, we managed to reverse that trend and achieved 2% lending growth. This turning point, as we will see later, is partly as a result of the diversification strategy outlined in the strategic plan that we presented to you a year ago and which is gradually beginning to take shape. Proof of this is that loan approvals have grown by 40% compared to the previous year. Another aspect that reflects the greater commercial momentum is the evolution of mutual funds, which, as you will recall, was one of the strategic levers of the plan with balances rising by 23% during the year and a net subscription market share of 9%, which is higher than our structural share. This positive performance has also been reflected in profitability, with net profit for 2025, improving by 10% to EUR 632 million, thanks to the growth in gross margin and lower provisioning requirements. The increase in income boost the ROTE adjusted for excess capital of 12% and maintains efficiency slightly above 45%, below our target of 50%. I would also like to highlight the continuing improvement of the bank's asset quality, an aspect to which the market may be paying less and less attention, but which we have been managing exceptionally well internally. And as a result, their balances have become immaterial, but continued to improve quarter after quarter. NPAs fell by an additional 25% in 2025. And additionally, leaving the net nonperforming asset ratio at a symbolic 0.8%. Stock fell by 20% during the year, reducing NPLs ratio to 2.1% below the 2.8% reached by the sector in November 2025, the latest data available. NPL coverage also improved during the year, increasing from 68% to 77%. This positive development is also reflected in the P&L with a cost of risk below 26 basis points below initial guidance. Finally, I would also like to draw your attention to value generation. One of the most important aspects as it's the consequence of all the above. The CET1 ratio driven by earnings ended the year at 16%, 90 basis points higher above last year, which allows us to increase the percentage of the 2025 earnings, which -- that will be allocated to dividends from the initial 60% to 70%. This is a significant increase that will improve the dividend up to EUR 443 million, 29% higher than the previous year. And this is the highest dividend paid in Unicaja's history. On the following page, we show you how the year ended compared to the initial guidance we shared with you a year ago, we believe it summarizes the year's performance very well. We expected net interest income to be above EUR 1.4 billion, and it finally reached EUR 1,495 million, which is 7% above our initial guidance due to the implementation of loyalty plans with linked customers, we expected fees to remain flat, but they ultimately increased by 3%, driven by growth in investment, in mutual funds and insurance, two of the commercial pillars of our plan. Costs remain in line with expectations, rising 5% due to investments, hiring and the projects we are implementing to execute the strategic plan. The cost of risk was below our initial forecast as our provisions. Business volume also grew as expected. As a result of all the above, net income increased by 10% to EUR 632 million, no less than 26% higher than the initial target, which was EUR 500 million, which, as you know, we already exceeded in the previous quarter leaving the ROTE adjusted for excess capital at 12%, which is 200 basis points higher than the 10 initial -- 10% initially expected. As you can see, these pages summarizes very well the positive performance of the entity in the first year of the strategic plan, which we -- where we met all the guidelines we provided a year ago. And in some cases, we significantly improve on them. On the next page, as I mentioned earlier, we show how the positive evolution of the entity's financial position and results allow us to present a very important milestone. The Board of Directors has decided to update the dividend policy and increase the percentage of profits we want to distribute in the way of dividends going from 60% to 70%. This is a significant increase in the distribution of earnings to our shareholders, which together with the best earnings will mean the payment of dividends for 2025 of more than EUR 0.17 per share, well above the EUR 0.134 paid for 2024 and compared to around EUR 0.05 that we paid in 2022 or 2023. The total dividend will amount to EUR 443 million, 29% higher than the previous year. This is a significant increase, which as I said before, has been made possible by the positive performance of the results and the bank's comfortable solvency position. Now if we turn to Page 6, you will see some of the progress made on the strategic plan in the first year. Although we are in early days, we have gone -- begun to notice a significant change in the dynamics, thanks to the entire team's focus on the plan's initiatives. And we wanted to share some ones with -- that we are particularly excited about with you. In consumer lending, we aim to double arrangements by 2027. This year, we have already increased by 40%, maintaining our focus on working with existing customers and direct deposit income. With regard to new insurance premiums, we wanted to increase by 25% in 2027. In this first year, we have already increased by 17% and we continue to see room for improvement to achieve our goals. Another noteworthy aspect is the off-balance sheet weight on total customer resources, where we have increased to 27% in the year with a final target of 30%. We have launched products such as Unicaja Store and reached very important agreements with the management company that will help us to continue increasing and diversifying our income. In the corporate sector, we are very pleased with the improved performance of the business in the first year of the plan. We have turn around a business that was in decline in the book after falling 9% in 2024, has grown by almost 4% in 2025. To achieve this, we have attracted 70% more new customers with lending increased our own customer financing share by 5 percent points and increased the weight of the current assets from 11% to 14%. All of this driven by our focus on improving customer satisfaction with an NPS indicator, improving by 10 points in the corporate business since we launched the plan. Across the board, as you will see later, we are working hard to improve our commercial and operational tools using artificial intelligence. We are rolling out tools across the entire organization and loading use cases in different areas, such as sales, customer service, operations, et cetera with efficiency improvements in many cases, exceeding 50%. Finally, a very important part of our plan is to hire specialized and significant profiles for the bank in order to achieve our targets. In this first year, we have already achieved 65% of the talent acquisition that we have planned. In short, it has been an intense first year of the plan, where we're gradually beginning to reap the rewards of this implementation. As a result of these advances, on Page 8, we update our earnings expectations for the 3 years of the strategic plan a year ago, along with the annual earnings for 2024. We presented the main details of the plan in which we showed our intention to exceed EUR 500 million in net profit in each of the 3 financial years and an accumulated net profit of more than EUR 1.6 billion, which was 40% more than the [ EUR 1.17 billion ] achieved in the previous 3 financial years from 2022 to 2024. Today, following the positive performance in the first years of the plan's implementation, we're increasing this accumulated net profit earnings expectations by EUR 1 billion taken to EUR 1.9 billion, which is 70% higher than the accumulated net profit achieved during the previous 3 years. The interest margin, which we initially expected to exceed EUR 1.4 billion each year, is now expected to exceed EUR 1.5 billion. And net income, which I mentioned earlier, we initially expected to exceed EUR 500 million each year, is now expected to exceed the net income for 2025. This is EUR 632 million achieved last year. All of this will be accompanied by a cost-to-income levels that will remain below 50%. On Page 8, we provide an update on shareholder remuneration target of the plan. As you will recall, the objective is to allocate more than 85% of the earnings for the 3 financial years to shareholder remuneration. Initially, the idea was to allocate 60% through the ordinary dividend and the remaining 25% through what we call additional remuneration which could be in cash dividends or share buybacks with the intention of concentrating this additional remuneration in fiscal year 2026 and 2027. Following the updates of the dividend policy from 2025 onwards, we are increasing the structural remuneration from 60% to 70%. This reduces the percentage of additional remuneration for the period to 15% of accumulated earnings. As can be seen on the right in order to achieve the aforementioned objective, the additional remuneration will represent around 25% of the earnings for fiscal years 2026 and 2027. In other words, for the 3 years of the strategic plan, we will pay 70% of the net profit in dividends, and for 2026 and 2027, in addition to that 70%, will include an additional remuneration of 25% of the profit for those 2 years, which will be either paid in cash dividends or through share buybacks, something we will decide based on circumstances. Therefore, for 2026 financial year, if we pay part or all of the additional remuneration in dividends, we will make an additional payment in December, to which we will have to add the 2 usual dividends for 70% of the result, the first in September and the second in April of the following year once approved in the General Shareholders Meeting. As you can see, this would be the plan over the 3 years as a whole. Shareholder remuneration represents more than 85% of the accumulated net profit. Finally, and given its importance, I would like to take a moment to mention some areas in which we are making progress in the field of AI, which we show on Page 9. We are convinced that this technology will change the way we do business and banking, not in the future, but right now, that's why we consider it's an absolute priority. We are making progress in the use cases across all areas, including commercial operations, IT development with very encouraging results that drive commercial activity, improve efficiency and reduce the time required for many tasks. This is facilitated by a hybrid of modular architecture. This is adapted to both cloud on-premise environments with independent components that accelerate system and construction are ready to work with different types of models. We believe that innovation is essential to get the most of it, which is -- that's why we have created an AI hub with more than 50 multidisciplinary professionals. And we've launched joint chair with University of Granada to promote research and attract talent. In short, we are promoting the adoption of artificial intelligence throughout the organization, which is leading us to achieve efficiency improvements of over 50% in some areas. In short, as you have -- you will have seen in the 2025 financial year has been very positive. Progress in the implementation of the strategic plan has led to an improvement in commercial dynamics which, in turn, has boosted results by 26% above initial forecast, which together with our comfortable solvency position allows us, on the one hand, to increase the percentage of earnings that we'll allocate to dividends from initially 60% to 70% increasing the dividend by 29%, to EUR 443 million, the highest in our history. And on the other hand, it allows us to improve our future earnings expectations. So with that, I'll hand over to Pablo, who as usual, who will give you more details on the financial performance for 2025. Pablo, whenever you're ready. Pablo Gonzalez Martin: [Interpreted] Thank you, Isidro. Let us now continue with the business activity on Slide 10. As you can see, total customer funds rose by 3.5% in 2025. Private sector deposits increased by EUR 662 million or 1% with a continued shift in the product mix from term to demand deposits that rose to EUR 55 billion, up 3% year-on-year, which explains the lower cost of deposits that we shall discuss later. Our balance sheet performance remains very positive, posting an annual growth of 13.8% driven by mutual funds, which after reaching the market share of 9% of net subscriptions grew by 22.6%. That is in the north of EUR 3 billion. On the following slide, we disclosed the details of assets under management and insurance. On the left-hand side, you can see that assets under management rose by 14% over the last year. Funds in turn climbed by 23%. Note worthy is the significant increase in net fund subscriptions, as shown at the bottom, these subscriptions rose from 1 point EUR 1,767 million to just over EUR 2.8 billion, accounting for a 9% market share of net subscriptions according to Inverco. On the revenue side, as you can see on the right-hand side, these 2 lines of business rose by 9% in 2025, accounting for 18% of total revenue for the year. With regard to lending, during the 2025 financial year, total performing loan book rose by 1.9%, which is a very positive trend compared with the declines reported in recent years, as Isidro mentioned earlier. Broken down by business segment, corporates posted a very positive uptick and after rising 1.7% in the quarter, they reported annual increase of 3.7%. This is one of the most positive business aspects of the year. In fact, thanks to the implementation of certain measures under our strategic plan, we have reversed the negative trend that this segment has been experiencing in recent years. In the case of individuals, growth for the year was 0.6%. Because albeit, we barely reduced the mortgage book by 0.2%. We were able to offset this with a strong increase of more than 8% in consumer lending. Again, driven by the measures set out in the strategic plan, which aims to diversify revenue streams. In short, this trend points to progressive improvement over recent quarters which can be explained by greater diversification and better sales dynamics, together with a major increase in new production as shown on the following slide. All new lending book segments grew markedly by 40% over the year as a whole from just over EUR 7 billion to almost EUR 10 billion in 2025. Growth in corporate banking is particularly noteworthy with formalized balances rising by 46% over EUR 6 billion. Mortgages rose by 30% to over EUR 3 billion. This amount leaving the book flat for the year given the pace of repayments. It should be noted that this more conservative growth in the mortgage book is mainly due to the high level of competition in this segment, where prices are very tight. Finally, although in related times, their balances are less representative, I would like to highlight the increase in new consumer lending production, which rose by 40% to EUR 822 million. In short, this positive growth is in line with the business priorities set out in our plan. On the following slide, you can see how we continue to make progress on our strategic plans, sustainability commitments. This effort is being recognized by ESG rating agencies with 6 improvements having been granted in the latest reviews. Regarding environmental matters, noteworthy is an increase in the weight of Article 8 and 9 funds, which now account for 72%. We maintain and reinforce our strategy of financing ourselves through green bonds with high eligible collateral, while also advancing in the decarbonization of the portfolio, now targeted at 6 sectors representing 81% of our lending to the private sector already. We also like to highlight, Unicaja's social commitment, one of our identity hallmarks, which can be summarized in aspects such as customer proximity, commitment to financial education and support for vulnerable groups. A portion of proceeds is returned to society through more than EUR 175 million distributed in dividends to foundations in addition to EUR 371 million in taxes paid in 2025. We're also committed to our customers by accompanying them in their own transition to this. And we are promoting new functionalities and agreements with third parties as reflected in the growth of the sustainable business where both the portfolio and new production are growing significantly. Finally, we would like to highlight our commitment to our employees with a focus on creating an environment that prioritizes people, good governance, equality and professional development. We shall now continue with a review of the income statement in the next section. Starting with the quarter, net interest income grew by 0.8% and as the effect of loan repricing was offset by lower funding costs, both in retail and wholesale. Fee income improved by 4.1% over the quarter, bringing us to gross income of 1.3% higher than last quarter. Costs are rising due to the seasonality of the quarter. Overall, the quarterly margin before provisions rose by nearly 1%. Provisions as a whole rose sharply over the period, mainly because we have included a provision for restructuring costs in the amount of EUR 27 million. Our aim is to implement a new workforce renewable plan similar to the one we announced last year. For the year as a whole, profit rose 2.6%, reaching EUR 2.095 billion. Total operating costs increased 5.4%, in line with the previous year and the guidance. Overhead costs rose as a result of ongoing investments, while personnel expenses increased by 4.2% in excess of the percentage agreed in the collective agreement due to new hires and variable remuneration. The operating margin improved by 0.5%. Provisions fell by 25% during the year, mainly due to lower provisions for legal risks. All of the above, led to a pretax profit of EUR 902 million, which after taxes and minority interests, including EUR 26 million in sector-specific tax amounted to EUR 632 million, up 10.3% compared to the 2024 financial year. Let us now take a closer look at the income statement. Starting with net interest income on Slide 18, we show the evolution of customer net interest income. As you can see, it fell by 4 basis points over the quarter as the decline in credit yields was partially offset by lower deposit costs. This is the same trend as reported in previous quarters, but increasingly moderated as the downward trend in lending is becoming more limited, albeit we expect it to continue somewhat due to the annual evolution of the 12-month Euribor, which is still slightly below what it was a year ago. We also increasingly see less room for declining the cost of deposits, which continues to improve due to the mix effect rather than the price effect. In any case, as we always say for an institution such as Unicaja with far more deposits than loans, business performance is better reflected by the net interest margin on profitable assets. And this remains stable during the quarter, as you can see. The following slide shows details of the margins performance during the quarter, which improved by EUR 3 million or 0.8%. The lower return on loans mentioned above is offset by the lower cost of deposits and wholesale funding as well as by the higher generation of liquidity. This quarterly performance is similar to that reported in other quarters this year. But as mentioned above, it is becoming increasingly moderate. Moving on to fees. We can see that they continue to perform well in the quarter, growing by 4.1%, mainly due to higher income from value-added services such as mutual funds and insurance. Over the year as a whole fees rose by 2.8%. As we have mentioned in the past, fees for collections and payments, known as banking fees fell by 7% as a result of the implementation of customer loyalty programs. Although some of these fees, such as car fees are already showing positive growth in 2025. At any rate, this impact was more than offset by the positive performance of nonbanking fees. These fees, which had greater added value rose by 12% in 2025 driven by mutual funds and insurance, which as shown on the right-hand side, now account for 49% of the total, up from 45% in 2024 and 41% in 2023. Let us move on to the P&L account to show the rest of the income captions, which also show a positive trend in the financial year due to the changes introduced in the sector-specific tax, but also due to the fall in nonperforming assets and the growing contribution of investee companies. On the cost side, as mentioned above, personnel expenses increased during the year due to wage rises agreed with employee representatives, new hires and also as a result of higher variable remuneration in view of the institution's positive performance. As for overheads, the figures are accounted for by the necessary investments we are making largely for the implementation of the strategic plan. In any case, and despite this increase in costs over the year, efficiency remains at 45.5%, below the 50% target we have set in the plan. On the following page, we continue with provisions, which show another positive aspect of the financial year as they continue to improve. Total provisions fell from EUR 319 million to EUR 239 million. That is a decrease of 25%. The quarterly cost of risk was 27 basis points and the annual cost of risk was 26 basis points lower than initially expected. Other provisions include restructuring costs for workforce renewal in both 2024 and 2025, amounting to EUR 38 million in 2024 and EUR 27 million in 2025. Excluding this effect, they are in line with expectations, showing a downward trend. On the following slide, we show a summary from a profitability standpoint. On the left-hand side, you can see different profitability metrics, all of which demonstrate the positive evolution of Unicaja's results. The reported return on tangible equity without any adjustments increased to 10%. If adjusted for excess capital above a CET1 of 12.5%, which is a level similar to that of other listed Spanish institutions, shows an improvement of 12%. At the bottom, we show the same metric calculated on regulatory capital, which shows an improvement of 70% in 2025. On the right-hand side, you can also see the evolution of the tangible book value, which when adjusted for dividends, increased by 9% during the financial year. We now turn to credit quality. Another positive of recent quarters. The balance of nonperforming loans continued to decline. The quarterly decline was 4.3% and the annual decline was 20%, bringing the nonperforming loan ratio to a new low of 2.1%. At the same time, coverage of nonperforming loans continued to rise from 68% a year ago to 77% at present. If we now consider total nonperforming assets, or NPAs, we see that in net terms, they account for 0.8% due -- both to the significant 25% drop in their balances during the year and to the increase in coverage, which rose from 71% in 2024 to 77% at the end of 2025. Finally, I would like to review the bank's solvency and liquidity position with you. On Slide 28, we show both the quarterly and annual trends. In the quarter, the ratio fell to 16% due to 2 different factors. On the one hand, we have the impact of the dividend adjustment, which is slightly higher than the quarterly result. Since until September, we accrued a dividend of 60% of the result, which now becomes 70% for the financial year. Secondly, we have the impact of the growth in risk-weighted assets, which is mainly explained by operational risk and credit growth. Even so the CET1 ratio closed the financial year 2025 at 16%. Over the year as a whole, we generated 90 basis points of CET1. On the positive side, we have the generation of earnings, which net of dividends and AT1 coupons amounted to 55 basis points despite allocating 70% of earnings to dividends. In turn, we have another 77 basis points mainly from lower deductions and market valuation, including the impact of EDP, which amounts to 21 basis points for the year. On the negative side, we have the growth in risk-weighted assets, which, as we mentioned, are rising due to the impact of the update of operational risk and credit growth. On the following slide, we show the institution's position in relation to different requirements. The minimum required eligible liabilities or MREL ratio stands at 27%, growing slightly over the year with a greater weighting of subordinated instruments. On the right, you can see the buffers we have in relation to the main requirements, which, as you can see, remain quite comfortable. And at the bottom, we show the liquidity ratios, which continue to be among the highest in Europe with the LCR standing out and in 2025, about 300%. And finally, we show you the details of the debt portfolio, as you all know, in our case, this is relatively important because the low loan-to-deposit ratio translates into a high retail liquidity position, which we invest in this structural portfolio, mainly in the amortized cost portfolio. As you can see, the portfolio has hardly changed during the quarter with the balance duration and rate remaining fairly stable. That's all from me, Isidro, whenever you're ready, I give you the floor. Isidro Gil: [Interpreted] Thank you, Pablo. Continue on Page 32 with some information about what we expect to see in 2026, which you can imagine it will be fairly consistent with progressive improvements that we hope to see it materialize as a result of the implementation of the strategic plan. Starting off with the net interest income, we expect some growth and therefore, to end this financial year about the level reaching 2025, fees should continue to grow at a low single-digit rate, driven by value-added fees, mainly from funds and insurance costs. And we hope that the fees from the banking will contribute -- costs will continue to grow at around 5%, reflecting the investments we want to make to continue successfully executing our strategic plan. We expect the cost of risk to remain below 30 basis points. The business volume will be maintained its current pace with growth of around 3%. And finally, as a result of the above, we believe that the net income will continue to grow in 2026, exceeding the result achieved in 2025. And to conclude, allow me to share a few quick conclusions with you before opening the floor to questions. Today, we have presented excellent results for 2025, reaching a new historic high in both earnings and dividends. But as I also told you last year, we are not satisfied. We want to continue improving something we hope to do by executing our strategic plan, a plan that in its first year is already showing some of the returns we expect. From a business perspective, the 2025 financial year is a turning point as evidenced by the 2% growth in total loans with some strategic segments rising significantly, such as consumer and corporate loans. This change in trend has been supported by an incredible acceleration in the market of balance sheet resources, which grew by 40% driven by 23% growth in mutual funds, another of the strategic and priority products in our plan. All of this has led to a 3% improvement in turnover above the previous year's level. As we have mentioned, this turning point is driving results, which are up 10% to EUR 632 million, 26% above the initial guidance, representing an excellent 17% return on regulatory capital, improving by more than 100 basis points over the year. This positive performance together with our comfortable solvency position has enabled us to increase the percentage of profits allocated to dividend payments from 60% to 70% resulting in dividend for 2025 of EUR 442 million, 29% higher than the previous year. Finally, as we highlighted earlier, this excellent performance means we can improve our earnings expectations for the period 2025, 2027 by 19% from the previous EUR 1.6 billion to more than EUR 1.9 billion, of which 85% will be used to pay out our shareholders, while maintaining a comfortable financial position as we expect to meet these expectations with a CET1 ratio of over 14%. In short, 2025 is once again an excellent year that allows us to lay the foundations for further improvements in the future. Finally, I would like to thank all Unicaja employees for their unquestionable effort and performance in executing the strategic plan. Without their commitment and support as well as the shareholders and directors, these results would not have been possible. This concludes our presentation. And if you agree, we will now move on to the Q&A session. Jaime Marcos: [Interpreted] Thank you very much, Isidro. Thank you very much, Pablo. Let's move on to the Q&A session. Let's start with the telephone line in Spanish. Please introduce yourselves. And please limit it to 2 questions so that we can answer the highest number of investors possible. So operator, thank you. Operator: Ladies and gentlemen, we will start the Q&A session. [Operator Instructions] The first question is from Maks Mishyn from JB Capital. Go ahead. Maksym Mishyn: Two questions. One, it's about the restructuring costs. If you can give further detail on what these costs include. And secondly, if you expect have them in 2026. And the second question is on the guidance, on volumes. Can you give more detail on what you expect in terms of loans and deposits outside balance? That would be very useful. Isidro Gil: [Interpreted] Maks, thank you for your questions. With regards to the first question and referred to the provisions for restructuring, you know that last year, we did this exercise, these voluntary retirement plans or early retirement plans. We're not looking at saving costs, but improving capacities regarding the environments where we are. Right now, the idea is to run it this year, and we don't expect it to happen the following year in 2027. With regards to guidance and volumes apart from the 3% growth in line with what we've done in 2025, we do see a more balanced mix between the asset growth and the resources customer growth around 3% in both segments. Jaime Marcos: [Interpreted] Thank you, Isidro. Operator, please, the next question. Operator: The next question is from Francisco Riquel from Alantra. Francisco Riquel: I would like to ask from NII guidance. Could you talk about the rate scenarios that you have included in the guidance because 1,500 is very flat, and the volumes are growing and interest rates is what it is. And I think it's a very conservative -- if it's conservative, I don't know whether you can talk about the sensitivity in NII in terms of interest rates for year 1 and year 2 and what you have included in the plan vis-a-vis margins. And my second question is about the use -- how you're going to use excess capital. A year ago, you asked for flexibility to consider M&A opportunities in the first part of the year. We haven't seen anything in 2025. And my question is whether you can give us an update on your ambitions for M&A for the next -- for the rest of the plan and how are you going to use the capital excess? Isidro Gil: [Interpreted] Paco, I'm going to answer the first question with regards to the guidance as to whether it's prudent and what hypothesis we have used. With regards to the hypothesis, we've used the curve that we had at the end of November, which will had a Euribor of 2.35% at 12 months is to -- we're around 2.22% at 12 months, and the expectation is to go -- see a rise by the end of the year. The balance sensitivity and the ANI to interest rates at 12 months is quite low. And the volume growth impact is also low. It will be seen more in 2027 than in 2026. In 2023, we started to reduce the balance sensitivity and we have increased this for 2026. But I think that for 2027, the higher interest rates -- potential high interest rates will have a positive impact. And with regards to the volumes at around 3%, the deposit cost is very similar to this year's -- the deal of the credit investment is going down in the first quarter and will be flat in the second, and will start to go up in the third with the new production and with the repricing, which will have no negative impact which will make the margin behavior to follow that line. The first quarter will be a bit lower because you have the days effect and it will catch-up up until we see it above. How much above? Well, it depends on the deposit cost evolution and on the volumes evolution, if we are able to grow more in deposits. As we've seen this year in site deposits, this will improve a bit more, and it will depend on those variables. But it will be as from 2027, where you will see a more significant increase of margin. Pablo Gonzalez Martin: [Interpreted] Good morning, Paco. As for the excess in the use of capital, I believe that today, we have explained to you how we are going to carry out that payment in excess of 85%. We also said that we are going to analyze new opportunities and if capital is required, well, we will have to analyze its efficiency in 2025. Such opportunities did not arise. We didn't see any clear opportunity of an investment with a good return for our investors. But should that happen, well, we might consider using capital more efficiently. And that's all I can say in this respect. Jaime Marcos: [Interpreted] Thank you very much, Pablo, and Isidro. Operator, please next question. Operator: The next question is by Ignacio Ulargui from BNP Paribas. Please go ahead with the question. Ignacio Ulargui: I have 2 questions for you. The first question is concerned with the growth of deposits. How do you envisage this in 2026? You have shown an increase of 3% as for lending and customer funds, you have also reported some growth. Now how do you think deposits are going to behave in 2026 and in line with the excess of capital question, taking into account the increase of payouts, what capital generation do you envisage going forward and how much of that capital will come from DTAs? Isidro Gil: [Interpreted] Thank you for your question. As for the growth in deposits, the first question was already answered. We said that growth is expected to be at around 3%, taking into account the mix between assets and liabilities reaching was striking a balance. In 2025, we draw a distinction between balance sheet items and off balance sheet items. 2025 was an exceptional financial year. And even though we believe that this will continue to grow off the balance sheet. We believe that the mix is going to be more balanced, and we will continue to post growth. And we will continue to do so on the balance sheet. As for capital generation, concerning this question, next year, we are going to distribute 95% of the results. Therefore, the capital growth lever, as I said before, is going to contribute less than this year, where it stood at 70%, but DTA capacity will also be available whereby capital might be expected to grow over the years. So we expect capital to grow. No doubt that capital growth is going to be lower compared to 2025 due to the fact that the results generation will be paid out to our shareholders, almost as a total. Jaime Marcos: [Interpreted] Thank you very much Isidro. Next question please. Operator: The next question is by Carlos Peixoto from CaixaBank BPI. Carlos Peixoto: I have a question as to your forecast concerning fees and the growth of fees. Do you think that it's going to continue growing at rate of 3%, in line with the growth of volumes. I'm asking this in order to understand how these products are expected to before? And do you think that there is any room, what ever for fees to grow further in the next financial year? Pablo Gonzalez Martin: [Interpreted] Carlos, we couldn't really understand your question 100%, especially the last part. We believe that the fee guidance is quite conservative, taking into account the performance of funds that pushed fees up in 2025. Well, as for our expectations concerning fees, this is based on our aim to continue growing both on the balance sheet and off the balance sheet customer funds, as Isidro pointed out before, we believe that mutual funds will continue to grow steadily due to customer demand, but we believe that deposits on the balance sheet will also continue to grow even more than in the current financial year. You should take into account that there's plenty of competition on the liability side, and that's why we have these customer loyalty programs in place. Concerning payments, we already see some positive signs such as growing fees and significant card activity. We continue to grow. We continue to enhance transactionality with customers, and that is going to be offset by the different customer engagement or loyalty plans that we are going to continue to deploy to target more customers. So hence, we believe that we should expect this increase in fees. But in the case of mutual funds, we believe that, that growth is going to be even greater. Jaime Marcos: Thank you very much, Pablo. I believe that there are no further questions. So operator, we can now hand over to questions in English. Operator: [indiscernible] Cecilia from Barclays. Cecilia Romero Reyes: The first one is on the buyback specifically, what would be the likely timing from here and what milestones need to be met before you can execute the next program? Is there a regulatory or any other approvals needed at this point? And then the second one is on competition for both mortgage and deposit. On mortgages, how are you seeing the competitive intensity at the moment, at current pricing levels, what kind of economics are you targeting on new mortgage production? And how important is cross selling to make those returns work? Are you being pushed to accept lower margins to defend volumes? And on deposits, are you seeing any renewed pressure on deposit costs from competitors keeping attractive offers in the market for longer, to what extent are neo banks and only platforms influencing the competitive behavior on deposits? Isidro Gil: [Interpreted] Good morning, Cecilia. I think that in -- with regards to buyback, the buyback from what we've said that the additional remuneration is dependent upon the fact that whether we're going to do it on a cash dividend payout or on a buyback, but what's true is that the decision will be made at the end of December, whether it's cash dividend or within program of payback. We haven't made a decision. But in any case, we're not talking about significant volumes if we get to do it. And it will depend on the -- whether it makes sense to do it on cash or whether to do a buyback program. But in any case, we would be talking about material amounts for those buyback programs. The second question is related to competition in mortgages. The credit growth in -- the lending growth after having seen negative rates in segments like public administration, is the only segment where we haven't grown, and we've been flat. We've been flat in the mortgage segment, which is the most representative segment. And that's why we've been applying a policy based on 2 things: one, on having a good risk profile. And that's been a standard tradition and how we've granted credits and not going above a certain level of price. And so that's -- we've kept that flat over the year. The market that has so much pressure for lack of housing, it's having a big impact on competition, on prices. Our expectation is for this to improve -- key solution to improve the housing situation is somewhat complex because the housing is not covering the social demand for new housing. So we will continue with a similar strategy. We will still have the adequate risk profile. And we will continue to generate -- continue along the lines that we've been doing. The idea is to keep the market rationale with regards to -- reasonable with regards to price. And we will be more positive in prices or we will find a balance between the credit given or the ability to link the customer. I think that in that segment, we could be able to compete with price. But if we find -- if we find ourselves in a no way back, we could end up in a scenario that we went through in 2025. Unknown Executive: Cecilia was asking on the competition on deposits and one of the offers from other institutions. Isidro Gil: [Interpreted] The competition in deposits and how we see the evolution in the deposit cost. As you know, the Spanish market is very competitive with regards to national banks. We've had various specialized banks in attracting liabilities. I think that will be the case even getting higher. And with regards to the strategy and the evolution of fees, we will continue with the loyalty programs. We have developed banks for our customers. We have very competitive digital solutions which are far better than our competitors. In terms of neo banks we have attractive solutions for our customers. And we consider that we keep that level or even going -- will go up in deposits despite the existing competition that we expect. Operator: Next question is from Sofie Peterzens from Goldman Sachs. Sofie Caroline Peterzens: This is Sofie from Goldman Sachs. So my first question would be on capital. Do you expect any regulatory headwinds in 2026 or '27 and what are your thoughts on using SRTs? And then the second question, just going back to mortgage lending, one of your peers is guiding for 6% mortgage loan growth or lending growth in '24 to '27. Why do you only see 3% volume growth? How should we think about the upside risk for volumes to perform better than expected? Pablo Gonzalez Martin: [Interpreted] Thank you, Sofie. With regards to any regulatory impact for this year, we don't have other jurisdictions like the U.S., where they're talking about deregulation and talking about a reduction of the regulation. We don't think that we're not going to have any negative impact in the following years. I think that the period of increase of capital requirements has gone to a reasonable level and the solvency and the quality of financial institutions in Europe is strong enough to withstand the stress test -- stress scenarios that are analyzed, and we don't consider there's going to be any negative impact in that regard. And with regards to competition and the growth expectations in the mortgage world, as Isidro has said, we will continue along our lines in the way that we will conduct the most reasonable analysis possible. We will look for customers with high credit quality with linking ability, and will be adjusted in price so that the performance of the customer. I don't think that the market will grow by 6%. That's why we don't have such a higher growth in the credit. We think that the credit growth, despite that we come from significant deleverage starts to grow, it's still continuing and the nominal growth of the [ bps ] of the GDP. And we -- as Isidro said, we need more production, more new housing, which won't happen in 2026 because it should have happened in the previous years and this evolution will happen in a later stage if it happens. And we don't think that there's going to be mortgage growth -- mortgage sector growth of 6%, but for us, mortgages are fundamental products to link the product to provide global services to our customers, and we will put our stakes on it. And he was mentioning SRTs, that given the solvency position that we have is not something that we have on the desk in the short term in terms of the SRTs. We look at the different options to improve our capital position. And we also look at the SRT. But in the short term, we don't expect the conduct of any, given the capital position that we hold right now. Operator: The next question is by Borja Ramirez from Citi. Borja Ramirez Segura: This is Borja from Citi. I have 2. Firstly, I would like to ask on the deposit growth outlook. You mentioned about the digital channel. I would like to ask what portion of your new customers are from the digital channel? And also what percent of your deposit inflows would come from the digital channel? And then my second question would be, if you could provide any -- an update on your M&A strategy, please. Isidro Gil: [Interpreted] Borja, well, as far as digital channels is concerned, you should know that we are a bank with a territorial footprint, a strong territorial footprint with let's say, on-site banking mainly. I don't have the exact percentages for the digital channel. However, we are starting out from a lower base. But actually, we have observed a growth in terms of deposits as well as consumer loans, most of our production comes through the digital channel. We also have plenty of competition in digital channel. However, there was significant growth in 2025, and we expect that trend to continue to grow going forward. We continue to focus on a multichannel model. All channels are interconnected, whether we talk about branch offices and the digital channels as well as the contact centers, any contact point with customers, including the web page, et cetera, everything is intertwined. So we continue to have greater weight in the our brick-and-mortar network. However, we continue to grow in the digital channel little by little. Pablo Gonzalez Martin: [Interpreted] Let me add that we continue to grow in terms of the number of customers, the higher deposits through the digital channel, there has been a growth of 5% in 2025, and we expect that growth to continue in future years, as Isidro said, this is going to be important. In the case of deposits, again, we expect growth to be reported in the digital channel. The next question is concerned with the consolidation of the financial system. Let me reiterate what we already said in prior years, especially since we have embarked upon this new change and since we have set out a new strategic plan, we are now focused on carrying out our strategic plan. Our shareholders do not want us to lose focus over the strategic plan. And therefore, we believe that we will keep this project unchanged. The achievements over the past years, ratify our strategic vision and the fact that we want this to remain as an independent project. And this is what we have been reiterating again and again over the past years. Operator: The last question is by Hugo Cruz from KW. Please go ahead with your question. Hugo Moniz Marques Da Cruz: I have 2 questions. First, on the usage of excess capital. If you don't have M&A opportunities, could you do a one-off payment above 100% payout or is the 100% a limit where how far you could go with one-off distributions? And second, on loan pricing. I think you said repricing shouldn't have a negative effect on your NII, but I was wondering if you could give a little bit more detail product by product. So how does front-book pricing compared with back-book pricing for your mortgages, SMEs, corporates, consumer, if possible? Isidro Gil: [Interpreted] Thank you for your question. As for the excess of capital related question, as we mentioned during the presentation, we are near 100% for 2026 and 2027. We undertook that commitment back in the day when we presented our strategic plan. And this, of course, means that we have to fulfill our commitment in excess of 85% of the strategic plan. Now that the payout is going to be 70% for 2025, the payout for the next 2 years with stand at around 100%, as you have mentioned. But now we are fulfilling the commitment that we undertook when present in the strategic plan. For the time being, we do not intend to carry out any other payout other than the one that we announced today during the earnings presentation, Pablo. Pablo Gonzalez Martin: [Interpreted] Now as for the pricing impact related question across segments, as for mortgages set at a fixed rate, the value is below what we expect to attain. As for SMEs and corporates, we are already rallying in terms of the front-book compared to the back-book with some differences. However, even though there has already been some repricing, the repricing impact is to be found only in the mortgage book at a variable rate with a moderate impact during the first quarter with some tail effects in the following quarter. However, we believe that the loan yield is going to -- will remain steady as of the second quarter and will remain so also in the third quarter. We still have some long-lasting loans among corporates and the public sector set at low interest rates. As they mature, the loan yield might be expected to grow even though we expect a greater impact as of 2027 when significant improvement in margins is expected to take place. Jaime Marcos: [Interpreted] Thank you very much Isidro and Pablo. Thank you very much for attending this earnings presentation. Should you need additional information, please do not hesitate to contact our Investor Relations team, and we look forward to having you again attending this presentation for the next quarter. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Marilyn Tan: Good morning, everyone. Welcome to the FY '25 Results Audio Webcast for Keppel Infrastructure Trust, or KIT. I'm Marilyn from the Keppel IR and Sustainability team. Let me introduce the KIT management team. We have with us this morning, CEO, Mr. Kevin Neo; CFO, Mr. Raymond Bay and Director of Portfolio Management, Mr. [indiscernible]. They will be making a presentation that will cover KIT's FY '25 highlights and business strategy, followed by the FY '25 business and financial update. Please leave your questions for the Q&A session at the end of the presentation. For analysts who are joining us on the MS Teams platform, please check now that on mute before we start the presentation. I will now hand the time over to Kevin for the presentation. Kevin, please. Tzu Chao Neo: All right. Thanks, Marilyn. Good morning, everyone, and thank you for joining us today. 2025 marks a 10th year of KIT's trading commencement as an enlarged trust, and we are glad to report a strong KIT unitholder return of 36% in the last 10 years. This compares very well against the 61% achieved by the REIT index over the same period. With more than 18 years of infrastructure investment and management experience, KIT has built a strong track record and continues to grow through acquisitions and value creation. We have accumulated a portfolio of very attractive assets that are essential to our daily lives. We are the sole producer and retailer of piped town gas in Singapore. We supply 13% of commercial power in Singapore. We produce more than 20% of the drinking water in Singapore as well. We are the sole producer and distributor of chlorine gas for water treatment in Australia, and we maintain 31% of global subsea cable length. As at 31st December 2025, KIT's AUM stood at approximately $9.1 billion. This is anchored by essential businesses and assets in developed markets across all segments, namely energy transition, environmental services, distribution and storage and digital infrastructure. The next slide. KIT's portfolio is well positioned to capture tailwinds driven by long-term structural trends of energy transition, digitalization and rapid urbanization. Our strategy is focused on essential infrastructure that provides stable cash flows and has long-term growth potential. Our assets are located in developed markets in Asia Pacific and Europe, where there's strong legal and regulatory frameworks in place. And last but not least, we are in sectors where we have operational expertise either in Keppel or in partnering experienced local teams on the ground. Overall, 2025 was a good year for KIT unitholders. We reported DI of $249.5 million for the year, which is an increase of 24% year-on-year. We achieved total unitholder return of over 17% for the year. We continue to add value to the trust, having unlocked over $300 million in net proceeds from capital recycling and deployed $120 million to acquire GMG, marking our foray into the digital infrastructure segment. We have the financing flexibility to utilize the remaining proceeds of about $180 million and have the debt headroom for further accretive acquisitions. As at end 2025, the gearing levels and ICR for KIT remained strong at 39% and 7.6x, respectively. KIT received industry awards last year, and our appreciation goes out to the Edge Singapore and AustCham Singapore for these accolades. KIT was named the overall sector winner and recognized as a top performer in shareholder returns over the past 3 years at the Edge Singapore Billion Club Awards 2025. This achievement reflects our sustained focus on long-term value creation for our unitholders. At the AustCham Singapore, Australia Business Alliance Award 2025, KIT was recognized as a Singaporean company with a significant contribution towards advancing sustainable infrastructure that supports communities in Australia. We are declaring a DPU of $0.0197 for the second half of 2025, and this will be paid on 20th February 2026. This aggregates to the full year 2025 DPU of $0.0394 which is an implied yield of 8% based on the year-end closing unit price of $0.49 for 2025. Looking back on the track record, KIT's transformation and asset recycling strategy since 2019. The chart on the left shows illustratively the income profile for the DI from initial portfolio without acquisition versus the chart on the right that shows the actual reported DI to unitholders. The green bars above represents the income contribution to KIT's portfolio DI derived from various acquisitions and realizations made since 2019. We have been very successful in investing and replacing the recap of DI when certain concession assets were extended. We have also grown our evergreen businesses within the initial portfolio. For instance, City Energy accounts for 22% of DI in FY 2018 but contributed more than 60% of the initial portfolio DI in FY 2025. Our focus is to deliver resilient cash flows to unitholders through active portfolio management to strengthen portfolio constitutions anchored by essential businesses bearing cash flows that are very defensive against market disruptions. This is how we managed to maintain our DPU through COVID-19, which is one of the most significant market disruptions in the last 10 years. Next slide. KIT's portfolio of essential businesses and assets provide products and solutions, for which demand remains steady because of economic cycles. These are business strategies that we look to drive the next stage of value creation for KIT. First, portfolio cash flow stability remains a key priority, and we will continue with our proven capital recycling approach of invest, divest and reinvest discipline to build a resilient portfolio with strength in underlying cash flows. Second, you want to strengthen the operating cash flows for existing assets and businesses by driving value-creating initiatives and capitalizing on sector-specific growth drivers. Third, we will employ active capital management to support sustainable distributions and continued growth in unitholder returns. With these strategies in mind, we have outlined specific objectives and areas to share with our unitholders. As an active manager, we will continue to evaluate our portfolio on an ongoing basis to recycle capital from divested assets for redeployment into accretive assets or businesses with stable cash flows. The goal is to manage DPU stability and offset the expected decline in income from concession assets. The focus on new acquisition is expected to be on energy transition, digital infrastructure and environmental solutions. This is in line with the recent OCBC report where analysts expect growing adoption of AI to drive demand for fiber connectivity, data centers, power generation and grid infrastructure. Our objective is to build and own an optimal portfolio of stable assets and growth assets to achieve DPU stability and growth. Currently, we have $180 million of divestment proceeds remaining from the sale of Philippine Coastal and Ventura for immediate redeployment. In addition, KIT's net gearing of 39% is healthy. Therefore, we could make use of debt headroom to acquire. Concurrently, we are focused on driving organic and inorganic growth in revenue and achieving operational cost efficiency for existing assets in our portfolio. In tandem, we work with the respective operating teams from the evergreen businesses such as City Energy, Ixom and GMG to execute on the planned growth strategies to grow KIT's operating earnings. As part of active capital management, we have been monitoring the market for opportunities to undertake early refinancing amidst the conducive interest rate environment. We expect to complete and execute on KIT's FY 2026, refinancing needs well ahead of maturity. Raymond, our CFO, will cover this in greater details. Financial flexibility is key as we pursue various options, including utilizing recycled capital, pre-invested cash and KIT's debt headroom with prudence for accretive acquisitions. Our main goal is to achieve DI and DPU continuity into the long run, and we are working to achieve this through the successful execution of our planned accretive acquisitions and value creation initiatives. But with that, let me hand over to [indiscernible] for the FY '25 business updates. Unknown Executive: Thanks, Kevin. Hello, everyone. I'm [indiscernible] joined the team as Director of Portfolio Management since November. I'll take you through the KIT portfolio business updates in the next few slides. Going to Slide 12. FY '25 saw stable operations for our assets and businesses in the energy transition segment. City Energy achieved higher FFO of $62 million for the year, mainly through its core operations. We tracked total gas water heater sales and the increase in market share in the residential market has been meaningful with potential for future growth. Growth opportunities are also present in the commercial and industrial market in new developments and in retrofit projects for existing properties. The FFO for the transition assets was an aggregate $124 million for FY '25, which included a cash surplus from capital management of AGPC 4Q '25. For AGPC, we had higher volumes in FY '25 compared to the prior year, underpinned by stronger demand. The FFO for the wind farms portfolio came in lower year-on-year mainly due to BKR2. However, wind resources in the second half of '25 have recovered compared to the same period last year. The European onshore wind platform saw stable production levels in FY '25 at lower power prices. The FFO for the German solar portfolio was SGD 46 million for FY '25, up 18% year-on-year, underpinned by stable performance. For the Environmental Services segment, the Singapore concession assets contributed an aggregate $52 million for FY '25. We maintained stable operations and met all contractual obligations with the regulators, such as NEA and PUB in the financial year. We continue to pursue potential opportunities for concession extensions following SingSpring's extension to 2028, noting that our land lease is only due in 2033. Moving on to EMK. Pricing in the private landfill business is expected to remain largely sideways. We continue to stay disciplined on pricing and focused on optimizing the NAV of our asset. For the incineration business, starting 1st of Jan this year, the Seoul Metropolitan Area or SMA, implemented a direct landfilling ban for municipal solid waste. With this in place, we see pricing upside for private incineration facilities. Public incineration facilities are running near full utilization, and this ban is expected to drive higher demand for private incineration facilities such as EMK, which are located near the SMA. Therefore, EMK plans to grow its incineration capacity, which is also running at full utilization to capture this tailwind and increase FFO for the Distribution & Storage segment. The FFO for Ixom was $71 million for FY '25, an increase of 42% year-on-year, underpinned by strong operating earnings. The bolt-on acquisition of the Hilditch base oils import and distribution business in 4Q '25 is expected to drive continued revenue and EBITDA growth in 2026. Hilditch earns a stable margin per unit volume and is expected to benefit from near-term tailwinds from Australia's new fuel emission standards supporting demand for refined and cleaner base oils. The FFO for Ventura was $23 million for FY '25 and was higher year-on-year on a 100% basis, underpinned by higher EBITDA. For the year, it achieved 100% service reliability and on-time performance exceeding 90% and secured new charter contracts. Ventura's maintenance CapEx is mainly debt funded. And for FY '25, the maintenance CapEx of $21 million was added back to derive DI. Ventura's business model requires ongoing maintenance CapEx, and the company will debt fund this CapEx in the near term. We completed the acquisition of GMG on 25th of November 2025. Hence the income contribution to KIT of about a month of about SGD 1 million is in line with our due underwriting. Since completion, the team has successfully extended a long-term charter to 2028 and are maintaining zone contract to 2030. Similar to Ventura, GMG is a business which requires ongoing maintenance CapEx for vessel upkeep, such as dry docking and we expect to be debt funding lease in the near future. In the next 2 slides, we will outline the strategic priorities for our evergreen businesses. We continue to work closely with the respective operating teams on the ground to execute these strategies and drive future operating earnings. These essential businesses have established strong local brands and local market positions in markets with high barriers to entry. They are long-term platforms focused on delivering customer-led solutions and creating sustainable value over time. For City Energy, our focus is on driving further market share gains in residential water heaters from the current 20%, increasing commercial and industrial gas usage and raising consumer awareness of the benefits of gas water heaters to support broader adoption. For Ixom, the key priority is to strengthen our market-leading positions across the core manufactured and traded product segments supported by long-standing relationships with key customers in the water utilities, manufacturing and resources segments. Other initiatives include continued growth in the bitumen business supported by disciplined growth CapEx and unlocking revenue and cost synergies from the recently acquired Hilditch business. For Ventura, we aim to maintain our strong track record in service delivery and standards, grow market share in the charter business for both public and private runs and position ourselves in a public bus service contract renewals coming up in 2028. EMK has the potential to further strengthen its position as one of the largest private incinerators in South Korea. The key catalyst ahead is the scaling up of incineration capacity to capture demand tailwinds driven by favorable policy changes. For GMG as one of the leading independent providers of subsea fiber optic maintenance, installation and support vessels, the focus is on maintaining strong operational reliability and a track record of vessels. At the same time, we aim to grow our fleet of specialized cable installation and maintenance vessels, underpinned by strong global demand for subsea cable connectivity. Moving on to the ESG slide, we met our ESG targets for the year across the 3 pillars of our sustainability framework, environmental stewardship, responsible business and people and community. In addition, we achieved a rating of A in MSCI ESG ratings assessment in recognition of the strong management of financial and industry relevant ESG risks and opportunities. I will now hand the presentation to Raymond for the financial and capital management of KIT. Teong Ming Bay: Thank you, [indiscernible]. Hello, everyone. I'll kick off my section with this slide that demonstrates KIT's strong earnings track record in the last 5 years. Moving to the next slide. The DI for FY '25 increased over 24% year-on-year to approximately $250 million. Asset DI before corporate cost was higher at $349.1 million. This is underpinned mainly by higher contribution from City Energy, the German solar portfolio, Ixom and Ventura. This included a cash surplus for AGPC, which was substantially used for debt repayment at KIT trust level. In the Environmental Services segment, lower income from Senoko after concession renewal was partially offset by the full year contribution from MEDP in FY '25. Corporate expenses, excluding the debt repayment, were lower year-on-year, mainly due to no performance fee accrued in FY '25. We recognized a divestment gain of $49 million from the sale of interest in Philippine Coastal and Ventura. Moving to the next slide. This is the second half FY 2025 DI. The DI increased about 21% year-on-year to $130.1 million. Asset DI before corporate cost was higher at $199 million, underpinned by higher DI for City Energy, the wind farm portfolio, AGPC and the German solar portfolio. In the Environmental Services segment, lower income from Senoko after concession renewal was partially offset by the full year contribution from MEDP in the second half of FY '25. Corporate expenses, excluding the debt repayment, were higher year-on-year, mainly due to higher trustee manager base fee. We recognized a divestment gain of $27 million from the sale of interest in Ventura in the second half of FY '25. Moving to the next slide. On to the balance sheet. KIT reported net gearing of approximately 39% with interest coverage ratio at 7.6x. The consolidated debt for KIT aggregated to about $3.2 billion as at end FY '25. Pending capital deployment, about $180 million of the remaining divestment proceeds have been used to pay down existing borrowings at the trust level. The weighted average cost of debt at the group was lower year-on-year at 4.4%, the weighted average cost of debt at the trust level was also lower at 3.4%. KIT has hedged approximately 73% of the trust's foreign income and approximately 72% of the KIT's total borrowings are hedged. Moving to the next slide. We have received firm commitments to refinance Ixom's loan subject to documentation and expect to complete the early refinancing ahead of its expiry in the second half of this year. We are also evaluating refinancing options for the remaining $330 million debt at trust level maturing later in the year. To date, we have approximately $239 million of committed RCF that is undrawn. To conclude, the refinancing needs for FY '26 will be met as we look to complete the refinancing ahead of expiry. With $180 million of remaining divestment proceeds and ample debt headroom, we are well positioned to execute our planned accretive acquisitions and value creation initiatives to achieve DI and DPU continuity into the long term. Thank you. With that, I will now hand over the time back to Marilyn. Marilyn Tan: Thank you, Kevin, [indiscernible] and Raymond. We will now proceed to the Q&A session. [Operator Instructions] Okay. We have the first question from Shekhar. Shekhar Jaiswal: [indiscernible], welcome to KIT. Okay. Good, good set of numbers. Really impressed, but I have a few things to ask about 2026. How should I look at GMG's distributable income in '26? Like the 1-month contribution we should look at annualizing it? Unknown Executive: Correct. Yes. So as you correctly mentioned, GMG contributed SGD 1 million. Going forward, the DI run rate is expected to remain for FY '26. And -- but I think one thing we would like to note is that GMG is a business which requires regular maintenance CapEx from vessel dry docking, right? But most of this maintenance CapEx is expected to be debt funded. So the focus is on DI. Tzu Chao Neo: So maybe I could add to that. When we -- something like what we did with Ventura, when we bought the business, we are aware that there is certain CapEx or maintenance requirements, which could be a bit lumpy, right? So when we enter into the transaction, we kind of size the capital structure such that we could use the debt capacity to debt fund certain expenses. This is to maintain DI's ability. So that's our plan. Shekhar Jaiswal: Okay. That helps. Just continuing on the same topic. You said there's now a long-term charter extended to 2028, maintenance contract to 2030. Can I get a sense on what percentage of your revenue or EBITDA from GMG is now covered with multiyear agreements? Unknown Executive: So to give you a sense, right, we have 6 vessels to our long-term charters. We have already secured 5 of those. We are in the process of renegotiating another one. And all 4 maintenance vessels, which are under the consortium model have been recontracted. So to answer your question, it's 5 out of 6 have charter certainty. Tzu Chao Neo: So I think when we announced the acquisition during our AGM last year, I think certain contracts was coming up -- certain contracts was renewed even before we entered into the transaction. And I think there was one contract that will come soon after the AGM, and that contract was renewed. And I think this basically plays to what we have been saying, right? There is a lot of demand for such vessels given the outlook for CapEx requirements to build new cables, to maintain cables in DCs, right? So this is where I think we want to ride that macro trend. Shekhar Jaiswal: Understand, understand. Okay. I just have two more questions before I jump back in the queue. I see there's a lot of other people waiting to ask. On BKR2, can I get an update on the wind situation? How should we look at 2026. You did mention in the slides that second half is looking better than year-on-year, but on half-on-half and how should we look at the 2026 DI for it? Unknown Executive: Yes. So as a recap, thinking about the factors which drive BKR2 performance, it's number 1 is mainly related to wind, right? Because the pricing is actually locked in by a feed-in contract -- feeding tariff contract backed by the German government. So if you look at the wind speeds in second half of 2025 and compare that against second half of 2024, they are at or already above levels in the previous period. Tzu Chao Neo: So I think last year, I think there was a lot of concerns around BKR2, given the winds, yes, we have said that in the first half of 2025, wind speed was very bad due to pretty rare climate phenomenon. I think we are glad to share that as what [indiscernible] has mentioned, the wind speed for second half has recovered. And the wind speed for second half 2025 is higher than that of the second half of 2024. But we hope that this will continue. And if this continues in 2026, hopefully, the performance from BKR2 is better than that in 2025, if we have a full year of proper winds. Shekhar Jaiswal: Okay. Okay. Fair enough. So we still look at it. We see how the first quarter goes and then reassess, is it? Tzu Chao Neo: Yes. Yes. So unfortunately, wind is not something that we can control. But like I said, when we look at wind, we have to look at it from a long-term perspective. There will be years where it may be below average, there'll be years where it may be above average. But long term wise, over the midterm, it should average out. Shekhar Jaiswal: Okay. Fair enough. Just 1 more question and then I'll jump back in the queue. In terms of pipeline, anything from Keppel's ecosystem where you -- and which verticals where you think most actionable ideas would come through or needs could come through over the next 12 months? Tzu Chao Neo: Sorry, Shekhar, I missed your question. If you don't mind, could you just repeat it? Shekhar Jaiswal: Yes. I'm saying from Keppel's ecosystem, if you have to look at deal flows, which verticals where you think will be the most actionable deal flow would be in the next 12 months? Tzu Chao Neo: Yes. So I think Keppel is across the verticals that we are in at the moment. I think certain assets are being constructed, and I think some of them were probably coming online over the period of time. As and when they come due and if they are appropriate core for KIT, we will definitely put our hands up to kind of -- to express our interest in acquiring them. But this will be done on a so-called very unplanned basis. But we do expect to call it a bit of activity in the energy transition sector, not just from the Keppel's tabled assets. But I think globally, right, we do expect a lot of activities around the energy transition and digital infrastructure segment. Marilyn Tan: Okay. The next would be to Hoo Ezien. Can you identify which house you're from? Ezien Hoo: Sure. It's Ezien from OCBC's credit research team. So my question is on AGPC. I think I may have missed a bit of what management was saying. There was a cash surplus from capital management at AGPC. Was that used to pay debt at the trust level. And if so, can you please explain more what actually happened at AGPC and what was done with the capital? That's all. Teong Ming Bay: Ezien, thanks for the question. I'll take that. So yes, so what happened was there was a refinancing activity in AGPC level. When the refinancing happened, there is a need to relook into the hedge position that led to a certain IRS has been -- we unwind certain IRS, which resulted in a gain. So the gain is approximately $51 million. This is -- I would like to stress that this is a one-off, right? And what happened is we -- this $51 million has been utilized to repay debt. And this debt will basically is an RCF facility. When we pare it down, it would become a war chest for us. We will have extended financial flexibility for acquisitions. Ezien Hoo: So the RCF facility is at the trust level. Teong Ming Bay: That's right. KIT's trust level. Tzu Chao Neo: So just to be clear, right, the total DI is not impacted by this because the proceeds is used to completely pay down debt at a KIT level. So it's a flush trigger. Marilyn Tan: Next question we have from Jialin. Jialin Li: Congrats on strong results. This is Jialin from CGSI. I have 3 questions before I jump back to the queue. So the first one could you walk through the CapEx for FY '26, I think especially for EMK, Ventura and GMG where you see strategic opportunities to grow? So what's the quantum of CapEx we are talking about? Should I finish all my questions before we dive into the answers or ...? Marilyn Tan: Yes. Jialin, it would be good if you give us all 3 questions. Jialin Li: Okay. Yes. So my next question is on GMG. So if we just focus on DI management guided just now, right? So can we think of resemble distributable income as a so-called clean DI meaning without debt repayment, without CapEx? And is it how we should be looking at FY '26 DI? And my third question is looking at distribution for next year, right, what's your thoughts around distribution trajectory for next year? Unknown Executive: Yes. So maybe I'll touch on the CapEx slide, right? So I think going on the CapEx plan for EMK, as we previously alluded to, we are dedicating some CapEx towards incinerator capacity expansion this year. This is to account for the fact that our incinerators today are 100% utilized, coupled with the fact that we are seeing incremental demand from the direct landfilling ban in Seoul which is supportive of pricing. So we are actually expanding capacity in 2 of the 4 incinerators that EMK currently operates. So that's on EMK. For Ventura, we are on the constant lookout to replace and deploy maintenance and growth CapEx towards the bus fleet. Tzu Chao Neo: So maybe I can just shed a bit of light on the CapEx plans for both EMT and Ventura. I think as what [indiscernible] mentioned, I think our incinerator is at maximum utilization. We do expect waste for incineration to increase especially given the policy change in the Seoul metropolitan area. Our landfills -- sorry, our incinerators are located just outside of SMA. So we are well positioned to receive the additional waste, right? And in order to capitalize on that long-term trajectory, we need to expand our capacity, right? And we do not expect this expansion to have an impact on EMK's cash flow because they're funded by cash on the books or by debt facilities that we have sized for this purpose. And I think this will be done over phases, right? And I think what I would like to point out is that this year, the incinerator at EMK is scheduled for some refurbishment. And we are just using that period of time to undertake the expansion. So this is a very efficient way of undertaking expansion. As probably everyone knows, Keppel as a group, my sponsor, has very strong operating and technical expertise in this area. We have obtained support in helping EMK to expand. And this is something that we spoke about last year. And I think we are -- we are seeing all this execution panning out as we speak. All right. And I think there is this question about GMG, the DI for December. Yes, that's clean where you can -- almost for the full year in 2026, you can annualize that to get to a estimates of the DI forecast from GMG. So last year, there's a 1 month or slightly over month of contribution. This year, we received 12 months of contributions. So the DI from 2025 had to be adjusted for that to get a more accurate estimation for 2026. Have we answered your question? Anything that's unanswered? Jialin Li: Yes. I think maybe one follow-up question is on CapEx, whether we could share certain amount like planned for -- planned aside for CapEx just for modeling purposes. And another -- the last question was on distribution trajectory for next year. Teong Ming Bay: Jialin, if you don't mind, could you refer to Slide 34 of our presentation slide. We have disclosed our CapEx guidance and also the debt amortization over there. Tzu Chao Neo: And I think on the distribution guidance, right, I mean, we don't want to give profit guidance. But I would say, I think we are in a good position. Our -- the 2025 DI from certain assets does not reflect the full contributions. For example, you need to annualize the DI from GMG to project what we will get for the full year of 2026. And I think we have -- last year, we realized about $300 million of capital from recycling of Philippine Coastal and a stake in Ventura, we have redeployed about $120 million of debt. There's about another $180 million that we can deploy this year. In addition to that, our balance sheet is very strong at 39%. So there's additional debt headroom that we can leverage on undertaking accretive acquisitions there. Marilyn Tan: Next in the queue would be questions from Suvro. Suvro Sarkar: Kevin and team, I just -- the first question from me is on the divestment gains part of it. So I'm a bit confused by the classification of divestment gains as part of our DI. So I mean, I always thought that divestment gains or losses, whatever it means is an accounting item and not a cash item, the whole cash sale proceeds should be a cash item. So how does it fit in with the DI, which is the cash flow basically? And if you're using divestment gains to the distributions, then how come we are still saying that we have $180 million remaining from the $300 million sales proceeds for -- so there must be some cash that has been used for the distributions from this side. Teong Ming Bay: Yes. Suvro, thanks for the question. So in fact, the divestment gain is an actual gain. What we have done with the divestment gain is you could think of it as a real gain at a principal level, right? What we have done is we have taken debt meanwhile to repay the debt at trust level as a cash management basis. Tzu Chao Neo: Yes. So maybe So the way I would explain is that we sold PCSPC last year. We saw a 25% stake in Ventura, right, at a very good gains. I think the gains over there is about over 30% in a year, right? So we make profit on the sale of a 25% stake in on GMG, that's on the real cash gain, right? So we recognize that a part of that real cash gain into a DI and the vast majority of that proceeds is not recognized in our DI. We only recognized a gain in our DI. The principal is still left in our balance sheet, which we have used part of it to reinvest in GMG. So of the $300 million, $120 million is used to take like a very significant stake in GMG. And we have about $180 million left, right? And part of this $180 million, we have used to reduce the pay down debt. The reduced interest expense across KIT, right? And that basically lowers our gearing down to 39%, which is very healthy, right? So we have those divestment proceeds as well as the additional debt headroom that we can do that can utilize to make further accretive acquisitions. Hopefully, that clarifies. Suvro Sarkar: Yes. So you're talking about the debt headroom not actual. So -- because you have to pay distributions of $240 million this year if you're distributing $0.0395. And your DI is $250 million. So at least of the $50 million divestment gains have to pay out at least 40 million to -- from that to the unitholders. So how do you classify it as a increased debt headroom? Tzu Chao Neo: Okay. Sure. So maybe let me just take a step back and explain it. We have certain proceeds from the sale, right? And we did not recognize the full sale proceeds into the DI, we only recognize the gain that we make right on Ventura, et cetera, into the DI, right? So yes, we have about $250 million, $40 million is about -- or $40 million is from the sale of Ventura. So that still reflects well against the delivery performance because it's still higher DI. But more importantly is I do not -- I think we want to kind of make it clear that recurring DI that you're trying to back so for 2025 results, does not reflect the full DI generation potential of KIT. Because that operating or recurring DI only includes 1 month of contribution from GMG, right? So if you annualize that, then you'll get to a better amount. And there's also a certain growth that we are trying to achieve in our portfolio that also had to give additional DI vis-a-vis 2025. And what we would also like to say is that the deficit proceeds, right, have not been fully redeployed as some of it has been used to pay down debt. Some of it has cash on balance sheet. And these are the amount, right, that we can use to reinvest that will create additional DI -- surplus for our -- KIT's uniholders. Suvro Sarkar: Got it. One other question on the CapEx front. In terms of growth CapEx versus maintenance CapEx breakdown -- so I see the 2026 numbers on Slide 34. So we are projecting around $100 million growth CapEx in total for next year. How does that compare with the growth CapEx in 2025? Is it higher and how do we finance this growth CapEx? Teong Ming Bay: Yes. Suvro, maybe I can take this. So the growth CapEx is largely stable. I wouldn't say there's a huge increase on this. In terms of growth CapEx, I think it's largely going to be funded through internal cash of the respective business or debt facilities. Suvro Sarkar: Okay. So shouldn't affect DI to a lot extent. Teong Ming Bay: No, no. Tzu Chao Neo: So Suvro, maybe just 1 point that I'd like to just add because I think what we're trying to do is we are trying to solve for the KIT's recurring DI, if -- and I think your question is about that gain in our DI. The way I'd probably look at it is that if we did not sell a 25% stake in Ventura, our DI will also be higher than what you are projecting here. Marilyn Tan: Thanks,Suvro, for the questions. We have another question from Jialin. Jialin Li: Yes. Sorry, it's me again. Yes, I have a follow-up question on Ixom. So just wondering whether you could share details on the acquisition of one its subsidiary happened this year? And also because I saw the CapEx breakdown for next year, there is quite some amount spent on Ixom. So just wondering whether you have plans for another acquisition of -- one of its, I don't know, maybe like subsidiary under Ixom or whether this is just expanding its current project line? Unknown Executive: Yes. So thanks, Jialin, for the question. So I think sharing more details around the Hilditch acquisition. So this is a base oil importer and distributor. So these are actually like engine oils and lubes used for vehicles typically for long-distance transport. So these are like logistics vehicles. And the business is expected to benefit generally from a tightening of fuel emission standards towards higher spec type of base oils. So the acquisition is expected to contribute roughly about a single-digit percentage EBITDA to Ixom's pre-acquisition levels. Tzu Chao Neo: Maybe again, just a bit more. Ixom, as we always say, there is two key businesses in Ixom. One is the chlorine business, the other is the chemical distribution business where [indiscernible] Australia. And it owns these fleets of very specialized chemical -- hazardous chemicals distribution fleets, right? So this acquisition is done by -- it's a bolt-on for this chemical distribution business. So the thinking behind that is to use the same infrastructure to distribute that product to retain customers. So it basically increases revenue to us. I think this acquisition was done pretty late last year. So our DI for last year does not reflect the full contribution from these acquisitions. So come 2026, you should see the full year contribution over that. So we expect an uplift over there as well. And more importantly, it's because we are using the same infrastructure to distribute more products to the same customers. There's also some operational efficiency that we can realize over there. Jialin Li: Okay. could you remind me of your -- because just now you mentioned the financial implication is on the EBITDA level, right? So could you maybe remind us of the EV EBITDA before this acquisition or maybe at the acquisition of Ixom itself? Unknown Executive: So I believe we had disclosed in one of our previous slides that Ixom's EBITDA is roughly AUD 200 million. In the current slide, we also have the EBITDA levels for Ixom, if you refer to our business updates. Jialin Li: Okay. Got it. And sorry, just to clarify. So the financial implication of this new acquisition is -- should we look at it via EV EBITDA? Or should we look at a certain percentage increase in EBITDA? Unknown Executive: Yes. So as I previously mentioned, it's going to be a single -- mid-single-digit EBITDA contribution to Ixom's pre-acquisition EBITDA. Tzu Chao Neo: So let me put a little bit more. So Ixom's last year, full year ending 2025, I think it's doing over $200 million -- slightly over $200-plus million EBITDA. This acquisition is done late last year. So it's not fully reflected into the number. As what [indiscernible] has mentioned, this acquisition on a full year basis could result in a mid-single-digit increase to Ixom's EBITDA. So this is then flows down to our DI. Marilyn Tan: Do we have any other questions from the analyst community? Okay. If not, then let me just quickly raise -- first and foremost, thank you to our public audience for your questions posed. I believe most of the questions have been addressed earlier through the common questions raised by the analysts. I just have 1 or 2 other additional questions that I will pose to our management team now. The first question is on Ixom's debt. The question is whether -- is there an expected refinancing cost for the Ixom's debt that we should be considering? And whether or not it is significant? Teong Ming Bay: I can take that. So we do not foresee an increase in refinancing costs. In fact, we do see a loan margin compression for Ixom. But do take note that the current markets situation in Australia. There are talks about RBA may increase the base rate. So I think at the end of the day, it would be netted off position. So to answer your question, there will not be an increase in refinancing cost for Ixom. Marilyn Tan: Okay. Thank you, Raymond, for the response. The second question is on the query on the projected CapEx for GMG, can management please advise on the CapEx? Tzu Chao Neo: Yes. So I think when we sought unitholder's approval for these acquisitions, I think we have disclosed that there is a lot of growth potential in this business. Our vessels are fully utilized. We want to grow the business, and we want to either buy new vessels -- construct new vessels or buy existing vessels and compare them into cable laying vessels. I think I'll say we are making good projections over there. I think we have acquired a vessel that's being repurposed into cable laying vessels, which we hope once it's been completed, can be deployed and we should then add to revenue, right. The -- and when we look at these acquisitions, right, we are aware of certain -- growth CapEx that will be coming up. And our plan, right, is to actually -- and we have also sized debt facility that we plan to use the debt fund all this CapEx. And so as a result, which is a result of this funding method, the impacts to our DI -- of the growth CapEx on a DI is not going to be material. But of course, we have also set aside as disclosed certain equity commitments that we have prepared to put in to buy even more vessels, right? At this stage, we have not utilized -- or we have not planned to put in that equity yet. But as and when we are able to see on new vessels, we will inform the market accordingly. Marilyn Tan: Thanks, Kevin, for response. Let me just quickly check to see if there are any additional questions that have come through. Okay. I think we just have one more question to -- from the public. So the question here is how big is our onshore wind farm capacity? And then the second part of the question is whether we intend to buy more of assets? Tzu Chao Neo: Yes. I would say we have about 1.3 gigawatts of renewable capacity, right, of which, I would say, 450 megawatts or 470 megawatts is for the German BKR2, the offshore wind farm. Then a big chunk of the remaining actually goes to our -- comes from our solar asset, the German solar portfolio, where it is doing very well. I think it has received or registered a good increase in DI from the German solar portfolio. And our wind farm basically -- our onshore wind farm is basically distributed across Norway and Sweden. From an investment quantum perspective, it's a relatively small part of our portfolio. Do we have more plans to buy more wind farms? I think as and when we find good assets in this sector, we will do it. But if there isn't any attractive assets, I think we're happy to kind of consider other sectors as well. Marilyn Tan: Thanks, Kevin. I think with that, we have completed all the questions that have been posed to us by analysts and the public. Thank you so much, everyone, for making time to attend our call. If there are no further questions, we will now close this morning's call, and have a good day ahead. Thank you.